The U.S. Court of Appeals for the Second Circuit has rejected an $18 million settlement agreement in a class action copyright infringement lawsuit brought against database operators by freelance writers, on the grounds that the settlement failed to adequately represents those members of the class whose works were not registered with the U.S. Copyright Office.  In re Literary Works in Electronic Databases Copyright Litigation, Case No. 05-5943 (2d Cir. August 17, 2011) (Winter, J.)  

As the internet rose in popularity, works sold by freelance authors for publication in newspapers and other periodicals increasingly became reproduced electronically in electronic databases such as Westlaw and Lexis Nexis.  In response to this electronic publication, a group of freelance writers sued the original print and subsequent electronic publishers, namely, The New York Times Company, Dow Jones, Inc. and database operators Reed Elsevier Inc. (owner of LexisNexis), and Thomas Corporation (owner of Westlaw).  In 2001, these actions by freelance authors were consolidated into a single class action before the U.S. District Court for the Southern District of New York.  The class was represented by 21 named plaintiffs, each of whom owned at least one copyright in a freelance article, and three associational plaintiffs, the National Writers Union, The Authors Guild, Inc. and the American Society of Journalists and Authors.

The district court referred the parties to mediation, beginning in January 2002.  By March 2005, the parties reached a comprehensive settlement agreement, that divided the works at issue into Categories A, B and C.  Category A represented works that authors registered with the U.S. Copyright Office in time to be eligible for statutory damages and attorneys’ fees under the Copyright Act.  Category B represented works that authors registered before December 31, 2002, but not in time to be eligible for statutory damages.  Under the Copyright Act, claims in Category B are eligible to receive only actual damages suffered by the author.  All other claims from freelance authors belonged to Category C.  While Category C claims comprised more that 99 percent of authors’ total claims, none of the 21 named plaintiffs held a work in Category C only.  The Settlement Agreement reached created a “damages formula” for each category, and awarded the most damages for those works belonging to Category A, followed by Category B works and finally those works in Category C.

Upon reaching the settlement, both parties moved the district court to certify the class for settlement purposes and approve the settlement.  The district court approved the settlement over the objections of class members who authored works in Category C that the settlement did not represent their interests equally with Category A and B authors.  In October 2005, the Category C objectors to the settlement appealed the district court’s order.  The Second Circuit ruled in 2007 that the district court lacked subject-matter jurisdiction to approve the settlement of claims for infringement of unregistered works because the registration requirement of the Copyright Act is jurisdictional.  Following this ruling, authors and publishers sought review from the Supreme Court.  In March 2010, the Supreme Court reversed the 2d Circuit, holding that the district court had jurisdiction over the settlement because the Copyright Act imposes only a “nonjurisdictional precondition” to filing a claim.  The 2d Circuit remanded the case following the Supreme Court’s decision, requesting that the parties file letter briefs addressing supplemental authority on the merits.

In its second opinion on the settlement agreement, the 2d Circuit addressed the Category C objectors’ arguments that the settlement impermissibly released claims beyond the factual predicate of the case, that class certification was improper because subgroups within the class have conflicting interests and that the district court erred procedurally in reaching its decision.  In its August 2011 opinion, the 2d Circuit agreed with the objectors that not all class members were adequately represented.  The panel found that the settlement contravened Federal Rule of Civil Procedure 23(a)(4) because the named plaintiffs failed to adequately represent the interest of class members who authored only Category C works.  The panel agreed with the Category C objectors that a “subclass” of plaintiffs should have been created, and found that “only the creation of a subclasses, and the advocacy of an attorney representing each subclass” could ensure that the interests of the Category C-only authors would be adequately represented.  Though the panel found it appropriate that the authors of unregistered works in Category C receive less under the settlement, since these claims are “weaker” under the Copyright Act, it objected to the settlement because it provided “no basis for assessing whether the discount applied to Category C’s recovery appropriately reflects that weakness.”