Legal Matters: Defining Property

The recent proposed settlement between Sony BMG Music Entertainment and consumers over CDs with faulty digital rights management software brings to mind legal issues that AOL faced a few years ago.

The Sony BMG class action settlement does not cover consumers who claim that the DRM software caused damage to their computers. Specifically, the deal excludes from the settlement those who claim damage to a computer or network resulting from interactions between the DRM and other software or hardware installed on the computer or network.

This raises questions of property damage and insurance—and brings us to AOL.

In 1999, AOL released version 5.0 of its access software. Within a few months, consumers began filing class action lawsuits around the country claiming the software caused damage.

AOL settled the suits for $15.5 million. Then the company sued its insurers for refusing to defend AOL and indemnify the company for the settlement.

The insurance companies claimed that the consumers did not allege damage to tangible property. This meant that the damages were not "property damages," so the claims were not covered by the policies.

The federal District Court in Alexandria, Va., sided with the insurers. On appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed.

First, the court decided that "tangible" means that the property must have a "physical substance apparent to the senses."

While the physical magnetic material on the hard drive is tangible property, the court wrote, that material is quite different from data, information and instructions stored on the hard drive. If a hard drive was physically scarred or scratched so it could no longer record data or instructions, then the damage would be damage to tangible property.

But if the data and information stored on the hard drive became "disordered" or the instructions came into conflict with each other, that would be damage to software. Although this may make the computer inoperable, the hardware is not damaged.

Courts in many states have ruled on this question.

Cases in the 1970s and 1980s generally concluded that software is intangible property. More recent cases shifted, treating software as tangible property. Yet there is no consensus among the jurisdictions.

How courts may define physical damage to property—and apply those definitions specifically to DRM—remains to be seen.



JA RULE RULING: The legal wrangling is finally over between Steve Gottlieb's TVT Records on one side and Island Def Jam and Lyor Cohen on the other regarding recordings by Ja Rule. The U.S. Second Circuit Court of Appeals on Jan. 10 denied TVT's petition for rehearing and for a rehearing en banc.

Last June, the appeals court reversed a $54 million judgment, which the District Court had reduced from a $132 million jury award. That left a $126,720 judgment in favor of TVT—against IDJ—for breach of contract, which the label did not appeal.

Charles Ortner with Proskauer Rose in New York is delighted with this result.

"It's gratifying that 23 appellate judges have reaffirmed that all that TVT was entitled to was $127,000," says Ortner, IDJ's lead counsel in the case. ••••