Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
Speaker 2: The weed of crime bears bitter fruit, So like this,
Speaker 2: it sticks. Did you think you'd get away with it?
Speaker 1: Did you think I would know? But the shadow knows.
Speaker 1: Perhaps that's why a novel theory of the SEC is
Speaker 1: being called shadow trading. A corporate insider may think he
Speaker 1: got away with it, after all, the trade was in
Speaker 1: the stock of a rival company. But it seems like
Speaker 1: the SEC is trying to show that, like the shadow,
Speaker 1: it sees all. Just ask former Metivation executive Matthew Panawatt.
Speaker 1: A jury convicted him the regulator's first enforcement action targeting
Speaker 1: so called shadow trading on Friday in California. Joining me
Speaker 1: is securities law expert James Park, a professor at UCLA
Speaker 1: Law School. Jim, this case has been called groundbreaking. Do
Speaker 1: you think it's groundbreaking and if so, why it is?
Speaker 3: In some ways, but in other ways, I think it's
Speaker 3: the standard case. The reason why it's unusual is I
Speaker 3: believe it's the first time the SDC has brought and
Speaker 3: won a case involving something called shadow trading, which is
Speaker 3: a type of insider trading where you're using information that
Speaker 3: you obtained from your own company to trade in the
Speaker 3: stock of another company. This is the first time the
Speaker 3: SDC has brought such a case and pursued serious sanctions.
Speaker 3: It's not all that unusual, though, in that most of
Speaker 3: the sort of outcome hinged upon factual issues. Did you
Speaker 3: believe that this individual got and read the email from
Speaker 3: the CEO which said that the company was going to
Speaker 3: be acquired? Factual issues which are fairly routine in insider
Speaker 3: trading cases. And I think you could argue that this
Speaker 3: is a straightforward extension of existing law that has been
Speaker 3: in place since the US Supreme Court's decision in the
Speaker 3: United States versus o'hagen. But I do think that it
Speaker 3: is significant because it shows the SEC is willing to
Speaker 3: bring these types of cases and could do so in
Speaker 3: the future.
Speaker 1: What was the evidence against the defendant here?
Speaker 3: Some of the evidence was circumstantial, so they knew the
Speaker 3: CEO sent an email that included him and other individuals
Speaker 3: in the company. They didn't necessarily know though, whether or
Speaker 3: not he read the email, and he claimed the trial
Speaker 3: that he did not read the email. But what they
Speaker 3: do know is that seven minutes after the email was
Speaker 3: sent and would have been received. He spent one hundred
Speaker 3: thousand dollars in options in this company that was likely
Speaker 3: to go up in price upon the announcement that his
Speaker 3: company would be acquired, and so that is circumstantial evidence.
Speaker 3: We don't know for a fact, you know, one hundred
Speaker 3: percent certainty that he actually knew of this inside information
Speaker 3: and that he read the email. But you know, that's
Speaker 3: what a jury's for. Does a jury believe his explanation
Speaker 3: for buying all of these options, which is that he
Speaker 3: read a research analyst report by Goldman Sachs and that
Speaker 3: he had been following this company for a long time.
Speaker 3: You know, that's up to the jury. And recall that
Speaker 3: this is a civil case. It's not a criminal case
Speaker 3: where the sec has to prove beyond a reasonable doubt
Speaker 3: that he violated Rule TEND five, which is the major
Speaker 3: Securities fraught provision that prohibits insider trading. They only have
Speaker 3: to prove by a preponderance of the evidence.
Speaker 1: I thought the defense phraised several good points or defenses.
Speaker 1: One that you mentioned that the trades weren't based on
Speaker 1: confidential information because the merger had been covered publicly by
Speaker 1: the press. So the jury just didn't believe that.
Speaker 3: It's a great point, and that was an argument that
Speaker 3: he made, is that you know, the market anticipated the merger.
Speaker 3: They anticipated the merger, and so this was not non
Speaker 3: public information. Now, I think the SEC's response is that
Speaker 3: sometimes there are rumors about whether mergers are going to happen,
Speaker 3: and the market sort of knows this and the price
Speaker 3: adjusts accordingly. But there's a difference between a rumor of
Speaker 3: a merger that could happen at some point in time
Speaker 3: and an email from your company CEO that says Pfizer
Speaker 3: wants to buy the company and they want to complete
Speaker 3: the deal over the weekend, which means there's a higher
Speaker 3: probability if you know that information that there's going to
Speaker 3: be a merger that will be closed over the weekend
Speaker 3: and announced on Monday before the market opens, and that
Speaker 3: is non public, and I think there's a good argument
Speaker 3: it is material important to investors. There's a difference between
Speaker 3: speculating about whether a merger might happen at some point
Speaker 3: in time and having an indication that there's a probability
Speaker 3: that it's going to happen over the weekend, and it's
Speaker 3: from your CEO, who presumably has good information and who
Speaker 3: typically would not say something this specific unless the possibility
Speaker 3: of an acquisition was fairly high.
Speaker 1: The defense also argued that the SEC hadn't proven that
Speaker 1: pan Watt had an intent to defraud because he didn't
Speaker 1: know it was illegal to trade in a company that
Speaker 1: wasn't his employer and didn't conduct business with his employer.
Speaker 1: So his attorney told the jury, the evidence will show
Speaker 1: that the entire SEC case is an attempt to put
Speaker 1: thoughts in mister Panawat's head that we're not there when
Speaker 1: he made the trades.
Speaker 3: It's a substantial argument. And you know, these cases depend
Speaker 3: on intent, and because we don't know for sure what
Speaker 3: someone's intent is, that's up for the jury to decide.
Speaker 3: And the jury looked at the evidence and they believe
Speaker 3: circumstantially that he acted with bad intent. And you know,
Speaker 3: one fact in favor of the SEC is that he
Speaker 3: buys one hundred thousand dollars in option. His purchase is
Speaker 3: represented around eighty percent of the options trading in that
Speaker 3: stock on that particular day. That is very unusual. And
Speaker 3: you know, the other point I would make is that
Speaker 3: ignorance of the law is not a defense, even if
Speaker 3: you don't know all the ins and outs of insider
Speaker 3: trading law, which is complicated. That is not a defense
Speaker 3: to liability. Now he does have an argument that I
Speaker 3: just was I'm not conscious of doing anything wrong because
Speaker 3: you know, I didn't understand I couldn't trade in the
Speaker 3: stock of other companies. And you know, the fact of
Speaker 3: the matter is he signs the policy saying that you
Speaker 3: cannot use company information to trade in the securities of
Speaker 3: another publicly traded company. Now, you know, I think, mister Pano,
Speaker 3: what would say. You know, we sign all sorts of
Speaker 3: things when you join a new company. We may not
Speaker 3: read these things carefully. And I just didn't understand this.
Speaker 3: You know, I didn't read the agreement very carefully. And
Speaker 3: you know, I think they're different, you know, views as
Speaker 3: to whether you're still accountable for following that particular policy
Speaker 3: or not. And you know, I think that the jury
Speaker 3: could have decided you are accountable, and you are accountable
Speaker 3: because you signed the policy, and because you signed it,
Speaker 3: you have to follow it. And if you're not following it,
Speaker 3: you know, you're deceiving your employee. And that sort of
Speaker 3: deception is a type of misappropriation of the company's confidential information.
Speaker 3: You know, another argument he could make might be, as
Speaker 3: you know, I found a loophole and I'm gaving the system.
Speaker 3: I don't know how sympathetic the jury would be to
Speaker 3: that argument, but you know, that is the sort of
Speaker 3: argument that one could give some weights to. But the
Speaker 3: jury rejected those arguments.
Speaker 1: Was this based on you know, you mentioned the policy,
Speaker 1: the confidentiality agreement that he signed at his company. I mean,
Speaker 1: did the SEC bring this based on that? Or could
Speaker 1: they have brought this even if there wasn't a confidentiality agreement.
Speaker 2: This is the.
Speaker 3: Foundation of the case. Without this policy, the SEC would
Speaker 3: not have an insider trading case. You can only misappropriate
Speaker 3: confidential information and violate Rule ten B five based on
Speaker 3: inside information if you have a fiduciary duty to the
Speaker 3: corporation who stock your trading in, or you have agreed
Speaker 3: to keep information confidential. Those are the two mechanisms by
Speaker 3: which you can violate insider trading prohibitions. The first avenue
Speaker 3: is called the classical theory of insider trading, and that
Speaker 3: actually does not apply to this case because Panawat does
Speaker 3: not have any fiduciary duties to insight, which is the
Speaker 3: company that he traded in he might have some juduciary
Speaker 3: like duties to his company metivation. But that's why you
Speaker 3: know this is seen or was seen as a type
Speaker 3: of loophole. It gets you around the classical theory. But
Speaker 3: there's a second theory which has just as much status,
Speaker 3: has been approved by the Supreme Court called the misappropriation theory.
Speaker 3: And under that theory, the deception is when you sign
Speaker 3: a policy of confidentiality with your company that commits you
Speaker 3: to complying with that policy, and if you deceptively trade
Speaker 3: and violation of that policy, you have violated Rule ten
Speaker 3: D five. So it is absolutely essential that they had
Speaker 3: a policy that specified you cannot trade them the securities
Speaker 3: of another publicly traded company. If they did not have
Speaker 3: that policy in a general policy of confidentiality, the sec
Speaker 3: would not have had a cake. Most public companies, or
Speaker 3: many public companies, are adopting these policies. There's a study
Speaker 3: by g Men of Michigan State that documents increasing adoption
Speaker 3: of these types of broad insider trading policies that cover
Speaker 3: securities of other publicly traded companies.
Speaker 1: So the SEC Enforcement Chief Gerbert Greenwall said, as we've
Speaker 1: said all along there was nothing novel about this matter,
Speaker 1: and the jury agreed this was insider trading, pure and simple.
Speaker 1: Why is he downplaying that?
Speaker 3: I think the SEC was receiving some pushback and you know,
Speaker 3: to say it's not entirely novel. It's partly true. But
Speaker 3: I think this is the first time that the SEC
Speaker 3: has pursued this shadow trading theory. I do think that
Speaker 3: it's an extent of prior laws, but to a different
Speaker 3: set of facts. And there's you know, room for disagreement
Speaker 3: about whether you think that's novel or not right. The
Speaker 3: misappropriation theory is very well established, but I think it
Speaker 3: was typically understood to apply to these confidentiality policies that
Speaker 3: might have specified you can't trade in your own company stock.
Speaker 3: But what begins to happen is companies are adopting broader
Speaker 3: policies that include other stocks. And so you know that
Speaker 3: I think is a reasonable extension of the misappropriation theory
Speaker 3: that you have deceived your employee in trading securities, and so,
Speaker 3: you know, technically, I think he's right that it's not
Speaker 3: completely novel. It's just an extension of existing doctrine to
Speaker 3: new set of facts. Now, you know, I think what
Speaker 3: the defense are and other concerned individuals might respond and say,
Speaker 3: is that, well, you've never aggressively applied the theory to
Speaker 3: this type of facts, and so the industry didn't really
Speaker 3: understands that this is a violation of insider trading law.
Speaker 3: But you know, the SEC would say that it's really
Speaker 3: your job to figure out the law and inform people
Speaker 3: that you know, this is a logical extension of this
Speaker 3: series coming up.
Speaker 1: Critics say the SEC is going beyond its jurisdiction. This
Speaker 1: is Bloomberg. The SEC won a jury verdict in its
Speaker 1: groundbreaking insider trading case that seeks to bar employees from
Speaker 1: using non public information about their own company to place
Speaker 1: bets on rival stocks. The closely watched two week San
Speaker 1: Francisco civil trial was the SEC's first enforcement action targeting
Speaker 1: so called shadow trading. In the case, the regulator argued
Speaker 1: that former Metivation executive Matthew Panawatt broke the law when
Speaker 1: he learned that his company would soon be acquired, and,
Speaker 1: believing the news would benefit other companies in the industry,
Speaker 1: traded another biotech company call options. His attorneys countered that
Speaker 1: the trades weren't based on confidential information because the merger
Speaker 1: had been covered publicly by the press, and they argued
Speaker 1: that the SEC couldn't prove that Panawat hadn't intend to defraud.
Speaker 1: I've been talking to Professor James Park of UCLA Law School.
Speaker 1: The SEC and its enforcement chief have brought cases that
Speaker 1: have pushed it into new territory, for example, a case
Speaker 1: over McDonald's CEO's relationship with an employee and the workplace
Speaker 1: culture at a video game developer. And it's also bringing
Speaker 1: several cutting edge cases to gain greater control over cryptocurrency.
Speaker 1: And the criticism is that it's going too far, that
Speaker 1: it's stretching its enforcement power, is beyond its jurisdiction.
Speaker 3: That is the criticism. And you know, I think one
Speaker 3: response the SEC might have is that these are novel problems.
Speaker 3: These are novel problems, the novel issues, and the reason
Speaker 3: we were not addressing them before is the SEC was
Speaker 3: too passive. We need to get out there. We need
Speaker 3: to enforce the laws to novel situations and educate people
Speaker 3: about what the law is. You can't simply ignore these
Speaker 3: broader standards and principles. You know, they're there for people
Speaker 3: to read and interpret and apply in good faith. And
Speaker 3: I think the SEC would say is, if you're applying,
Speaker 3: you know, the definition of insider trading in this appropriation,
Speaker 3: if you're applying the definition of security and good faith,
Speaker 3: you would know that in some cases that there are
Speaker 3: violations of securities laws. Now, the argument on the other side,
Speaker 3: I think is that you know, certainly, I think the
Speaker 3: SEC has become more aggressive, and I would say more
Speaker 3: entrepreneurial in certain ways. I have an article coming out
Speaker 3: in the Northwestern Law Review later this fall that says
Speaker 3: the SEC is acting more as an entrepreneurial enforcer, and
Speaker 3: part of that is that you have a more expansive,
Speaker 3: aggressive regulatory policy, and enforcement is a way to develop
Speaker 3: that policy. And you know, they're positives and negatives I
Speaker 3: think to the SEC being more aggressive and entrepreneurial, but
Speaker 3: recall that there are times when the SEC is criticized
Speaker 3: as too passive, too much of a bureaucracy captured by
Speaker 3: the industry because the lawyers want to get good jobs
Speaker 3: with law firms, and so, you know, I think, either way,
Speaker 3: if you're too passive, if you're too aggressive, the SEC
Speaker 3: is going to face some criticism for its enforcement policies.
Speaker 3: But I would say that I do think that this administration,
Speaker 3: for better or worse, has implemented a more entrepreneurial or
Speaker 3: aggressive approach to enforcement.
Speaker 1: Do you think that this case will survive and appeal
Speaker 1: this theory.
Speaker 3: It's always hard to say. I think, on the facts,
Speaker 3: on the factual determinations, I think that there's not much
Speaker 3: of a basis for overturning the case. The vulnerable point
Speaker 3: to me, I think is on the enter. I think
Speaker 3: that is the one argument that a judge on the
Speaker 3: Ninth Circuit or perhaps the Supreme Court could look at
Speaker 3: very closely on these facts. And you know, that's the
Speaker 3: place where I think a appellate court could be a
Speaker 3: little bit skeptical of the SEC theory of the case.
Speaker 3: On the other hand, I think that you know, these
Speaker 3: are typically factual matters. The enter is fraudulent intent is
Speaker 3: a matter for the jury, and many appellate courts will
Speaker 3: defer to that, And the Supreme Court may not think
Speaker 3: of this as a good vessel for clarifying the boundaries
Speaker 3: of insider trading law.
Speaker 1: Do you know how widespread shadowed trading is? I mean,
Speaker 1: I'm not sure how the SEC even discovered this trade.
Speaker 3: Well, I think in this case they do monitor trading activity,
Speaker 3: and so if you see a big spike in trading,
Speaker 3: you know, eighty percent of the options activity can be
Speaker 3: traced to one person who made one hundred thousand dollars
Speaker 3: in a few weeks from the SEC. Self regulatory organizations
Speaker 3: like FINRA, they monitor these trading patterns. My guess is
Speaker 3: that's how they discovered this case. As to how extensive
Speaker 3: shadow trading is, that is difficult to measure. I've you know,
Speaker 3: seen some studies here and there that have tried to
Speaker 3: measure it, and you know whether or not it's extensive,
Speaker 3: but it's always hard to conclusively determine whether or not
Speaker 3: it is extensive. My guess is it will become less
Speaker 3: extensive after this case, and given how it has been publicized.
Speaker 3: You know, these sorts of decisions matter. My colleague for
Speaker 3: Nonstreppo has a nice paper on the impact of O'Hagan
Speaker 3: in the late nineteen nineties and how that might have
Speaker 3: affected insider trading on merger agreements that he finds it
Speaker 3: did have an impact.
Speaker 1: So then you know, considering all that, how big a
Speaker 1: victory is this for the SEC? A ten on a
Speaker 1: ten scale or.
Speaker 3: Five, it's a big victory, every trial win is a
Speaker 3: big thing and a good thing for the SEC because
Speaker 3: you're not just settling cases. That's the criticism of the
Speaker 3: SEC is that too often they just settle cases. The
Speaker 3: defendant doesn't admit to wrongdoing or deny it, and the
Speaker 3: SEC has been afraid or doesn't have the resources to
Speaker 3: actually go in front of judges and juries and test
Speaker 3: their theory. So I think this is very significant, and
Speaker 3: you know, along with their win in the Coinbase motion
Speaker 3: to dismiss, it's been a good few weeks for the
Speaker 3: SEC and these are needed wins because when you're getting criticized
Speaker 3: for stretching the law regulating by enforcement, the shortst response
Speaker 3: is winning cases in courts. And you know they have
Speaker 3: won these cases. They need to keep litigating cases and
Speaker 3: winning them fairly consistently in order to enhance the legitimacy
Speaker 3: of their enforcement efforts.
Speaker 1: And just hours before this jury verdict came in a
Speaker 1: jury in New York found Terraform Labs co founder Libel
Speaker 1: for fraud over the firm's twenty twenty two collapse. Was
Speaker 1: that a big win as well?
Speaker 3: Also a big win in my you a much more
Speaker 3: straightforward case of fraud there with aspect to the crypto assets,
Speaker 3: where you know, you're claiming that these crypto assets are
Speaker 3: this project is you know, being used in the real world,
Speaker 3: that merchants are actually using this digital coin to effectuate transactions.
Speaker 2: They are not.
Speaker 3: You are literally making up fake transactions that to create
Speaker 3: the impression that something's happening in the real world. That
Speaker 3: strikes me as a fairly straightforward fraud. And Judge Raycoff,
Speaker 3: I think, you know, my view got it right that
Speaker 3: these particular digital assets were securities, and so that's a
Speaker 3: securities fraud, but another big win for the sec And.
Speaker 1: Just to clarify whether cryptos a security hasn't been decided
Speaker 1: by an appellate court yet and the district court judges
Speaker 1: like Raycoff are split on that.
Speaker 3: They are split, although it seems like the trend seems
Speaker 3: to be in favor of at least some and in
Speaker 3: fact actually all of the judge is it said, some
Speaker 3: digital assets can be securities under the Howie test. The
Speaker 3: difference is whether you think that, you know, are the
Speaker 3: tokens when they're trading in secondary markets can they be security?
Speaker 3: So there is a bit of a split there, and
Speaker 3: you know, with pre form, you know, producing a jury
Speaker 3: verdict once Judge Raycoff determines the damages, I would expect
Speaker 3: there's a chance that that could be appealed to this
Speaker 3: US Court of Appeals for the Second Circuit, So that
Speaker 3: could be the first case where we get some guidance
Speaker 3: from the Court of Appeals.
Speaker 1: Now, a lot of people might not realize that Congress
Speaker 1: has never defined insider trading. It's all judge created law.
Speaker 3: You know, it is insider trading law. You know, has
Speaker 3: been developed by judges, and you know, there's an argument
Speaker 3: that for non lawyers it can be difficult to understand
Speaker 3: these cases and the boundaries of the law. So you know,
Speaker 3: it's really up to in House Council to do a
Speaker 3: better job of explaining the boundaries of insider trading and
Speaker 3: doing it in a way so people are not tuning
Speaker 3: it out, and you know, this is important stuff. You know,
Speaker 3: if you have a compliance meeting, you know, maybe mister
Speaker 3: panowatt attended one and maybe you know, maybe they explained
Speaker 3: the policy to him, but he was not paying attention something.
Speaker 3: You know, that's possible, or it's possible that the compliance
Speaker 3: meeting was not thorough enough. These are things that compliance.
Speaker 3: These are decisions. Compliance divisions need to be looking at
Speaker 3: very seriously. They have to also think about how do
Speaker 3: we understand or how do we explain these rules in
Speaker 3: a clear, comprehensible way so that our employees understand what
Speaker 3: the law is.
Speaker 1: And let's see how long it takes for the sec
Speaker 1: to bring the next shadow trading case. Thanks so much
Speaker 1: for your insights, Jim. As always, that's Professor James Park
Speaker 1: of UCLA Law School. In other legal news today, Donald
Speaker 1: Trump is now all in three in his last attempts
Speaker 1: to get his hush money criminal trial, scheduled to start
Speaker 1: on Monday delayed. An appeals court judge rejected the latest
Speaker 1: salvo from the former president, who argued he should be
Speaker 1: on the campaign trail rather than in a courtroom defending himself.
Speaker 1: Trump's lawyers had asked the state's mid level appeals court
Speaker 1: to halt the case indefinitely while they fight to remove
Speaker 1: the trial judge and challenge several of his pre trial rulings.
Speaker 1: After three straight days of emergency hearings on Trump's delay requests,
Speaker 1: it appears the way is cleared for jury selection to
Speaker 1: begin on Monday. Trump's hush money case is the first
Speaker 1: of his four criminal indictments slated to go to trial
Speaker 1: and would be the first criminal trial ever of a
Speaker 1: former president. Coming up next, on the Bloomberg Lan Show,
Speaker 1: Top Gun the Sequel, a judge throws out the case
Speaker 1: against Paramount for copyright infringement. I'm June Grasso, and you're
Speaker 1: listening to Bloomberg.
Speaker 2: What attention? Taking me?
Speaker 1: An attention?
Speaker 2: Good?
Speaker 1: Paramount has come out on top of a copyright lawsuit
Speaker 1: over Top Gun, Maverick. There's a lot at stake. The
Speaker 1: sequel grows nearly one point five billion dollars at the
Speaker 1: box office worldwide, and a federal judge in California has
Speaker 1: found that the sequel, set decades after the article that
Speaker 1: inspired the original Top Gun movie, does not infringe the
Speaker 1: copyright of the article. Very good news for Paramount, since
Speaker 1: another sequel is in the wings, so to speak. Joining
Speaker 1: me is intellectual property litigator Terrence Ross, a partner at
Speaker 1: Katain Yutchen Rosenmuan over So, the writer of this nonfiction
Speaker 1: magazine article about real life F fourteen fighter pilots how
Speaker 1: to sign the movie rights to Paramount for the first movie.
Speaker 1: So then what happened?
Speaker 2: So, if you remember way back in nineteen eighty three,
Speaker 2: wod June wrote this article in California Magazine on the
Speaker 2: top gun program down at the QS Navy Fighter Weapons School,
Speaker 2: but wrote it in a sort of an interesting way
Speaker 2: where he wrote it from the perspective of a pilot
Speaker 2: in his backseat going through the program, and it caught
Speaker 2: somebody's eye in Hollywood, and Baramount went out and got
Speaker 2: an assignment of rights per movie from him. When I
Speaker 2: look at such agreements, I was focused on what's the
Speaker 2: credit being called for, you know, at the end of
Speaker 2: the movie. And he got the lowest possible credit you
Speaker 2: could get, which is suggested by story written by June.
Speaker 2: I mean suggested by is like the lowest language you
Speaker 2: can get and still get some sort of credit for.
Speaker 2: But they had rights and complete rights in the article
Speaker 2: for purposes of the movie, and they went out made them
Speaker 2: movie unclear whether they really needed those rights, but they
Speaker 2: did it so the you know, I says, Copyright Act
Speaker 2: has a provision in it that allows heirs to a
Speaker 2: copyright to terminate a license in the copyright years after
Speaker 2: the license was given. On sort of the theory that
Speaker 2: young up and coming writers artists often get cheated in
Speaker 2: these licenses, and so we have to leave a window
Speaker 2: of opportunity later on if the work has been worth
Speaker 2: something for them to recover some value. So they're allowed
Speaker 2: to terminate the license. And after yone's death in twenty eighteen,
Speaker 2: his son and widow did exactly that. They sent a
Speaker 2: letter to Paramount saying they've terminated the rights in the
Speaker 2: nineteen eighty three California Magazine article because they had seen
Speaker 2: somewhere that there was a sequel being worked on, and
Speaker 2: that sort of got us up to the top Gun
Speaker 2: Maverick the sequel, the.
Speaker 1: Judge seemed to address every possible angle here. One thing
Speaker 1: he said was similarities between the two works based on
Speaker 1: facts can't be protected. So doesn't that pretty much cover everything?
Speaker 1: Because the initial magazine article was nonfiction, right, it was
Speaker 1: about real people.
Speaker 2: So I agree with you, June, as the judge found
Speaker 2: at one point the magazine article was really just a
Speaker 2: factual recitation of what went on at US Navy's Fighter
Speaker 2: Weapons skull DAN a mirror mark, and therefore there really
Speaker 2: wasn't much that could be protected by copyright. And I
Speaker 2: have to say, I mean, he said, the judge went
Speaker 2: through this carefully. I agree with you completely. Judge Anderson
Speaker 2: did a very careful job here with this decision. He
Speaker 2: went through every possible argument raised by the plaintiffs and
Speaker 2: fucinctly described what was wrong with those arguments as a
Speaker 2: matter of law, which is going to make it very
Speaker 2: hard to appeal this case to the Ninth Circuit.
Speaker 1: Why did Paramount even get a license for the first movie?
Speaker 1: It seems like they wouldn't have needed a license.
Speaker 2: So in the age of copyright lawsuits at the drop
Speaker 2: of a hat that we live in, lawyers in house
Speaker 2: at creative organizations such as Paramount Pictures had to be
Speaker 2: very careful, and the cost of getting a license here
Speaker 2: was relatively inexpensive. They didn't have to give away much
Speaker 2: credit in the movie for getting a license. The device
Speaker 2: was relatively low as these things go, So I mean
Speaker 2: it made sense even if the in house lawyer thought
Speaker 2: there was no need to get a copyright license, why
Speaker 2: not get it as an insurance mechanism. I sort of
Speaker 2: get it. Although it did lead to these problems down
Speaker 2: the road at that point in time, back in nineteen
Speaker 2: eighty four, I think it was a very reasonable decision
Speaker 2: on the part of the Paramount lawyers.
Speaker 1: So the court applied this extrinsic task. Will you tell
Speaker 1: us about you know what the court decided and how?
Speaker 2: Sure? So, the Ninth Circuit, which covers the West coast Alaska, why,
Speaker 2: as far as federal appeals, probably sees the most copyright
Speaker 2: cases of any court in the United States. Second Circuit,
Speaker 2: which covers New York Connecticut, mate and see quite a
Speaker 2: few as well. But it's really the Ninth Circuit is
Speaker 2: the driver with respect to these copyright lawsuits involving infringement.
Speaker 2: And for decades now they have laid out a test
Speaker 2: by which the trial courts can filter out certain losses
Speaker 2: at an earlier stage, what we call summary judgment, instead
Speaker 2: of making every one of these copyright infringement lawsuits involving
Speaker 2: music or movies or television show go to a jury troup.
Speaker 2: And so what the Ninth Circuit created this judicially imposed
Speaker 2: gloss on the Copyright Act. You can commit copyright infringement
Speaker 2: on the Copyright Act by not merely xeroxing of work
Speaker 2: or recording a work. You can also do it by
Speaker 2: creating work that's substantially similar. And those are the tough cases.
Speaker 2: The case is where the allegation is that work is
Speaker 2: substantially similar to the copyright at work. So the Ninth
Speaker 2: Circuit said, that's where we have all the problems. We're
Speaker 2: going to set up this test that involves two parts,
Speaker 2: and we're going to call that the extrinsic review and
Speaker 2: the intrinsic review. The extrinsic review looks at sort of
Speaker 2: objective comparison of certain elements of the allegedly infringing work
Speaker 2: with the copyright at work. It is done by the
Speaker 2: judge with the assistance of experts, does not require jury troump.
Speaker 2: The intrinsic part of the test examines an ordinary person
Speaker 2: adjures subjective impressions of the similarities between the two works.
Speaker 2: In order to get to that point, the planet first
Speaker 2: has to satisfy the extrinsic test and convince the court
Speaker 2: that there are objective elements that are substantially similar. So
Speaker 2: the court, as part of the extrinsic test, focuses on
Speaker 2: similarities between the plot, themes, dialogue, mood, setting, pace, character,
Speaker 2: sequence of events, and of course dialogue the actual wording
Speaker 2: being used. So that's where we work in this decision
Speaker 2: by Judge Anderson. He was conducting that review of the
Speaker 2: extrinsic factors to determine whether the case should even get
Speaker 2: to jury.
Speaker 1: Trop So, Terry, will you go through some of what
Speaker 1: the judge considered in making this decision.
Speaker 2: So you know, the plane off raised a number of
Speaker 2: alleged similarities between the Top Gun Maverick and this California
Speaker 2: magazine article. I think I saw somewhere in the opinion
Speaker 2: as on the order magnitude of seventy seven zero different
Speaker 2: alleged similarity. And the judge source said they all fit
Speaker 2: into certain categories, and he went through the category by
Speaker 2: category and pointed out there are certain things that just
Speaker 2: not protected by copyright. We talked about facts, they're not protected.
Speaker 2: So the fact there is this Top Gun program, the
Speaker 2: fact that Navy pilots are that are selected to go
Speaker 2: through it are the best in the Navy. Those are
Speaker 2: all factual elements that get no protection whatsoever. But then
Speaker 2: there are literary expression elements that also get no protection.
Speaker 2: So general plot ideas a murder mystery, you can't protect that.
Speaker 2: You know, stock characters, the detective solving the mystery, the
Speaker 2: British secret agent, you don't get protection for that. And
Speaker 2: then there certain SEMs are fair which are sort of
Speaker 2: situations that arise naturally out of the plot. So if
Speaker 2: you've got a World War II drama set in Europe,
Speaker 2: the characters are going to be Nazis, The bad guys
Speaker 2: are gonna be Nazis, right, and they're gonna be wearing
Speaker 2: squats because you don't get to copyright that. All those
Speaker 2: things are unprotected. And the bulk of what was in
Speaker 2: the California magazine article, which is the allegedly infringed work,
Speaker 2: fit into a category such as that.
Speaker 1: The Plate of the Journey, who is well known in
Speaker 1: this area, said, we respectfully disagree with the ruling, particularly
Speaker 1: on some rejudgment, So explain. The Ninth Circuit has warned
Speaker 1: against prematurely dismissing copyright lawsuits before allowing experts to testify.
Speaker 1: In this case, I think they had submissions from experts
Speaker 1: and the judge didn't consider the plaintiff's.
Speaker 2: Expert So the Ninth Circuit has caution District court judges
Speaker 2: about dismissing copyright lawsuits at too early a point in
Speaker 2: the case, particularly prior to jury trial. The defendants had
Speaker 2: brought a motion to dismiss right after the complaint was piled,
Speaker 2: So this is the earliest possible time to get a dismissal.
Speaker 2: It's basically an attack on the completing itself, saying the
Speaker 2: way you've played this doesn't amount to cognizable legal claim.
Speaker 2: And the court had heard that way back in November
Speaker 2: of twenty twenty two. If I recall correctly and said, look,
Speaker 2: this is way too early. I think within the four
Speaker 2: corners of the complaints, the judge that within this, I
Speaker 2: think there's enough to make out a cognizable legal claim,
Speaker 2: but I'm not going to comment upon where this might
Speaker 2: go in the future. So we go through discovery, we
Speaker 2: get expert reports, and Paramount comes back at the end
Speaker 2: of discovery, the last thing you do before the jury
Speaker 2: trial and files most for summer judgment says you're on it.
Speaker 2: We're back. You said we needed to allow the facts
Speaker 2: to be developed and get expert testimal. We did, and
Speaker 2: we say this is still not a legally cognizable claim
Speaker 2: and therefore we should be entitled summary judgment. And at
Speaker 2: that point I think the judge was perfectly within his
Speaker 2: rights to consider such emotion, and given what we now
Speaker 2: know about those various alleged points of infringement, I think
Speaker 2: the judge got it right and was allowed to do
Speaker 2: this on summary judgment. Now there's a second question that's
Speaker 2: raised by the plane If, which is, well, well, yes,
Speaker 2: you did allow expert to give testimony, and that would
Speaker 2: have been considered, but you refuse to allow our expert
Speaker 2: to testify or to accept it the testimony. They're experts,
Speaker 2: And this is where it gets complicated. In my view,
Speaker 2: it was not that the plaintiff wasn't allowed to put
Speaker 2: up expert testimony. In my view, and I think in
Speaker 2: the judges the plaintiff copyright owners put up expert testimony
Speaker 2: that wasn't competent and relevant to the case. The expert
Speaker 2: for the plaintiff had failed to take into account any
Speaker 2: of these defenses to copyright and infringement. You know that
Speaker 2: they're just facts, that their sins are fair, that they're
Speaker 2: non protectable elements. The expert for the planoffs have just
Speaker 2: assumed everything was copyrightable, and the just said, you know,
Speaker 2: that's what this case is all about, whether or not
Speaker 2: it's copyrightable, whether it's protectable in the first place. You
Speaker 2: can't assume that away. Therefore, your expert opinion is of
Speaker 2: no value here, and we're not going to allow it
Speaker 2: and again think the judge got that right, and therefore
Speaker 2: I really do not think that that's a legitimate complaint
Speaker 2: on appeal. I'm sure the plaintiffs will appeal to the
Speaker 2: Ninth Circuit and raise this point, but judges have enormous
Speaker 2: discretion at the trial court level into what testimony they
Speaker 2: will allow, into evidence what they will not, and I
Speaker 2: just don't see the Ninth Circuit overturning his decision here.
Speaker 1: And let me just say that you are on record
Speaker 1: that when we discussed this the first time, when this
Speaker 1: suit happened, that you said this wasn't going to fly,
Speaker 1: so to speak. So I just want to credit you
Speaker 1: for that.
Speaker 2: Terry Well, I appreciate the question.
Speaker 1: Nothing to get you anything, you know, when.
Speaker 2: You've been doing this as long as I have sort
Speaker 2: of get a flavor for the types of cases that
Speaker 2: get brought. And you know, one of the really telling
Speaker 2: things to me was the plantifs were only able to
Speaker 2: identify a single sentence, and my sentence is being generous
Speaker 2: because it's only a two word sentence, a single sentence
Speaker 2: of dialogue that was similar between the article and top
Speaker 2: Gun Mavericke the sequel, and that's one of the things
Speaker 2: I always look for, are there a lot of similarities
Speaker 2: in dialogue? Are there really unique settings that are similar?
Speaker 2: And here the only dialogue that was similar was a
Speaker 2: phrase fight on, which apparently is the code word at
Speaker 2: the Top Gun school that these pilots use to say
Speaker 2: that the mock engagement is starting. And again that's telling
Speaker 2: that that's the only dialogue similarity they could come up with.
Speaker 2: And quite frankly, idio itself is not copyrightable because the
Speaker 2: Copyright Office does not allow copyrights in short phrases, and
Speaker 2: that would come within that exception to the rules. So
Speaker 2: when you look at and you see no no dialogue
Speaker 2: similar no settings that are really unique, and just all
Speaker 2: these generalities, it's impossible to not have those gut reactions.
Speaker 2: This isn't go anywhere? Does go to get dismissed? I
Speaker 2: guess I got it right this time.
Speaker 1: You always get it right. But why appeal? Then I'd say, Okay,
Speaker 1: they're looking for some kind of settlement, but you know
Speaker 1: Top Gun three is in the wings, so Paramount's not
Speaker 1: going to want to settle this.
Speaker 2: I don't know what this plane iff's specific motivation will
Speaker 2: be to appeal, And apparently counsel for Plane has already
Speaker 2: announced that they're planning on appealing it. I can only
Speaker 2: tell you in general how attorneys think about this, and
Speaker 2: you know, there's no doubt that this had to have
Speaker 2: been I have no inside information, but this had to
Speaker 2: be a contingent V litigation where the lawyer only gets
Speaker 2: paid if they win. So that's a factor. Second, Topa
Speaker 2: Maverick made enormous mile money. I believe the box office
Speaker 2: gross was one point five billion. Yeah, and I think
Speaker 2: it had to do something with the timing of being
Speaker 2: one the first released after the pandemic, when people are
Speaker 2: coming back in theaters and desperate for content. But if
Speaker 2: you can believe this June, that is the largest gross
Speaker 2: of any Tom Cruise movie of all time. It's bigger
Speaker 2: than the Jackie Reacher movie, is bigger than any of
Speaker 2: the I don't all we're up to six or seven missions.
Speaker 2: I have no idea how that happened, but this is
Speaker 2: the enormous amount of money. And you know, the argument
Speaker 2: for damages if there was copyright infringement is that we're
Speaker 2: entitled to the reasonable royalty based on that royalty amount,
Speaker 2: and so the amount at Steak is enormous. And so
Speaker 2: when you have large amounts at steak, even if you
Speaker 2: have a minimal chance of success, you know, the math
Speaker 2: works out that you ought to pursue the appeal on
Speaker 2: the off chance that you get two out of three
Speaker 2: judges on the appellate panels. That's some problem with what
Speaker 2: the district court did. And of course the longer it
Speaker 2: drags out, the hope on the play side is always
Speaker 2: that the defendse get tired of paying their attorneys because
Speaker 2: this is expensive sort of litigation, and then they might
Speaker 2: just consent to the settlement and so they get some
Speaker 2: money out of it, and you're right top gun free.
Speaker 2: The script is already being written. What I read an
Speaker 2: Wood reporter is that their negotiations with director and other
Speaker 2: principal roles and so it looks it's like semi green
Speaker 2: winter ready, and so there's that much more money to
Speaker 2: be had. And that's my speculation in my opinion, based
Speaker 2: on past experience, as to why they might appeal.
Speaker 1: So finally, I just want to ask you this, which
Speaker 1: also the Hollywood Reporter brought up this idea that this
Speaker 1: kind of order could undermine the notion that studios have
Speaker 1: to reacquire the rights to stories for a sequel if
Speaker 1: the original was based on source material. And they talk
Speaker 1: about the copyright lawsuit that Columbia Pictures filed against George Gallo,
Speaker 1: who wrote the story that developed into The Bad Boys.
Speaker 2: So it's an interesting question of law that I think
Speaker 2: is discussed too broadly in that Hollywood Reporter article that
Speaker 2: you're referencing. It really comes down to what was the
Speaker 2: agreement that was signed in the first place. So if
Speaker 2: you get a license to the copyright, you can do
Speaker 2: whatever you want with it, including creating derivative works, which
Speaker 2: is essentially what a sequel is, a derivative work. The
Speaker 2: way we teach copyright is copyright is like a bundle
Speaker 2: of sticks. They're different individual rights, and you can give away,
Speaker 2: license away, sell away individual sticks, or the entire bundle
Speaker 2: of sticks, and so it depends how the agreement is written.
Speaker 1: Here.
Speaker 2: I don't think that was a problem, and therefore I
Speaker 2: don't think this decision really has any impact upon future negotiations.
Speaker 2: It's always going to turn on what was the specific
Speaker 2: first agreement by which the rights were acquired, that they
Speaker 2: buy or license the entire bundle or just one stick
Speaker 2: for a limited period of time. And that's why I
Speaker 2: think those comments, I mean the Hollywood reporter overreach.
Speaker 1: We appreciate all your commentary on the show. Thanks so much, Terry.
Speaker 1: That's Terrence Ross of Katin Yuchen Rosenman. And that's it
Speaker 1: for this edition of the Bloomberg Law Podcast. Remember you've
Speaker 1: can always get the latest legal news by subscribing and
Speaker 1: listening to the show on Apple Podcasts, Spotify, and at
Speaker 1: Bloomberg dot com, slash podcast, slash Law. I'm June Grosso
Speaker 1: and is Gloomberg