Going Once, Going Twice ... A New Alternative to Design-Bid-Build Contracts

Under the Copyright Act of 1976, copyright protection “subsists in any original work of authorship fixed in any tangible medium of expression, now know or later developed, from which they can be perceived or otherwise communicated, either directly or with the aid of a machine or device.”^ The Act goes on to state that works that may receive copyright protection are not limited to script or printed material but may include “any physical rendering of the fruits of creative intellectual or aesthetic labor.”^

Throughout its history, and despite the Act’s somewhat archaic language, copyright law has proven to be adaptable enough to cover all manner of works created with new and emerging technologies. However, the traditional understanding of copyright law is being challenged by the advent of artificial intelligence (AI) and its ability to produce new creations.

The US District Court for the District of Columbia. recently ruled that works created autonomously by AI are not susceptible of copyright protection. In Thaler v. Perlmutter, Stephen Thaler appealed an administrative decision by the United States Copyright office denying his application to register the copyright for an image generated by an AI program he developed. The court’s decision examined the meaning of what it means to be an “author,” as defined by the Copyright Act and held that only works of human authorship are susceptible of copyright protection under U.S. law.*

The court compared the issue to a case from 1884 that examined whether copyright protection could extend to the then-cutting edge field of photography. In Burrow-Giles Lithographic Co. v. Sarony, it was argued that a photograph should not qualify as a protected work because it was created by a camera. The US Supreme Court disagreed and held that while a camera may generate a “mechanical reproduction” of a scene, it does so only after the photographer develops a “mental conception” of the photograph^^. The court reasoned that the technology used to create the work was immaterial so long as there was human involvement in and creative control over the work.

In a later case, the US Ninth Circuit examined a case in which a crested macaque monkey took a photograph of himself, and various parties attempted to file suit on the monkey’s behalf to confirm copyright protection for the monkey’s photograph.** While the case was decided on standing grounds, the court considered whom the Copyright Act was designed to protect and concluded that the act was designed solely to protect humans.

The Thaler court identified no authority supporting copyright protection in any work originating from a non-human.* However, the issue presented in Thaler was limited to copyright protections for a work created solely by an AI, absent any human input. Therefore, it remains to be seen how courts will address issues related to copyright protection for images that blend human and AI origins.

We stand in a new frontier in both technology and copyright law. As artists and developers increasingly use AI as a tool, the increased distance between human creativity and the final product will present challenging questions regarding how much human input is necessary to afford these creations protection under copyright law.*

References:

^17 U.S.C § 102(a)

* Thaler v. Perlmutter, No. 22-CV-01564-BAH, R. Doc. 24 (Filed 08/18/23).

^^ Burrow-Giles Lithographic Co. v. Sarony, 111 U.S. 53, 59 (1884).

** Naruto v. Slater, 888 F.3d 418 (9^th Cir. 2018).

Intuitively, contracting parties in commercial transactions understand that legal consequences follow a breach of contract: If a party fails to deliver a product as promised, the breaching party can be liable for the cost to correct the breach; but what is that cost?

Say, for example, a business cancels an order to provide parts to a long-time customer because the relationship has gone sour. Legally, the liability for that breach of contract may extend beyond the cost of the order. A breaching party is liable for damages that are a direct consequence of the failure to perform and that were foreseeable at the time the contract was made, which may include lost profit. If the breach was intentional or malicious, the party's liability may extend even to direct damages that were not foreseeable.

The business that cancelled the order now faces a jury’s decision to identify the direct and foreseeable losses, a decision that, by its nature, is vague. However, the law imposes a limit on the jury’s prerogative to decide the damages. Even for a bad faith breach of contract, liability arises only for the direct, immediate consequences of the breach and there should be no liability for damages determined to be remote, indirect, or that have no necessary relation to the breach.

In a recent case, a jury found that a defendant boat engine manufacturer breached its contract with plaintiff boat manufacturer by cancelling a purchase order for engines, and further, that the engine manufacturer was in bad faith. The jury awarded $1.8 million in foreseeable lost revenues and $1.3 million in unforeseeable lost profits. The trial court threw out the “unforeseen” portion of the award because it was not a direct damage, and emphasized that a breaching party does not “become the insurer for all misfortunes that may arise from the breach.”

The boat manufacturer had argued that the cash flow expected from the sale of the boats rendered engine-less by the breach would have been invested in more personnel and capital to grow its northwest division. But, because of depleted cash flow from lost sales, that opportunity was lost. The court found, as a matter of law, that this loss was not a direct consequence of the breach, and thus, regardless of the bad faith, was not a recoverable contract damage. Simply, loss of cash flow in one part of the business that had a ripple effect in a separate division was too indirect to be a recoverable damage. See Marine Power Holding, LLC v. Malibu Boats, LLC, 2016 WL 7241560 (E.D. La. 12/15/2016).

By contrast, courts have found that loss of cash flow is recoverable where directly related to the damages suffered, such as where breach of a contract to deliver chickens to a chicken farmer caused the forced sale of the chicken farm. See Volentine v. Raeford Farms of La., 50-698 (La.App. 2 Cir. 8/15/16), 201 So.3d 325.

Failure to perform on a contract exposes a business to more than it may realize. Understanding this risk allows for smarter decisions before the breach.

In Casbon v. K.W.E.J., LLC d/b/a Keller Williams Realty, et al, the buyer of a home sued her real estate agent for the seller’s alleged misrepresentation of the home’s living area square footage. The facts of this case are unusual because the seller’s representation was based on a prior appraisal report, and accurately reflected the home’s square footage as stated in that report. Also, the buyer financed the purchase, and her lending institution appraised the home again, which resulted in a nearly identical living area square footage calculation.

The plaintiff sought to refinance about a year after buying the home. She used a different lending institution, which retained a different appraiser. The house included a sunroom which had been converted from a porch. The appraiser chose to classify the sunroom as something other than standard living area. As a result, the appraisal report stated the home’s living area square footage was several hundred square feet smaller than the prior appraisal reports, and the plaintiff was not approved for the refinance. The plaintiff sued her real estate agent on the ground that the agent failed to verify the living area square footage before plaintiff purchased the home.

The defendant agent filed summary judgment, arguing she did not owe the plaintiff a duty to investigate or confirm the home’s square footage. The trial court denied the defendant’s motion, finding an issue of fact regarding the classification of the sunroom, specifically “whether it is living area or not living area.”

Reversing the Trial Court, the Court of Appeal granted summary judgment in favor of the real estate agent. The Court noted prior caselaw establishing that agents are not required to confirm square footage as represented by a property owner by measuring or otherwise researching the accuracy of the seller’s representation. The Court also rejected the plaintiff’s contention that the issue here was how the sunroom was classified rather than how the room was measured. To the Court, this was a “distinction without a difference.”

The Court applied the standard rule that real estate agents only are required to disclose defects which are known or should be known to them. Additionally, the purchase agreement expressly put the obligation to verify the seller’s representation of living area on the buyer. Thus, the plaintiff’s claims were dismissed.

Case reference: Casbon v. K.W.E.J, LLC, et al, 23-321 (La. App. 5 Cir. 10/4/23), 375 So.3d 524.