WebTM Blog

The Pitfalls of Using Class Headings in USPTO Trademark Applications.

I have been filing trademark registrations for international clients for more than twenty-seven years. For trademark filings based on international clients’ “home country” applications or registrations, problems frequently arise when their U.S. applications simply repeat the generalized descriptions and identifications of goods and classes of goods that are often acceptable overseas.

The Nice classifications (either all goods in class or the class headings) are not sufficiently specific for a successful application in the US Patent and Trademark Office. Rather, it is necessary to describe the claimed goods with a greater degree of specificity in their ordinary commercial terms. A failure to narrow descriptions of goods and classes sufficiently can lead to delays and even refusals to register. A textbook example of this can be seen in the Bottega Veneta application for its famous, and soon-to-be-registered, leather weave. When the application was first filed in June 2007, the description of goods in Class 18 encompassed a major part of the heading for class 18:

Leather and imitations of leather, and goods made of these materials and not included in other classes; animal skins; hides; trunks and traveling bags.

After a number of office actions (which attacked the application on multiple grounds), in January 2009, Bottega Veneta finally amended the class 18 description (at the PTO’s urging) in keeping with its actual intended use:

wallets, purses, handbags, shoulder bags, clutch bags, tote bags, business card cases, credit card cases, key cases, cosmetic cases sold empty, briefcases, attache cases, valises, suitcases and duffle bags, all made in whole or in substantial part, of leather” in Class 18.

Bottega Veneta’s specific list of items fell within the plain meaning of the general language in the original filing (i.e., “goods made of these materials and not included in other classes,” and “trunks and traveling bags”). However, the use of the class heading can also prevent a later amendment, as it did recently in In re Fiat, 109 USPQ2d 1593 (Serial No. 79099154 TTAB 2014)

There, the applicant requested an amendment to the scope of its services from the class 35 heading (“Advertising; business management; business administration; office functions”) to “advertising services; retail store and on-line retail store services featuring a wide variety of consumer goods of others.” In deciding whether to accept an amendment, however, the Trademark Office looks at the “plain meaning” of the initial description to determine whether it encompasses the added goods or services. In other words, an applicant may amend an application to clarify or limit the identification of goods or services, but not to broaden it. Looking at the original description, the TTAB held that the addition of “retail store and on-line retail store services featuring a wide variety of consumer goods of others” was an impermissible expansion of the scope of the original recitation, despite the fact that those services are properly included within class 35. The “plain meaning” rule, the TTAB explained, “is necessary to provide the public with notice as to the scope of goods and/or services for which applicant is seeking registration and to enable the USPTO to reach informed judgments concerning likelihood of confusion.”

The U.S. practitioner who takes on a registration for international clients under the Madrid Protocol or international convention — Section 44(d) (based on an application) and Section 44(e)) (based on a registration) — must be aware of these issues, among many others, in order to avoid delays and refusals which may cost the client both time and money — and even loss of trademark protection in the United States.

Corporate Officers Held Personally Liable for Copyright Infringement

Universal Furniture International, Inc. v. Paul and Leonard Frankel, Court of Appeals, 4th Circuit 2013

In Universal Furniture International, Inc. v. Collezione Europa USA, Inc., 618 F.3d 417 (4th Cir. 2010), the Fourth Circuit Court of Appeals affirmed a district court judgment against Collezione Europa USA, finding it liable for copyright infringement and awarding the plaintiff $11 million in damages. Collezione declared bankruptcy shortly after the judgment was rendered, so Universal pursued Collezione’s owners and managers, Paul and Leonard Frankel. Leonard defaulted, while Paul attempted to contest his liability.

Collezione was in the business of producing “knock-offs” of others’ furniture designs and offering them at lower prices. The Frankels were Collezione’s only corporate officers. Paul was Vice President, Secretary, and Treasurer, and was responsible for various financial aspects of the business and certain distribution matters. In the trial against Collezione, he testified that he was aware of the cease-and-desist letter sent by Universal and “told his brother that it would be a good idea to redesign the furniture.” Paul was also present when

a photographer took pictures of the apparently-Collezione-but-actually-Universal furniture, and that he received those pictures and distributed them to salespeople (although he maintains that he was not aware of any intellectual property violations). Finally, Paul was involved in the decision to hold orders during the redesign of the furniture to give customers a chance to purchase the new design, and personally contacted at least one of those potential buyers. He had responsibility for the flow of Collezione product, and as a co-owner of the business, he was generally familiar with its operations.

Holding that Paul either knew, should have known or willfully blinded himself to knowing of the infringements, the District Court found that the facts were sufficient to justify finding Paul directly or vicariously liable. The Fourth Circuit affirmed.

“It is copyright infringement not only to copy another’s design, but to authorize distribution of such copies to the public for sale,” the Court noted. Furthermore, a party is guilty of vicarious infringement if he possessed (a) the right and ability to supervise the infringing activity and (b) an obvious and direct financial interest in the exploited copyrighted materials.” Most corporate officers will, ipso facto, have such a direct financial interest. As the Court observed in this case, Paul “had every incentive to see that his company successfully marketed its knock-off furniture, and to ensure that it did so without committing copyright infringement. His failure to prevent infringing distribution thus leaves him at least vicariously liable for that infringement.”

The latter sentence is phrased rather oddly, but what the 4th Circuit meant is that Paul was involved in making calculated decisions that the furniture his company manufactured and sold was close enough to pass as a knock-off, but not so close that it would be infringing. For that reason, Paul was found to have had “knowledge” (i.e., that he knew or should have known) of the infringements. Simply put, a person’s belief that his or her copy or imitation does not infringe on the original work is not a defense to copyright infringement.

You’ll find the 4th Circuit’s August 20th 2013 decision here.

[Note that the decision is designated as "Unpublished." This means that the judges have, for some reason, decided to give it less value as binding precedent and that the decision will not appear in the hardbound official reporters published by the West Publishing Co. However, the Internet has really changed the meaning of "Unpublished." Today "unpublished" decisions can be readily found online (including Google Scholar) and are even occasionally posted on federal court websites. Prior to January 1, 2007, the federal courts had the discretion of barring parties from using unpublished decisions in their legal arguments. Once that discretion was removed by the enactment of Fed. R. App. P. 32.1, the party citing the "unpublished" opinion simply needed to furnish a copy of the decision so the judge's clerk needn't go looking for it. For more on the controversy over "unpublished" opinions, see "Non-publication of legal opinions in the United States" at Wikipedia.]



Corporate Officers May Be Personally Liable for Company Infringements

A recent court order denying a motion to dismiss an action for trademark and copyright infringement reiterates the well-established principle that corporate officers who engage directly in conduct that infringes on the intellectual property rights of others may be held liable for the infringement despite having acted in his or her corporate capacity.

Asher Worldwide Enterprises, LLC (“AWE”), owner of reliabuy.com, sued Housewaresonly.com, Incorporated and its principals, Stuart and Marcia Rubin (collectively, the “Rubins”) for unfair competition under the Lanham Act and for copyright infringement. AWE alleged, among other things, that the Rubins infringed on AWE’s copyrights by copying product descriptions from reliabuy,com and reproducing them on housewaresonly.com, a competing website. (See, Asher Worldwide Enterprises, LLC v. Housewaresonly.com, Incorporated, United States District Court, Northern District of Ill., Case No. 12 C 568.)

As alleged by AWE, the Rubins’ copying wasn’t inadvertent. In late 2009 and early 2010, AWE published 65 product descriptions on reliabuy.com and several months later 47 of them appeared on housewaresonly.com. In August 2010, AWE published 25 more descriptions and all of them subsequently appeared on housewaresonly.com. The Rubins allegedly copied descriptions again in October 2010, publishing 75 of 139 new reliabuy.com product descriptions. And when AWE redesigned its website to focus on discount commercial restaurant equipment, the Rubins started a competing site (restaurantkitchenwarehouse.com) and copied over 200 product descriptions that had been created by AWE.

The Rubins unsuccessfully argued that they could not be held liable for infringements by their corporation unless there was some “special showing” — for example, that the corporation served as their “alter ego.” That argument was quickly shot down by the court. Citing Seventh Circuit precedent, the district court ruled that the plaintiff need only allege that the corporate officers “acted willfully and knowingly and personally participated in the infringing activities or used the corporation to carry out their own deliberate infringement.”

While merely being an officer in a corporation is not enough to invoke personal liability, the court held, “[w]hen corporate officers are in control of the decisions of the corporation at all times, [ ] they may be liable for the intellectual property infringements of the corporation.”

That an individuals was acting on behalf of his or her corporation is no defense to personal liability for trademark and copyright infringement.

The standards for imposing personal liability on corporate officers — and employees — are similar in most, if not all, federal circuits and state courts. The Supreme Court spoke on the subject in Calder v. Jones, 465 U.S. 783 (1984), a libel case brought by Shirley Jones against the National Enquirer and two of its employees, an editor and writer who were responsible for the offending article. In ruling that the individual defendants could be haled into court in California, Justice Rehnquist observed that “their status as employees does not somehow insulate them from jurisdiction… In this case, petitioners are primary participants in an alleged wrongdoing intentionally directed at a California resident.”

That principal has not changed over the years. In 2009, the Ninth Circuit held that an individual “is liable under the Lanham Act for ‘torts which he authorizes or directs or in which he participates, notwithstanding that he acted as an agent of the corporation and not on his own behalf.’” POM Wonderful LLC v. Purely Juice, Inc. and Paul Hachigian, No. 08-56375 (9th Cir. 2009), citing Coastal Abstract Serv., Inc. v. First Am. Title Ins. Co., 173 F.3d 725, 734 (9th Cir. 1999) (quoting Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1015 (9th Cir. 1986.)

McCarthy also teaches that trademarks, like copyrights, may be infringed upon by individuals as well as a corporation, and “all participants, including those acting merely as officers of a corporation, may be jointly and severally liable.” McCarthy on Trademarks, Chapter 25, Section 25:24.

In short, corporate officers and employees who engage directly in infringing conduct do not escape personal liability merely because they acted in a corporate capacity. A copy of the AWE decision, dated August 26, 2013, can be accessed here.


“Free” online images may be expensive copyright infringements

Time and again clients come to us with a letter from a third party demanding that they cease and desist from using an image on their website and hand over an accounting of their income and profits. In many such cases, the client or their web designer found the infringing image on the Internet, liked it and decided to use it. Hey, it was on the Internet and there wasn’t a copyright notice on it, so it’s in the public domain, right? WRONG.

The use of a copyright notice is no longer required under United States law (and the laws of most foreign countries) and many people understandably don’t like using them, as it detracts from an image’s appearance. While the lack of a copyright notice might (sometimes) be an issue for works first published prior to 1989, web owners should assume that ALL images posted on other people’s websites are protected by copyright unless proven otherwise. An assessment of whether a given image is in the public domain is no simple matter and should be left to someone with sufficient knowledge both of copyright law and the circumstances of the image’s initial publication. A table showing what works are in the public domain according to their year of first publication and national origin can be viewed here, but as the reader will quickly see, the issue is somewhat of a minefield.

What’s the penalty for using a work that is under copyright? It could be high. For works first published in the United States, a copyright holder must, in order to invoke the protection of the copyright laws, register the copyright with the United States Copyright Office. This can be done before or after the infringement has commenced. If registration is done before the infringement first occurs, the owner will be entitled to statutory damages and attorney’s fees. (More on that below.) If registration is done after infringement commences, the owner will only be entitled to an award of actual (non-speculative) monetary damages and profits. For works first published outside the United States, if the owner has not also registered his or her copyright in the United States — and most owners of foreign copyrights don’t — the owner will only be entitled to the same award as the U.S. owner who files after infringement commences, i.e., actual monetary damages and profits.

Section 504 of the Copyright Act explains, in general terms, what statutory damages, damages and profits are available to the owner. “Actual damages and profits” means the actual damages suffered by the owner “as a result of the infringement, and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages.” For example, if an owner lost out on a contractual opportunity due to an infringement, that would count as an actual damage. Furthermore,  an owner’s claim that he or she would have charged the infringer $1,000, had he or she asked for a license, might in some circumstances serve as a measure of damages: the owner would at least have to show that it entered into “benchmark” licenses with other persons for similar uses of the same copyrighted property.

As for profits, the copyright owner “is required to present proof only of the infringer’s gross revenue.” Then the infringer is “required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” For non-commercial infringements, the calculation might seem easy: if there is no sale of an infringing item, then there is no profit. But it’s not quite that simple. If an image is used to advertise a product or service, some portion of the profits earned from that product or service will likely be awarded to the copyright owner, and the onus will be on the infringer to prove exactly what percentage. (Courts have awarded higher than twenty percent of the infringer’s profits in such cases.) For commercial infringements — as in the use of an image on an article of clothing — the calculation of profits will generally be more straightforward: gross income less cost of goods sold less expenses of the business amortized against sales.

At any time before final judgment in a copyright case, the copyright owner who has registered his or her copyright prior to the commencement of the infringement may choose statutory damages instead of actual damages and profits. This option is not only less time-consuming, but it will generally result in higher awards than damages and profits. The statutory sum per infringement (not per infringing copy) is a minimum of $750 or a maximum of $30,000, as the court considers just. If the case involves only one infringing copy, statutory damages should be at the lower end of that range, while if the case involves hundreds or thousands of infringing copies, statutory damages will be at the upper end. However, in 2012 the Supreme Court upheld an award of $675,000.00 against a college student in Boston for illegally downloading 30 songs — an award of $22,500.00 per infringement. There is a lot to criticize about the Court of Appeals decision that was affirmed by the Supreme Court, but the case shows the extent of what is at stake when statutory damages are available. Even worse, where the copyright owner proves that the infringement was committed willfully, the court may increase the upper range to $150,000. A copyright owner who publishes his or her work without a copyright notice may have a more difficult time proving willful infringement than one who has stamped the work with a “c-in-a-circle” – © –” followed by the year of copyright and the name of the copyright owner. Caveat: Online copyright notices don’t need to be on the image itself for an argument of willful infringement to succeed. They may appear anywhere on a web page or website, or may be included in the metatags of an image or other download.)

On the other hand, if the court finds that the infringer wasn’t aware of the infringement and had no reason to believe that his or her acts constituted infringment, then at the court’s discretion, the award of statutory damages may be reduced to a mere $200. This is often a difficult circumstance to prove, because ignorance of the law is never an excuse — that is, “I found it on the Internet” is not a defense.

These measures of damages are in addition to the substantial legal fees, and sometimes expert fees, that the infringer will incur in defending a case. They are also in addition to the legal fees of the copyright holder who has registered his or her copyright prior to the commencement of the infringement. Legal fees are the primary reason that the parties in most copyright infringement cases want to settle quickly. The majority of infringements involve low or no profits. Even an infringement that turns a profit of $20,000 is probably not high enough to litigate over, considering that going to court will exceed that amount. Thus it is usually better to split the difference and come to a settlement that both parties can live with.

The next time you use an image you found on the Internet, however, think twice and follow this simple rule: if you are in doubt, don’t use it. Also be sure that you know the sources of all your web designers’ images. Copyright infringement could cost you serious money.

Register your trademarks in emerging export countries

As China’s high-growth, low-wage era wanes, our clients in a range of industries, from clothing and fashion to electronics, are looking for alternatives to source their products. The emerging leaders in low-cost exports include Bangladesh, Cambodia, the Dominican Republic, Ethiopia, Indonesia, Kenya, Laos, Mexico (in that country’s southern-most states), Myanmar, Nicaragua, Peru, the Philippines, Sri Lanka, Tanzania, Uganda, Vietnam. Only four of those countries, Kenya, Mexico, the Philippines and Vietman, can be covered under an International Registration. Nevertheless, we have successfully registered our clients’ trademarks in all of these countries (as well as most others) and strongly recommend that our clients obtain trademark protection in these countries long in advance of conducting any business there. We do so for a variety of reasons, including preventing a third party from blocking a foreign trademark holder’s sourcing in that country, the slowness of the registration process in some jurisdictions, and avoiding legal battles with future contract manufacturers.

A strong trademark in the global market means taking a proactive approach and investing in registration before it’s too late. Many people fail to realize that a trademark registration in a particular territory covers only that territory and that their trademark may well be up for grabs anywhere else. With more than 25 years of experience in filing international trademarks, we can provide you with the advice and services that you need in your business, whether a start-up or well-established.


How Apple Conspired with Publishers to Raise Prices for eBooks

On July 10, 2013, Apple Inc. was found guilty of conspiring to restrain trade in violation of Section 1 of the Sherman Anti-Trust Act. That section criminalizes agreements among competitors at the same level of market structure to fix prices. Although Apple is not a publisher, it was instrumental in bringing together Penguin, Simon & Schuster, HarperCollins, Hachette and Macmillan, and helping them to execute a price-fixing scheme that they believed would serve their long-term mutual economic interests. Without Apple, the five publishers could not have raised ebook prices across the board and eliminated price competition for ebooks practically overnight.

What is curious about the case is not whether Apple and the publishers were guilty — their’s was a classic price-fixing conspiracy — but why five of the six biggest publishers in the U.S. did it at all.

The background of the case is the pricing of ebooks by Amazon, which launched the Kindle in 2007. Until February of 2010, Amazon bought ebooks much the same as it bought physical books: at a wholesale price set by the publisher, which also established a suggested retail list price (“SRLP”), but gave the retailer discretion to set the actual selling price. In the Kindle’s first two years, many publishers set the wholesale price for e-books about 20% lower than the equivalent physical book, reflecting, at least in part, the lower cost of distributing ebooks. (With ebooks not only are there no printing costs. There are also no costs related to shipping, warehousing, inventory and inventory taxes, damaged shipments, faulty print runs, returns and pulping.) Since the typical hardcover bestseller had an SRLP of between $24 and $28, at $9.99 for an ebook, Amazon would either earn a nominal sum at the lower end, or lose a couple of dollars at the upper end.

From the moment Amazon began pricing new releases and New York Times Bestsellers at $9.99, the major publishers (the five mentioned above plus Random House, the largest of all) were very unhappy. They believed that the $10 price would lead consumers to think that the value of a book was $10 and balk at paying $24 to $28 for hardcovers, which at the time represented 95% of sales. In their first attempt to get Amazon to raise ebook prices, the publishers soon put the wholesale price of ebooks on parity with their physical counterparts.

The increase had no effect. Amazon continued to offer Bestsellers and new releases at $9.99, even though Amazon was losing money on most of those transactions. (For a hardcover with an SRLP of $26.00, Amazon paid $13 for the ebook, sold it at $9.99 and lost $3.01 on the sale.) The publishers, on the other hand, lost nothing, but still objected on the basis that it was too cheap. In addition, they feared that Amazon, which had 90% of the ebook market at that point, would use its market position to demand lower wholesale prices for ebooks once Amazon tired of offering ebooks as loss leaders. The publishers also thought that the $9.99 price would add to the continuing demise of bricks-and-mortar bookstores1 and even the death of the hardcover. (In retrospect, predictions of the demise of the hardcover were premature.2)

Amazon established the $9.99 price, and in general tried to keep ebook prices low, for several reasons, one of which was the direct result of the publishers requiring “digital”. First, Amazon was already heavily discounting many of the hardcovers, earning just a few dollars over the wholesale price. Purchasing an ebook for the same price as a hardcover, even a discounted one, was an unattractive prospect to consumers, particularly given that digital rights management (“DRM”), a regime imposed by publishers, prevented consumers from even lending an ebook, let alone selling it in the used book market when they were done with it or holding onto it for its value as a “First Edition.” DRM made ebooks worthless as commodities. $9.99 was thus, at least arguably, a sensible price. Second, since ebooks at that point accounted for no more than five percent of the market, Amazon wanted to gain loyal customers, which was as easy as selling them a Kindle and offering them as much content as possible at the lowest prices — content, not incidentally, that due to DRM could only be read on the Kindle and (later) its apps. Third, while Amazon would take a loss on the digital versions of Bestsellers and new releases, it benefited when Kindle owners became more invested in their devices and therefore more likely to purchase other (and more) ebooks, not to mention other products from Amazon.

By the end of 2009, just about the time that Apple came courting, Macmillan, Simon & Schuster, Hachette, and HarperCollins were so fed up with Amazon’s ebook pricing that they had either begun delaying ebook releases or announced their intention to do so. The theory behind the delay, called “windowing,” was that consumers would be forced into buying the more expensive hardcover edition (rather than wait for the ebook) and Amazon would raise its ebook prices out of desperation. In practice, however, the publishers only ended up losing money. In fact, Penguin refused to join the other publishers after an internal study revealed that when release of an ebook was delayed, its sales never recovered — that is, the customers who would have purchased the ebook didn’t buy the hardcover and didn’t return to buy the ebook when it finally became available. Penguin was right.

In November 2009, Steve Jobs authorized Eddy Cue (“Cue”), Senior Vice President of Internet Software and Services at Apple, to pursue the opening of a dedicated Apple ebookstore simultaneously with the launch of the iPad, set for January 27, 2010. At his initial meetings with publishers in December, Cue assured the publishers that Apple was in favor of higher consumer prices for ebooks if that’s what the publishers wanted, specifically $12.99 and $14.99. (HarperCollins wanted even higher prices, but Apple wouldn’t hear of it.) Apple had a number of demands, however. First, Cue made it clear that Apple would not compete with Amazon or anyone else on prices for ebooks. Second, it would not tolerate windowing, because it would interfere with the growth of the ebook market. Third, Apple would only launch its store if it got all six major publishers to sign on. (Random House eventually decided to bow out, but Apple went ahead with the other five.) Fourth, Apple would not pay the publishers’ then-current wholesale prices for ebooks — generally $13 to $15, but as high as $17.50 — because Apple believed those prices were too high. (Of course, these were the prices that Amazon was already paying the publishers.)

After discussing various proposals, Apple and the publishers settled on the “agency” model of sales, where the publishers, not the retailer, would set the retail list price — i.e., it would no longer be a “suggested” price, but a mandatory one – and ebooksellers would earn a percentage as a sales agent. It was then, however, that the real negotiations began. The issues were essentially three-fold: Apple’s commission, what retail prices the publishers would set, and how the publishers would deal with Amazon and every other ebook seller.

Apple negotiated aggressively. It insisted on a 30% commission, the same commission it was getting in its App Store, and never budged from that. As for pricing, Apple was unwilling to accept retail prices that it thought would be embarrassing. After a two weeks of back and forth, during which the publishers were in daily contact with each other, Apple sent the publishers its terms: when a Bestseller was listed at $30.00 or less, the ebook price could not exceed $12.99; when the Bestseller was listed above $30.00 and up to $35.00, the ebook price couldn’t exceed $14.99. For all other new releases, the $12.99 ebook price would apply to physical books with list prices between $25.01 and $27.50, and the $14.99 ebook price would apply to physical books with list prices between $27.51 and $30.00.

In addition, knowing that the agency model would fail unless every other ebookseller were forced to accept it, Apple insisted on a “most favored nations” clause (“MFN”) under which the publishers guaranteed that their retail price at the Apple store for any given ebook was equal to the lowest selling price on the Internet for the same ebook. In other words, if Amazon continued selling ebooks at $9.99, the publishers would have to set a $9.99 price for the Apple store and Apple would still be entitled to its 30% commission. As one of Cue’s colleagues at Apple in Britain noted, following a conversation with Cue (and ascribing these words to him), “any decent MFN forces the model.” With the MFN, moving Amazon and everyone else to the same pricing structure as Apple was a fait accompli.

In January of 2010, the publishers were claiming that Apple was their savior, but the irony of the deal they made with Apple is that consumers would pay more money for Bestsellers and new releases while the publishers would earn less. Under the wholesale arrangement with Amazon as it then existed, the publishers received about 50% of the hardcover list price, i.e., they received $13 for a book priced at $26, even if Amazon only sold it for $9.99. Under the Apple “agency” arrangement, the publishers would earn just 70% of the ebook selling price. That meant that a $12.99 ebook (which applied to a bestseller whose physical counterpart had an SRLP of under $30.00), earned the publishers $9.01, whereas the publisher might have received as much as $15 from Amazon (i.e., 50% of $30.00).

Some of the publishers predicted that with the agency model, they would lose about 17% of their e-book gross revenue, resulting in significant losses in the millions of dollars, but they still believed they would be better off in the long term. HarperCollins concluded that the economics of the deal were “terrible” for the company and its authors, but felt that “the strategic value” of Apple creating an ebookstore was “very high.” Apple must have been laughing all the way to the bank. It had gotten five major publishers to accept less for their ebooks than Amazon was paying, while forcing consumers to pay higher prices. At the same time, Apple created for itself a no-risk “level playing field” for entering the ebook market without any threat of competition with Amazon or anyone else. It was already set to launch the iPad. Now it would compete against the Kindle, rather than the prices of ebooks that Amazon offered for it.

Moving Amazon to an agency deal and thereby fixing prices was only possible by the publishers acting in concert with each other, and Apple was their prime mover. The effects of the deal were immediate. Within two weeks of Amazon moving to the agency model, the average per unit e-book retail price increased by 14.2% for new releases, 42.7% for Bestsellers and 18.6% across all of the five publishers’ ebooks. As Apple had anticipated, the publishers also instituted price increases for their backlist ebooks, even though these weren’t actually governed by the price tier regimen negotiated by Apple. In addition, the five publishers also raised the prices of some of their new release hardcovers so that the ebook version would move into a higher price tier. The result of the price increases was, not surprisingly, lost sales. Thus, as the Court found, “consumers suffered in a variety of ways from this scheme to eliminate retail price competition and to raise e-book prices. Some consumers had to pay more for e-books; others bought a cheaper e-book rather than the one they preferred to purchase; and it can be assumed that still others deferred a purchase altogether rather than pay the higher price.”

If there was any question whether Apple knew what it was doing by forcing the publishers to agree to the MFN, Steve Jobs clarified it when he spoke to his biographer, Walter Isaacson, the day after the iPad was launched:

Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that -– they thought it would trash their ability to sell hardcover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, “We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.” But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, “You’re going to sign an agency contract or we’re not going to give you the books.

Although Apple attempted to defend itself as the hero that went to battle against Amazon.com and established “competition” in the ebook marketplace, nothing could be further from the truth. As the factual findings in the case make clear, Apple’s efforts were intended to reduce competition and they succeeded in doing so. Apple’s vision of “competition” in the ebook market was not lower ebook prices for consumers, but offering a better device which consumers could use to access the same ebooks at the same prices.

The high prices that resulted from the scheme were ameliorated somewhat once the five publishers pleaded guilty and agreed with the U.S. Department of Justice not to prohibit retailers from setting the sale price for ebooks. But Amazon’s low prices may not have endured anyway: for obvious economic reasons, predatory pricing is only a short-term strategy. In any case, Amazon’s practice was probably legal under U.S. law as controlled by Supreme Court precedent. Selling under cost becomes illegal only if

the scheme alleged would cause a rise in prices above a competitive level sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it. Evidence of below cost pricing is not alone sufficient to permit an inference of probable recoupment and injury to competition. The determination requires an estimate of the alleged predation’s cost and a close analysis of both the scheme alleged and the relevant market’s structure and conditions. Although not easy to establish, these prerequisites are essential components of real market injury.3

Since Amazon showed no sign of ever wanting to raise prices, it would probably not have satisfied the test, even if it was arguably recouping its loss through customer loyalty.

Currently ebooks account for about 20% of publishers’ revenues, compared to 15% in 2011 and 5% in 2009-2010. 2012 ebook sales in fiction rose 42% (over 2011), while nonfiction and audiobooks saw increases of 22% each. For children’s and young adults’ ebooks, sales increased some 117%. Hardcovers did slightly better in 2012 than 2011.4

Apple’s prediction of immediate dominance in the ebook market never came to pass, despite the fact that Apple has sold some 84 million iPads, vastly more devices than have been sold by Kindle. Amazon has about 50-60% of the ebook market, while Apple has 10-20%. This is probably because Kindle owners are readers, while iPad owners prefer to use their iPads for other things. It isn’t the verdict against Apple that “ensures that Amazon will remain on top for the foreseeable future,” as Matt Buchanan claimed in a recent article in the New Yorker.5 What predicts Amazon’s continued dominance is that it has built up a business based on books in every available format and has fostered a literary culture led by readers.

Although a serious competitor, Apple was never the savior the publishers were looking for. Indeed, it is rather strange to view Amazon as the bully and Apple as the good guy. After all, it was Apple, not Amazon, which cost publishers — and authors — millions of dollars in lost income by paying publishers less for their ebooks than Amazon was willing to pay.


1Amazon and other online booksellers also aggressively discounted physical books, a practice with which bricks-and-mortar booksellers could not compete, given the increased costs of maintaining a bookstore. While Amazon can be blamed for exploiting the efficiencies of online bookselling, there were other factors that led to the demise of bookstores, one of which was noted by Ken Auletta in the New Yorker on April 26, 2010, just as Apple’s conspiracy with the five publishers was unfolding:

Amazon had a profound effect on publishers’ business, creating a place where customers could reliably find books that were no longer being promoted in stores. Backlist books—those which sell reliably over time—are vital to publishing houses. At Random House, more than fifty per cent of revenue is generated from books like “The Prophet” and “Mastering the Art of French Cooking,” which provide steady profits that allow editors to make more adventurous gambles on new books. With Amazon, “people could find backlists,” David Young, of Hachette, said. “You were no longer hoping and praying that you would find that spine on a shelf.” Carolyn Reidy said that in a three-month period online vendors typically sell copies of twenty-five hundred Simon & Schuster titles that bookstores don’t stock.

Auletta, Ken. “Publish or Perish: Can the iPad topple the Kindle, and save the book business?” New Yorker, April 26, 2010


[Mr. Auletta's article is fascinating because at the time he wrote it he was unaware of the conspiracy to raise and fix prices. Many of the quotes from industry players really only make sense now, knowing how they acted behind the scenes.]

2Carr, Nicholas. “Don’t Burn Your Books—Print Is Here to Stay.” WSJ, January 5, 2013. http://online.wsj.com/article/SB10001424127887323874204578219563353697002.html

3Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. (92-466), 509 U.S. 209 (1993). http://www.law.cornell.edu/supct/html/92-466.ZS.html

4Bosman, Julie. “E-Book Sales a Boon to Publishers in 2012.” New York Times, May 15, 2013. http://www.nytimes.com/2013/05/15/business/media/e-book-sales-a-boon-to-publishers-in-2012.html?_r=0

5Buchanan, Matt. “The E-Book Conspiracy Comes to a Close.” New Yorker, July 11, 2013. http://www.newyorker.com/online/blogs/elements/2013/07/apple-amazon-ebook-antitrust-court-ruling.html

How can Gail Zappa Even Apply for a Trademark in “CAPTAIN BEEFHEART”?

Some of our readers have asked how Gail Zappa can even apply for a trademark of Don van Vliet’s moniker, CAPTAIN BEEFHEART, and want to know whether something can be done now to prevent the mark from registering.

The Trademark office (PTO) doesn’t require an applicant to show that s/he has the right to register the mark where the name/mark is not a living person. (In the case of a living person, the applicant needs written consent from that person consenting to registration.) Instead, the PTO relies on the applicant’s sworn declarations. Fraudulent or misleading claims are a basis to cancel a trademark registration.

Since the CAPTAIN BEEFHEART mark was already “published for opposition” on April 23rd and no one opposed it within the requisite 30-day period, there is little that can be done until the mark is registered. During the application process, “adversarial” arguments — for example, that the opposer has a signed contract from Don van Vliet that allows the opposer to use the name “Captain Beefheart” in perpetuity in connection with the sale and exploitation of Mr. van Vliet’s sound recordings — are ignored by the PTO and the Commissioner of Trademarks. What impedes registration are more technical matters related to trademarks: a likelihood of confusion between the applied-for mark and a prior federally registered trademark; a right of priority asserted by party who filed for the same or similar trademark after the applicant filed for it; pending litigation against the applicant for trademark infringement related to the applied-for mark; and claims that the applied-for mark is generic or merely descriptive of the goods and services for which trademark registration is sought.

Once the trademark is registered, however, it’s open season until the mark is incontestable, essentially 5 years after the registration issues.”. Affected parties — including the Estate of Don van Vliet, record companies and film companies that have produced Captain Beefheart sound and audiovisual recordings — should, if they have just cause, bring a cancellation action either in federal court or the Trademark Trial and Appeal Board (TTAB) as expeditiously as possible. The fact that no one opposed registration during the review period is not fatal to a later cancellation action by any means. (The lack of opposition only indicates that no one was watching the PTO publications, undoubtedly because no one expected that anyone would apply for a CAPTAIN BEEFHEART registration.) Affected parties may also contemplate putting Ms. Zappa on notice now that they will seek cancellation if she goes ahead with the registration. Whether the mark will be cancelled, of course, depends upon the extent and source of Ms. Zappa’s rights over the actual rights of those seeking cancellation and their legal and financial ability to assert those rights.

Can Gail Zappa Stop Anyone from Using the Name “Captain Beefheart”?

On June 18th, the United States Patent and Trademark Office (PTO) issued a “Notice of Allowance” to Gail Zappa, permitting her to file a statement of use within the next three years demonstrating that she is using CAPTAIN BEEFHEART as a trademark. It has been widely misreported in the music media that Gail Zappa already “trademarked” the name, but the Notice of Allowance only paves the way for registration, which may or may not happen down the road. Moreover, even if the Trademark Office registers the mark, she may not be entitled to it lawfully. Captain Beefheart, for the uninitiated, is the moniker used by composer, performer and artist Don van Vliet beginning in 1964, long before he ever met Frank or Gail Zappa. Mr. van Vliet died in 2010. [Correction: van Vliet knew Frank Zappa in High School. But he didn't record for Zappa until long after he recorded for other record labels.]

Let’s take a look at what Gail Zappa did to get this far.

On August 3, 2012, Ms. Zappa filed a sworn Declaration with the PTO stating that

she believes she is entitled to use [CAPTAIN BEEFHEART] in commerce; to the best of her knowledge and belief, no other person, firm, corporation or association has the right to use said mark in commerce either in identical form or in such near resemblance thereto as may be likely, when applied to the goods or services of such other person, to cause confusion, or to cause mistake, or to deceive….

In other words, Ms. Zappa told the PTO that she is the only person with the right to use Mr. van Vliet’s moniker in commerce — to the exclusion of EMI, Virgin International, Buddha Records (acquired by Bertelsmann Music Group, which released a remastered Safe as Milk and The Mirror Man Sessions) and any other record company that recorded and released “Captain Beefheart” recordings. In fact, Ms. Zappa’s registration is not just for records, but identifies a wide range of products to which she intends to claim exclusive rights:

International Class 009

  • Audio and video recordings featuring music and concerts;
  • musical sound recordings;
  • musical video recordings;
  • phonograph records featuring music;
  • pre-recorded CDs, DVDs, audio tapes, video tapes, audio discs, video discs, audio cartridges, and video cartridges featuring music and concerts;
  • downloadable audio recordings, downloadable video recordings, and downloadable MP3 files all featuring music and concerts;
  • downloadable motion picture films, downloadable television shows and downloadable radio shows all featuring music and concerts;
  • downloadable multimedia files featuring music and concerts;
  • electronic publications, namely, books, magazines, manuals, journals, catalogs, brochures, newsletters, featuring music and concerts recorded on computer media;
  • interactive multimedia computer game programs;
  • music-composition software;
  • software for creating music;
  • software featuring musical sound recordings and musical video recordings;
  • multimedia software recorded on CD-ROM featuring music and concerts;
  • electronic game software;
  • downloadable ring tones for mobile phones;
  • downloadable graphics for mobile phones;
  • sunglasses.

Granted, Ms. Zappa’s application is an “intent to use” application — meaning that she hasn’t necessarily used CAPTAIN BEEFHEART as a “source identifier” (see below) on any of these products yet — but it’s hard to imagine that in the coming months she’ll be placing the mark on goods in all these categories. Nonetheless, she has 4 options:

(1) She can file a statement of use for the specified goods. If she goes this route, she must already have used the mark in commerce on all of them. Trademark Manual of Examining Procedure (TMEP) §1109.03. For instance, it’s not enough to release a CAPTAIN BEEFHEART DVD but not CAPTAIN BEEFHEART electronic game software or CAPTAIN BEEFHEART sunglasses. Registrants who try to fool the PTO by filing a statement of use without actually using the trademark for all the specified goods risk having their trademark canceled at a later date.

(2) She can ask the PTO for up to five additional 6-month extensions to file the statement of use in anticipation of releasing goods in all the specified categories;

(3) She can “divide” her application, allowing the trademark to be registered for the categories she’s actually using, while retaining an active intent-to-use application for the remaining goods; or

(4) She can allow the mark to be registered for the categories she’s actually using and relinquish the remaining categories.

There are a number of pitfalls to a broad trademark application of this type. Living performers who attempt to register their names as trademarks in Class 9 are generally surprised to find out that the PTO will reject their applications on the basis that the proposed mark only identifies a featured performer on a sound recording and doesn’t function as a trademark to identify and distinguish the applicant’s goods from those of others and to indicate the source of applicant’s goods.

Section 1202.09(a)(ii) (“Evidence that a Performer’s Name is a Source Identifier”) of the TMEP tells trademark examiners that

The use of the author’s or performer’s name on a series of works does not, in itself, establish that the name functions as a mark. The record must also show that the name serves as more than a designation of the writer or performer, i.e., that it also serves to identify the source of the series. See In re First Draft, 76 USPQ2d 1183, 1191 (TTAB 2005) (holding pseudonym FERN MICHAELS identified only the author and did not function as a mark to identify and distinguish a series of fictional books because the “evidence of promotion” was “indirect and rather scant,” despite applicant’s showing that the name had been used as an author’s name for 30 years; that 67 separate books had been published under the name, and approximately 6 million copies had been sold; that the book jackets listed the titles of other works by Fern Michaels and promoted her as a bestselling author; that the author had been inducted into the New Jersey Literary Hall of Fame; and that there was a www.fernmichaels.com website); In re Chicago Reader Inc., 12 USPQ2d 1079, 1080 (TTAB 1989) (holding CECIL ADAMS, used on the specimen as a byline and as part of the author’s address appearing at the end of a column, merely identifies the author and does not function as a trademark for a newspaper column).

The PTO will make an exception, however, where the performer’s name is used on a series of sound recordings and where the applicant states (truthfully) that s/he controls the quality of the recordings and the use of the name, such that the name has come to represent an assurance of quality to the public. TMEP §1202.09(a)-(a)(ii), (a)(ii)(B); see In re Polar Music, 714 F.2d at 1572, 221 USPQ at 318; In re First Draft, 76 USPQ2d at 1189-90.

This would seem difficult, if not impossible, to demonstrate in the case of an artist like Captain Beefheart, who recorded for various record labels both before and after he met the Zappas. Without exception, recording agreements grant the labels the right to use a performer’s name, real and fictitious, for as long as their rights last (and generally in perpetuity). Thus, if called to account, Ms. Zappa may not be able to show her entitlement to exclusive use of the Captain Beefheart name. It would be interesting to know whether Ms. Zappa has purchased all extant Captain Beefheart recordings, or acquired posthumous rights of publicity for Mr. van Vliet under Cal. Civ Code § 3344.1. That right lasts for 70 years after death and is freely transferable, licensable, or descendible. Although federal trademark law supersedes state law, it only does so if there is a legitimate claim to a federal trademark in the first place. Unfortunately, the PTO is not obliged to ask these questions or investigate the veracity of any statements made by Ms. Zappa in her application, but may simply rely on the fact that her declarations are made under penalty of fine or imprisonment.

Finally, even if Ms. Zappa obtains a registration on any of the goods specified in her application, she may not be able to enforce those rights against prior users, particularly those who acquired rights to use Mr. Van Vliet’s moniker in connection with sound and audiovisual recordings. Ms. Zappa’s claim over the CAPTAIN BEEFHEART trademark, even if it registers, is far from assured.

“Transformative” art does not infringe copyright, Second Circuit rules

[Patrick Cariou v. Richard Prince, et al., 11-1197-cv, April 25, 2013.]

When United States District Court Judge Deborah Batts issued her decision in Cariou v. Prince on March 18, 2011, the art world shuddered. In 30 of his larger-than-life paintings, appropriation artist Richard Prince was found to have infringed on the copyrights of a French photographer, Patrick Cariou. But that wasn’t the worst of it. Prince is an artist of some renown. He shows at Gagosian Gallery, a contemporary art gallery that also shows Richard Serra, Damien Hirst, Edward Ruscha, Jeff Koons and many other art “stars” of the last three decades. His works sell for over a million dollars each.  And here was a federal judge not only ordering the immediate delivery of 30 of Prince’s artworks to Cariou, “for impounding, destruction or other disposition, as Plaintiff determines” but also the notification by  Prince and his gallery to the purchasers of any sold works that the works “were not lawfully made” and “cannot lawfully be displayed” – ever. (For the District Court decision, see Cariou v. Prince, Case No. 08 Civ. 11327, Slip Op. at 36-37 (S.D.N.Y. Mar. 18, 2011)). It was both a shocking affront to freedom of expression and another depressing indication of copyright law run amok, with little care for the practices of contemporary art.

Artists can now breathe a partial sigh of relief. On April 25th, 2013, the Second Circuit Court of Appeals overturned Judge Batts’ decision, finding 25 of the 30 works non-infringing and sending the case back to Judge Batts to determine whether the remaining five works are infringing in accordance with the Second Circuit’s criteria. Although flawed, the Second Circuit’s decision is historic: it is the first time that a court has given a truly expansive reading to “fair use” outside the traditional confines of literary criticism, educational uses and parody.

The Patrick Cariou photographs Prince appropriated for his art depicted Jamaican Rastafarians and landscapes. They were reproduced in Cariou’s book entitled Yes Rasta, published in 2000. Cariou testified that his work was “extreme classical photography [and] portraiture” and he didn’t “want that book to look pop culture at all.” 7000 copies were printed, but most of them were sold below the suggested retail price. Cariou earned about $8,000 in royalties. But for a handful of private sales, Cariou did not sell or license the photographs – indeed he was reluctant to do so.

Cariou’s work obviously inspired Prince, but certainly not in the way Cariou would have hoped. Cariou’s artistic aims were irrelevant to Prince, who sought to “make a kind of fantastic, absolutely hip, up to date, contemporary take on the music scene.” Titled “Canal Zone,” the series also related to a “post-apocalyptic screenplay” that Prince dreamed up, which emphasized the themes of “equality of the sexes” and “the three relationships in the world, which are men and women, men and men, and women and women.” Whether Prince’s ideas seem sophomoric – how “up-to-date” could a reference to Joni Mitchell’s song, “Woodstock,” in the title of one of the works (“Back to the Garden”) be? — or whether Prince’s use of the Rastas’ images seems vaguely racist is beside the point: what mattered to the Second Circuit was whether he actually did something different with the appropriated work.

Section 107 of the U.S. Copyright Act provides that

the fair use of a copyrighted work … for purposes such as criticism, comment, news reporting, teaching …, scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include — (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

In Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 577-78, a 1994 decision upholding the right of rap group 2 Live Crew to create a parody of Roy Orbison’s Pretty Woman, the Supreme Court warned that interpreting Section 107

is not to be simplified with bright-line rules, for the statute, like the doctrine it recognizes, calls for case-by-case analysis. The text employs the terms “including” and “such as” in the preamble paragraph to indicate the illustrative and not limitative function of the examples given, which thus provide only general guidance about the sorts of copying that courts and Congress most commonly had found to be fair uses. Nor may the four statutory factors be treated in isolation, one from another. All are to be explored, and the results weighed together, in light of the purposes of copyright.

Although the holding in the Campbell decision was confined to the question of whether 2 Live Crew’s song was “parody” of the original, the Supreme Court suggested, for the first time, that the appropriation of a pre-existing work was “fair use” if it was “transformative,” citing more than a dozen times to an article by Pierre Leval, then a judge in the United States District Court, Southern District of New York. The article, entitled “Toward a Fair Use Standard,” 103 Harvard Law Review 1105 (1990), boldly set forth the “transformative” standard, cogently arguing that when a work is appropriated, “fair use” required nothing more (or less) than that the new work create “new information, new aesthetics, new insights and understanding” or “employ the quoted matter in a different manner or for a different purpose from the original.” This is so, Judge Leval argued, because “[m]onopoly protection of intellectual property that impeded referential analysis … would strangle the creative process.”

Campbell came two years after the Second Circuit’s decision in Rogers v. Koons, 960 F.2d 301 (1992), where the Second Circuit ordered impounded and destroyed a Koons’ sculpture (reproduced in multiple), entitled “String of Puppies” for copyright infringement of a photograph with the same tableau. In its decision, the court considered first whether the appropriating work was a “parody” of the original (although the court also confused “satire” and “parody”) and rejected Koons’ claim to be ”acting within an artistic tradition of commenting upon the commonplace” and making a “satirical critique” of materialistic society:

It is the rule in this Circuit that though the satire need not be only of the copied work and may, as appellants urge of “String of Puppies,” also be a parody of modern society, the copied work must be, at least in part, an object of the parody, otherwise there would be no need to conjure up the original work. [Citations omitted.]

We think this is a necessary rule, as were it otherwise there would be no real limitation on the copier’s use of another’s copyrighted work to make a statement on some aspect of society at large. If an infringement of copyrightable expression could be justified as fair use solely on the basis of the infringer’s claim to a higher or different artistic use–without insuring public awareness of the original work–there would be no practicable boundary to the fair use defense. Koons’ claim that his infringement of Rogers’ work is fair use solely because he is acting within an artistic tradition of commenting upon the commonplace thus cannot be accepted. The rule’s function is to insure that credit is given where credit is due. By requiring that the copied work be an object of the parody, we merely insist that the audience be aware that underlying the parody there is an original and separate expression, attributable to a different artist. This awareness may come from the fact that the copied work is publicly known or because its existence is in some manner acknowledged by the parodist in connection with the parody.

Finding no parody, the court concluded that “String of Puppies” was “substantially similar” to the original work – with the same “expressions,” content and meaning – and thus an infringement.

It was this decision to which Judge Batts seemed to adhere in her opinion in Cariou, thereby missing the change that occurred in the Second Circuit’s thinking following Judge Leval’s appointment to the Second Circuit in 1993. (Judge Leval assumed senior status in 2002.) By 2006, when the Second Circuit decided Blanch v. Koons, 467 F.3d 244, it had more or less embraced Judge Leval’s doctrine which, after all, had been heavily cited by the Supreme Court. This time around, Koons’ work was found to be non-infringing. Where Rogers v. Koons never even mentioned the word “transformative,” Blanch v. Koons was based on it:

The test for whether [Koons' use] is “transformative,” then, is whether it “merely supersedes the objects of the original creation, or instead adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message.” … The test almost perfectly describes Koons’s adaptation of [the original work]: the use of a fashion photograph created for publication in a glossy American “lifestyles” magazine — with changes of its colors, the background against which it is portrayed, the medium, the size of the objects pictured, and, crucially, their entirely different purpose and meaning — as part of a massive painting commissioned for exhibition in a German art-gallery space. We therefore conclude that the use in question was transformative.

Although Judge Batts cited Blanch, she didn’t understand its implications and focused instead on the fact that Koons’ work, by commenting “on the ways in which some of our most basic appetites — for food, play and sex — are mediated by popular images,” could also be understood as commenting on the original photograph as an example of such popular images. Adding her reading of Rogers to her narrow understanding of Blanch and Campbell, she concluded:

The Court is aware of no precedent holding that such use is fair absent transformative comment on the original. To the contrary, the illustrative fair uses listed in the preamble to § 107 “criticism, comment, news reporting, teaching [ ...], scholarship, [and] research” — all have at their core a focus on the original works or their historical context, and all of the precedent this Court can identify imposes a requirement that the new work in some way comment on, relate to the historical context of, or critically refer back to the original works.
*     *     *
“If an infringement of copyrightable expression could be justified as fair use solely on the basis of the infringer’s claim to a higher or different artistic use . . . there would be no practicable boundary to the fair use defense.” Rogers v. Koons, 960 F.2d at 310. The Court therefore declines Defendants’ invitation to find that appropriation art is per se fair use, regardless of whether or not the new artwork in any way comments on the original works appropriated. Accordingly, Prince’s Paintings are transformative only to the extent that they comment on the Photos; to the extent they merely recast, transform, or adapt the Photos, Prince’s Paintings are instead infringing derivative works.

The Second Circuit rejected every aspect of Judge Batts’ decision. In doing so, it expanded the meaning of “transformative” by clarifying that the allegedly infringing work need not refer to or comment in any way upon the appropriated work. “We agree with Appellants,” the court wrote, “that the law does not require that a secondary use comment on the original artist or work, or popular culture.” The decision continued:

Certainly, many types of fair use, such as satire and parody, invariably comment on an original work and/or on popular culture. For example, the rap group 2 Live Crew’s parody of Roy Orbison’s “Oh, Pretty Woman” “was clearly intended to ridicule the white-bread original.” [citing Campbell). Much of Andy Warhol’s work, including work incorporating appropriated images of Campbell’s soup cans or of Marilyn Monroe, comments on consumer culture and explores the relationship between celebrity culture and advertising. As even Cariou concedes, however, the district court’s legal premise was not correct. The law imposes no requirement that a work comment on the original or its author in order to be considered transformative, and a secondary work may constitute a fair use even if it serves some purpose other than those (criticism, comment, news reporting, teaching, scholarship, and research) identified in the preamble to the statute. ... Instead, as the Supreme Court as well as decisions from our court have emphasized, to qualify as a fair use, a new work generally must alter the original with “new expression, meaning, or message.” [Here, the Second Circuit cited Campbell and Blanch, both of which were citing Judge Leval.]

Furthermore, the court held, “Prince’s work could be transformative even without … Prince’s stated intention to do so. Rather than confining our inquiry to Prince’s explanations of his artworks, we instead examine how the artworks may “reasonably be perceived” in order to assess their transformative nature.”

The court meant two things by this. First, in appropriating a work of art, the artist need not intend to address any aspect of the appropriated work, the artist who created it or culture in general. In fact, he or she need not intend to create any particular meaning at all. It is enough to use the appropriated work in a new way to create different ideas and expressions. Second, the law doesn’t require the artist to explain the meaning of his or her work, in part because any explanation is likely to be self-serving, and also because the meaning of an artwork is completed by the viewer.

The Second Circuit’s finding that Prince’s work sufficiently transformed Cariou’s photographs so as to qualify it as “fair use” turned mainly on a side-by-side comparison. The crucial (indeed, transformative) nature of the Second Circuit’s decision is its complete (and refreshing) lack of concern with meanings and messages and its focus instead on visual and physical transformation resulting from the artistic process:

Here, our observation of Prince’s artworks themselves convinces us of the transformative nature of all but five, which we discuss separately below. These twenty-five of Prince’s artworks manifest an entirely different aesthetic from Cariou’s photographs. Where Cariou’s serene and deliberately composed portraits and landscape photographs depict the natural beauty of Rastafarians and their surrounding environs, Prince’s crude and jarring works, on the other hand, are hectic and provocative. Cariou’s black-and-white photographs were printed in a 9 1/2″ x 12″ book. Prince has created collages on canvas that incorporate color, feature distorted human and other forms and settings, and measure between ten and nearly a hundred times the size of the photographs. Prince’s composition, presentation, scale, color palette, and media are fundamentally different and new compared to the photographs, as is the expressive nature of Prince’s work.

Unfortunately, the court refused to decide whether five remaining works by Prince (GraduationMeditationCanal Zone (2007), Canal Zone (2008) and Charlie Company) were sufficiently different as to be transformative. “Certainly”, the Court said, “there are key differences in those artworks compared to the photographs they incorporate.” The court went on to describe some of those differences, but thought that the five works were either “substantially unaltered” or “aesthetically similar to Cariou’s original work because it maintains the pastoral background and individual focal point of the original photograph” or “the cumulative effect is of the subject in a habitat replete with lush greenery, not dissimilar from many of Cariou’s Yes Rasta photographs.” This waffling reveals a weakness in the court’s test. The fate of the five works now lies in the hands of Judge Batts who, if she doesn’t order the matter put before a jury, will almost certainly condemn the work, given her obvious dislike of Prince’s work the first time around and the fact that the Second Circuit has essentially presented her with a roadmap for doing so.

Two major questions remain open following this decision. The first is whether the  Cariou decision will reach into other media, such as music, and other federal jurisdictions. Until now, federal courts have been largely deaf to the issue of sampling (the appropriation of a master recording) and interpolation (the appropriation of a musical composition). In the Sixth Circuit, for instance, the appropriation of a single chord or a brief, insubstantial passage has been enough to justify the impoundment and destruction of millions of record albums by major recording artists, regardless of the vastly transformative nature of the new works. In fact, the Sixth Circuit is apparently completely unaware of the “transformative” test.

The second question is whether the Second Circuit (or any other court) can give the “transformative” test a brighter line. This may be impossible, given that “fair use” is inherently, and no doubt intentionally, a fuzzy concept. Even the Supreme Court mandated a “case-by-case analysis,” which invariably requires an intellectual dance. That said, no other test has even come close to tolerating a significant degree of appropriation, which is crucial to contemporary art, and hence the progress of art.

Fourth Circuit Decision Threatens Current Phase of Google AdWords Program

On April 9, 2012, the Fourth Circuit Court of Appeals vacated a District Court judgment which found that Google did not infringe on plaintiff’s “Rosetta Stone” registered trademark through the Google AdWords program. The case was sent back to the lower court for re-consideration and, quite possibly, a jury trial.

Through its AdWords program, Google sells advertisers the right to use registered trademarks so that they can receive top placement in Google search results. Advertisers purchase their desired keywords (including any registered trademark with which they may want to be associated) through competitive auction. Since there are only a certain number of top positions, it is quite possible that a trademark owner and its legitimate distributors could be outbid by an unrelated third party.

Prior to 2009, Google permitted the use of third party trademarks only as search terms. They were not displayed in the purchaser’s links or advertising. That changed in 2009, when Google decided to permit AdWord purchasers to use third party trademarks in their advertisements if the trademark has NOT been registered with Google’s Advertising Legal Support team. (According to Google’s policy, Google is “only able to prohibit all use or to allow all use of a trademark in ad text by an advertiser.” Obviously, prohibiting all use of a trademark in ad text by any advertiser is not a viable option for many trademark holders.)

Google also imposed some restrictions, but they aren’t necessarily favorable to trademark holders. In order to use the third party trademark in advertising, the AdWords purchaser must be a reseller of a genuine trademarked product (whether or not authorized by the trademark owner) or a maker or seller of component parts or compatible goods; or must offer information or reviews of the trademarked product. In the latter category are advertisers who set up a web page giving short shrift to the trademark owner’s product and then offering a competing product. (This practice, known as “comparative advertising,” is protected by principles of free speech, but is rife with abuse, as advertisers regularly make misleading and unsubstantiated claims to make their products seem better than that of their competitors and the FTC does not engage in proactive enforcement of its regulations against such practices.)

Plaintiff Rosetta Stone sued Google after being plagued with counterfeiters who purchased the “Rosetta Stone” mark as a keyword in Google’s AdWords program. Between September 3, 2009 and March 1, 2010, the Plaintiff reported to Google 190 instances in which counterfeit products bearing the Rosetta Stone mark appeared in Google’s sponsored links, providing Google with the domain names, the text of each sponsored link and other identifying information. According to Rosetta Stone, Google continued, despite the notifications, to allow those same advertisers to use Rosetta Stone’s mark on other websites. It is unclear from the 4th Circuit’s decision whether Rosetta Stone had provided enough information so that Google “knew or should have known” of the infringing activity. Undoubtedly that question will be answered by the finder of fact in the lower court.

On nearly every major legal point, the Fourth Circuit differed with the District Court. As to the facts, the Fourth Circuit castigated the District Court for failing to “apply the summary judgment standard of review but instead view[ing] the evidence much as it would during a bench trial.” That is, the District Court failed to draw all inferences regarding the evidence in favor of Rosetta Stone, the party against whom summary judgment was sought. This is the basic summary judgment standard.

Rosetta Stone’s main charge against Google, that of direct trademark infringement, is illustrative. Here, the District Court misunderstood the Lanham Act as merely prohibiting Google from passing off its own goods and services as those of Rosetta Stone’s, completely missing the fact, according to the 4th Circuit, that the law prohibits not just confusion as to source, but also as to affiliation, connection and sponsorship. Under this interpretation of the law, Rosetta Stone clearly had presented enough evidence to defeat Google’s motion for summary judgment and take the case to trial.

On the issue of Google’s knowledge and intent, Google’s own studies showed that “there was significant source confusion among Internet searchers when trademarks were included in the title or body of the advertisements” — precisely what Google permitted the purchasers of “Rosetta Stone” to do. Consequently, the Fourth Circuit concluded, “a reasonable trier of fact could find that Google intended to cause confusion in that it acted with the knowledge that confusion was very likely to result from its use of the marks.”

Regarding consumer confusion, the evidence also tended to favor Rosetta Stone. In the District Court, Rosetta Stone presented testimony from would-be customers who purchased bogus “Rosetta Stone” products from a Google-sponsored advertiser, believing that they were buying the genuine article. In addition, Rosetta Stone provided documentation of 123 similar complaints and produced an expert’s report showing that “17% of consumers demonstrate actual confusion” as to whether the paid links were sponsored by Rosetta Stone or a third party. And if this weren’t enough, when two of Google’s in-house trademark lawyers were shown a Google search results page, “they were unable to determine without more research which [of those] sponsored links were authorized resellers of Rosetta Stone products.” Since uncertainly about the origin of a product is quintessential evidence of actual confusion, the 4th Circuit ruled, the District Court should have denied summary judgment to Google.

The 4th Circuit also laid to rest any claim by Google that its use of the Rosetta Stone mark was “functional” because its use allowed Google “to readily identify in its databases relevant information in response to a web user’s query.” As the 4th Circuit pointed out, the functionality doctrine has nothing to do with Google’s use of Rosetta Stone’s mark, but holds that a party may not register a trademark that is the name of a useful or functional product feature. “It is irrelevant,” the 4th Circuit ruled, “whether Google’s computer program functions better by use of Rosetta Stone’s nonfunctional mark.” On the other hand, the court did leave open the possibility of an affirmative defense based on “nominative” use, which occurs when a defendant uses the plaintiff’s mark to refer to plaintiff’s products, generally for purposes of comparison with those of defendant. The 4th Circuit declined to decide whether this affirmative defense was available to Google and merely cited to the standard set by other cases for determining whether a nominative use has occured: “[I]n order to avail [itself] of the nominative fair use defense[,] the defendant (1) may only use so much of the mark as necessary to identify the product or service and (2) may not do anything that suggests affiliation, sponsorship, or endorsement by the markholder.” However, given the actual use in context, a nominative fair use defense does not seem likely.

On remand, Google will be required to prove that it did not turn a blind eye to trademark infringement by those Rosetta Stone advertisers who switched websites after Rosetta Stone reported them to Google. (Again, whether Rosetta Stone provided Google with enough information is an open question.) Google will also need to convince the court or jury that any likelihood of, or actual, confusion among consumers is de minimis. That may be a difficult burden to meet in light of the fact that Google instituted the current phase of its AdWords program in 2009 not because it believed there would be no likelihood of confusion as to the registered trademarks it would auction off, but because it wanted to make money. Google’s admission that it “expected a substantial boost in revenue from this policy change as well as an uptick in litigation from trademark owners” is likely to weigh heavily against Google.

One issue that the 4th Circuit did not directly address in its decision was whether Google’s sale of the Rosetta Stone mark as an AdWord constituted a “use in commerce” under the Lanham Act. For purposes of its decision, however, it assumed that was the case while also citing the Second Circuit’s opinion in Rescuecom Corp. v. Google Inc., 562 F.3d 123, 129-31 (2d Cir. 2009) which expressly decided that the sale of AdWords is a “use in commerce” where the plaintiff’s trademark is used in the advertisement or link. It is highly unlikely that the 4th Circuit will take a different view if that question comes back up on appeal.

With the Rescuecom and Rosetta Stone decisions, it is becoming clear that courts are ready to line up against the use of AdWords in links and advertisements, a practice that has been lucrative for Google for several years. When Google sold AdWords only for “internal” use, the courts were split. District Courts in the Second Circuit unanimously found that such uses were not “uses in commerce” primarily because consumers never saw them. S & L Vitamins, Inc. v. Australian Gold, Inc., 2:05-cv-1217 (E.D.N.Y. Sept. 30, 2007); FragranceNet.com, Inc. v. FragranceX.com, Inc., 2007 WL 1821153 (E.D.N.Y., June 12, 2007); Site Pro-1, Inc. v. Better Metal, LLC, 06-CV-6508 (ILG) (RER) (E.D.N.Y. May 9, 2007) (“Better Metal did not place plaintiff’s SITE PRO 1R trademark on any of its goods, or any advertisements or displays associated with the sale of its goods”); Hamzik v. Zale Corp./Delaware, 2007 WL 1174863 (N.D.N.Y., April 19, 2007); and Merck & Co. v. Mediplan Health Consulting, 2006 WO 800756 (S.D.N.Y., March 30, 2006). However, other courts found that an AdWord purchase of a third party trademark was, by its very nature (i.e., regardless of the visibility of the use), a “use in commerce.” See, e.g.,
Buying for the Home, LLC v. Humble Abode, LLC, 03-CV-2783 (JAP) (D.N.J. Oct. 20, 2006); 800-JR Cigar, Inc. v. GoTo.com, Inc., 2006 WL 1971659 (D. N.J. July 13, 2006); and Edina Realty, Inc. v. TheMLSonline.com, 2006 WL 737064 (D. Minn. Mar. 20, 2006). Similarly, 9th Circuit precedent holds that the use of a third party trademark as a metatag is a “use in commerce” even though consumers wouldn’t normally see it. Brookfield Communications, Inc. v. West Coast Entertainment Corp, , 174 F.3d 1036, 1064 (9th Cir.1999).

Even so, Google could still prevail, either by attrition (as in the Rescuecom case, where Rescuecom simply voluntarily dismissed its lawsuit after receiving the favorable ruling); negotiated settlement; the defense of nominative use; or plaintiff’s failure to prove actual or likelihood of confusion. Whatever the case, it will be some time before we have an answer.