Interesting Contract Interpretations in Eighth Circuit Fantasy Baseball Case–CBC v. MLB

By Eric Goldman

CBC Distribution and Marketing, Inc., v. Major League Baseball Advanced Media, L.P., No. 06-3357/3358 (8th Cir. Oct. 16, 2007)

You’ve already heard about this case, which held that MLB’s right of publicity claim against a fantasy baseball league provider was barred by the First Amendment. Personally, I found that ruling only mildly interesting. The First Amendment defense to ROP claims is so squirrelly that I have no idea when we’ll see it again, so the precedential impact of this ruling is unfortunately low. Instead, the court should have ruled that publishing player statistics in an online commercial database isn’t a commercial exploitation (i.e., lacked the requisite “commercial advantage”) of any player’s publicity rights any more than publishing a book compiling such statistics would be. That would have been a more sensible ruling and would have provided a lot greater certainty for the future.

In any case, I think the discussion about the expired CBC-MLB contract is way more interesting than the right of publicity discussion. The court lays waste to the standard interpretation of at least 2 very commonly used contract provisions, and this provides a cautionary tale to drafters.

Representation/Warranty of Authority

The contract said that the licensor “represents and warrants that it has the authority to grant the rights licensed herein.” Normally, this R&W is made as part of a series of ownership R&Ws–typically that the licensor (1) owns its licensed stuff, (2) has the right to grant licenses to the stuff, and (3) use of the licensed stuff won’t infringe any third party rights. When these R&Ws are poorly drafted, they can be effectively redundant (i.e., a third party claim of infringement triggers all three R&Ws), but #2 does pick up two additional situations compared to #1: (a) where the licensor owns the stuff but has granted an exclusive license to a third party that would conflict with the newly granted license, and (b) where the licensor itself in-licenses stuff, in which case the R&W tests if the licensor has appropriate sublicensing rights.

Here, the court rejects the licensee’s argument that the Players Association (the licensor) breached the R&W because it didn’t have good title (because there were no enforceable publicity rights). Instead, the court reads the R&W as an R&W of agency–that is, that the Players Association is the agent of the players.

FWIW, personally, I rarely use R&Ws of ownership. Usually, I handle infringement risks solely through an indemnity. So I would be unlikely to encounter this issue in a contract I drafted. But I have seen this language hundreds of times in other contracts, and I believe the parties have always intended to ascertain the licensor’s good title. As a result, this court seems to have completely misread this provision, and its interpretation jeopardizes the interpretation of the language in the many, many other contracts where it appears.

Declaration of Ownership

The court also interprets the language that the Players Association “is the sole and exclusive holder of all right, title and interest” in and to the players’ names/statistics. I call this type of provision a declaration of ownership–typically intended to clarify the respective ownership rights between the parties. Personally, I hate these provisions, especially in licenses of public domain data. What does it mean to declare the licensor the “owner” of public domain data? And I’ve had way too many pointless/fruitless negotiations over the ownership about user data that are unquestionably hindered by the weak grammatical structure of such a declaration.

The Eighth Circuit gives us another reason to hate the declaration of ownership clauses. They say that “quite obviously” the language is an R&W of ownership, which the Players Association breached because, in fact, it didn’t have enforceable right of publicity rights. So watch out for those declaration of ownership clauses–they could become an unintended backdoor warranty of ownership!

Enforceability of Post-Termination Restrictions

The MLB contract had provisions waiving a licensee’s right to challenge MLB’s ownership rights (the no-challenge clause) and restricting post-termination use of the data (the no-use clause). The no-challenge clause isn’t that unusual in the trademark license context, but it’s extremely aggressive with respect to licenses of public domain data. (I can’t recall ever seeing it in a right of publicity license). The no-use provision is very common among licenses of public domain data. Without the clause, immediately after the license, the licensee will have an electronic copy of the data and can exploit it freely without paying for it, thus undermining the licensor’s business model.

The district court struck down both clauses on public policy grounds. This was a sensible approach with respect to the no-challenge clause, which has the effect of precluding judicial oversight over dubious claims of ownership. As for the no-use clause, I’m reminded of the Listerine case and the survival of confidentiality restrictions in a trade secret license even after a trade secret has lapsed in the public domain. Normally we tolerate these trade secret restrictions that make the licensee worse off than if the licensee had never signed the contract in the first place. I’m not sure it’s a good policy result, but it’s well-established as a legal doctrine.

Whenever I did data in-licenses, I would always contractually preserve our post-termination ability to procure replacement data from other sources for this very reason (just like I always include a provision in trade secret licenses/NDAs removing the confidentiality obligations if the trade secret is in the public domain). My guess is that MLB was a real bear about such negotiations, so they probably would have resisted the inclusion of such a provision. But without that provision, there is a risk that the court would enforce the post-termination obligation in a way that effectively made the data licensor a monopoly supplier of the data in the future.

The court sidesteps all of this by finding the declaration of ownership provision was a warranty that the licensor breached and thus released CBC from the reciprocal obligations. This sure seems like a roundabout way to reach the result that CBC isn’t contractually restricted from using public domain data. It would have been cleaner if the court would have categorically restricted such clauses on public policy grounds. Instead, because the court took this convoluted process, licensees of public domain data either have to (a) include sufficient warranties (or clauses that a court will misinterpret as a warranty) that will allow the licensee to escape post-termination restrictions on public domain data, or (b) as I always do, include a post-termination right to obtain the data from other sources, which is usually painful to negotiate.