Trademark holding companies were originally devised by lawyers as tax-saving devices — specifically to reduce an operating company’s corporate franchise tax liabilities in the state or states of operation. (Corporate franchise taxes are the taxes a corporation pays to a state for the privilege of doing business there.) Theoretically, the savings could be substantial. The holding company is typically set up in Delaware or Nevada, where there is no corporate income tax on intangibles (like trademarks). The parent company transfers its trademarks to the holding company, which then licenses them back in return for a royalty. The royalty is then treated as an expense to the operating company and tax-free income for the holding company. This sleight of hand may still work in some jurisdictions, but in many places, the courts have already caught on.

No Tax Savings in New York.

Under New York law, trademark holding companies have been consistently disregarded as a means of reducing taxes. The lead case regarding tax liability is Sherwin-Williams Co. v. Tax Appeals Tribunal, 2004 NY Slip Op 07737 [12 AD3d 112] October 28, 2004. There, the New York Court of Appeals (New York State’s highest court) upheld a determination that Sherwin-Williams (an Ohio corporation) was required to report the income earned by its trademark holding company (a Delaware corporation) formed for the purpose of holding some 500 Sherwin-Williams domestic trademarks. The establishment of the holding company and the licenses back to the parent company, the court said, lacked any valid business purpose apart from tax avoidance.

Sherwin-Williams argued that it formed the holding company to: (1) improve quality control oversight with regard to its many licensees and franchisees; (2) enhance its ability to enter into third-party licensing arrangements at advantageous royalty rates; (3) insulate its  trademarks from the parent company’s liabilities; and (4) have flexibility in preventing a hostile takeover. To accomplish those purposes, the holding company established separate office space in Delaware and named as President an individual who had no previous association with the parent company. The tax tribunal and New York courts found these reasons unpersuasive. Not only did the parent company call the shots on management of the trademarks, but the President of the trademark holding company was a person who had no prior experience as a trademark manager. Thus the deduction for royalties that Sherwin-Williams’ operating company paid to its subsidiary holding company was disallowed and the combined income of both entities — the operating company and the holding company — was found subject to New York state corporate franchise tax.

The Sherwin-Williams case is only the most recent New York case to reach this conclusion regarding the reduction of tax liability via trademark holding companies. How would Sherwin-Williams have fared in a lawsuit in which it was sued for trademark infringement or in which the operating company was sued for breach of contact by a licensee or by a consumer for product liability?

Limitations on Liability.

Sherwin-Williams argued to the New York courts that it formed its trademark holding company in part to “insulate the trademarks from the parent’s liabilities,” but the court found ample reason to find the two companies were simply alter egos — at least from the standpoint of tax liability – including the fact that control over the quality of the Sherwin-Williams’ goods came from the parent company, rather than its subsidiary. That finding would not bode well for other types of claims. Automobile Insurance Co. of Hartford v. Murray, Inc., 04-CV-770A (LGF), a 2008 decision from the U.S. District Court, Western District of New York, bears this out. In that case, a lawnmower manufacturer that was sued for product liability attempted to defend itself on the basis that its trademark holding company was the actual owner and licensor of the trademark and therefore the wrong party had been sued. The court examined the organization and function of the holding company, however, and determined that it was formed “with no other business purpose … except to hold and license” the operating company’s trademarks. Consequently, the operating company was found to be the “de facto” or “actual” licensor.

Indeed, in most situations it is doubtful that a trademark holding company would be effective at protecting anything. The operating company/”licensee” will not be able to insulate itself from trademark infringement claims of its subsidiary holding company / “licensor.” Any such lawsuit would almost of necessity be brought against both companies, since both would have played a part in the alleged infringement. Nor is the trademark holding company/”licensor” likely to get away with pointing to its “licensee” (which is usually the licensor’s parent company!) as the sole party liable for breaches of contract or product liability. As one of the leading experts on trademark law has said, “in general, it is accurate to conclude that there is a very substantial risk that a trademark licensor … will be held liable for the torts of licensees…” McCarthy § 18:74 under the theory that the the licensee is a related company. This is especially true where the two companies share board members, management and/or office space. Notwithstanding Murray, where only the operating company was sued, it is the customary practice for attorneys when filing suit to include as many different entities and individuals as could be liable or capable of paying a judgment. In short, whether the claim is asserted against the operating company or its holding company, piercing the corporate veil would not be difficult.

The only possible protection that a holding company might afford to the trademark is an instance in which the operating company is sued for reasons unrelated to its licensing and business activities — for example, if the operating company defaulted on a mortgage or lease, or was sued for some kind of tortious (non-product-related) conduct — but even there, if the operating company’s assets were insufficient to satisfy the judgment, the trademarks might still be reachable as assets of the operating company.

Legal Pitfalls of Licensing through Trademark Holding Companies

In deciding whether to pierce the corporate veil of a trademark holding company, the courts will consider a number of factors, including whether the two companies have common directors or officers; whether the parent corporation owns all or most of the stock in the subsidiary; whether the parent finances the subsidiary; whether the subsidiary has any business with any entities other than the parent; whether the subsidiary has any assets other than those conveyed to it by the parent; and whether employees, officers and directors of the parent (and not the holding company) are the ones controlling the quality of the goods sold under the marks owned by the holding company. In principal, setting up a holding company is easy. But forming and operating one that will be recognized by the courts as an independent entity is time-consuming and expensive. And there is no bulletproof formula for success. In the cases cited above, the holding companies had different management, their own offices, and multiple licensees (i.e., various sources of income), but still failed in their purported objectives. A trademark holding company owned by a parent operating company is by its very nature suspect, but an “independent” holding company owned personally by the owners of a parent operating company is no better. In addition to these problems, there is the legal risk that a trademark holding company just might put a company’s trademarks at risk.

Although trademark holding companies are common, not only have they not been fully endorsed by the courts, but they have also caused damage to trademark owners. Not long ago, one of our clients sued two trademark infringers. The client’s trademarks are owned by a holding company (established by predecessor counsel, not us). One of the defenses mounted by the other side in a countersuit for invalidity is that the licensor holding company doesn’t exercise sufficient control over its licensees. Rather, they argued, control is exercised by the holding company’s parent corporation and the holding company has therefore made a “naked license.” The remedy for a naked license is for the court to declare that the trademark in question was abandoned by the trademark owner. In CNA Financial Corp. v. Brown, 922 F. Supp. 567 (M.D. Fla. 1996), reconsideration den. by 930 F. Supp. 1502 (M.D. Fla. 1996), aff’d, 162 F.3d 1334 (11th Cir. 1998), a court did just that. CNA lost its trademark because the court found that it did not actually control the quality of the services offered by its licensees, but only controlled how the marks themselves were used. (The issue in our client’s case was never addressed by the court, as the case was subsequently settled in our client’s favor.)

This is not the only risk. A holding by a court that an operating company is the de facto or actual licensor of the trademark, as in the Murray case cited above, opens the door to the corollary conclusion that the holding company’s trademark applications and maintenance filings in the PTO were fraudulent, since the holding company may not be the true owner of the trademark. That would be an additional ground for cancellation of trademark registration.

There are still other complications, including how a court or the PTO will view a transfer of a trademark to a holding company, without a transfer of the accompanying “goodwill.” Under U.S. law, trademarks cannot be assigned “in gross” but must be assigned together with the business (i.e., the goods and services) represented by the trademarks. In other words, because the “goodwill” is created by the business, a trademark cannot exist independently of it. A transfer of a trademark to a holding company may thus be considered an assignment in gross, which is voidable and subjects the trademark to cancellation. Indeed, if the holding company does no business other than licensing, it may be very difficult to claim that any goodwill at all is associated with the legal owner of the mark.

These latter issues have not been directly addressed either by the courts or the PTO. However, the risk of losing one’s trademarks by transferring them to a U.S. holding company, when weighed against some very speculative benefits, hardly seems worth it.

(In a future posting, I will deal with a slightly different scenario: where the trademark holding company is located outside the United States.)

This is a very romantic idea which based on certain populist notions regarding the American Dream, but not rooted in historical or legal reality. It is the purpose of this article to describe the “First to Invent” system as it worked in the real world.

Contrary to popular (and populist) belief, the “First to Invent” system was not a system in which patents were awarded to the first person to conceive of an idea. Hacker News provides these helpful examples to show how it worked. (We have taken the liberty of clarifying their examples):

EXAMPLE 1

X comes up with an idea at time 0. X starts working to reduce the idea to practice.
At Time 4, Y comes up with a similar idea, and also starts reducing to practice.
At Time 10, Y gets it all working, writes up and files a patent application.
At Time 15, X gets it all working (poorly), writes up and files a patent application.

Under a “First to File” system, Y will be awarded the patent. Under a “First to Invent” system, Y is presumed to be the one entitled to the patent, but X can initiate an “interference” action. (That’s an administrative procedure in the patent office to determine who “invented” first.) To win the interference action, X must show that he conceived of the invention prior to Time 4 and worked continuously and diligently to reduce it to practice until Time 15. Proving this can be difficult — it requires extensive and objectively verifiable record-keeping. It is also expensive. An interference action may be as little as $50,000 but is typically much more and can exceed three quarters of a million dollars. Fortunately, interference actions are rare: less than one percent of all patent applications become involved in an interference action. This means that in over 99% of patent filings, the patent is effectively awarded to the first (and only) to file.

In those cases where there is a dispute by two or more inventors (or teams of inventors), you only need to ask yourself who has the money to mount an interference action and you’ll know that the answer is “not the small inventor.” An empirical study cited on Bill Heinze’s blog, ip-updates confirms this point. In “Competition, Innovation and Racing for Priority at the U.S. Patent and Trademark Office,” Linda R. Cohen and Jun Ishii from the Department of Economics at UC Irvine analyzed a random sample of 662 patent interference actions and concluded as follows:

“we do not find evidence that the system works to the benefit of small inventors or firms. Small firms rarely avail themselves of the interference process. But if we assume that the winner of an interference is the first-to-invent,* the results suggest that small inventors do not suffer from a filing disability. Alternatively, there is some indication that other groups do have such problems – both the U.S. government and U.S. universities, for example, are far more likely to enter our sample as junior parties, yet they win a reasonable share of cases, which suggests that both institutions systematically take longer to file patent applications than do private firms and individuals. However, we need more data to establish the trend statistically.”

Cohen and Ishii found that in 390 out of 662 cases, or 58.91% of the time, the patent went to the senior filer (i.e., the first to file), while 27.64% went to the junior party, 7.85% went to both parties, and 5.59% went to neither party. (Cohen and Ishii presumed that the party awarded the patent was actually the first to invent, but that probably isn’t true in every case.) In most cases, the winners were large corporations.

Let us continue with the examples comparing the two systems.

EXAMPLE 2

X conceives of the idea at Time 0 and begins working on reduction to practice.
Y conceives of the idea at Time 4 and begins working on reduction to practice.
At time 6, X takes time off to work on something else — perhaps he took another job or started working on a different invention — and he only resumes working on the invention at Time 8.
Y files his patent application at Time 10. X files at Time 15.

Here, Y wins under both the “first to file” system and “first to invent” system, because X lost his priority date of Time 0 when he interrupted his work. His new priority date is Time 8. Since Y was working diligently from time 4 to his filing date, Y’s priority date is Time 4.

EXAMPLE 3

Same as Example 2, except X files at time 10, Y files at time 15.

X, who was the first to conceive of the invention, wins under the “first to file” system, but loses to Y (after an interference action) under “first to invent” system.

In sum, under the “first to invent” system, the patent wasn’t necessarily awarded to the one who first conceived the idea or first reduced it to practice. The situation was far more complicated.

Walter Hunt and Elias Howe

Moving from the abstract to the concrete, here is a real world example of the “first to invent” system in action in one of the most important patents in the history of American industrialization: the sewing machine.

Walter Hunt built the first American sewing machine in 1834, but decided not to seek a patent because he thought his invention would cause unemployment. His machine sewed only straight seams, but used a lockstitch mechanism characterized by a needle with an eye at the point which passed through the cloth, creating a loop on the other side through which a second thread passed via a shuttle. In 1846, Elias Howe obtained the first American patent for what Hunt was the first to invent: “a process that used thread from two different sources.” Howe’s sewing machine, however, failed commercially.

When Isaac Singer, with the help of Walter Hunt, made design improvements, thereby creating the first commercially viable sewing machine, Howe sued Singer for patent infringement. (In Singer’s machine, the needle moved up and down and the mechanism was powered by a foot treadle.) Belatedly, Hunt tried to file for a patent for his earlier invention, but his claim was rejected by the Patent Office. Had Hunt been successful, Howe would never have prevailed against Singer.

What follows are excerpts from the 1854 decision of Judge Charles Mason, Commissioner of Patents, on Hunt’s application. (Thanks to sewalot.com, where we found this text.)

Hunt claims priority upon the ground that he invented the Sewing Machine previous to the invention of Howe. He proves that in 1834 or 1835 he contrived a machine by which he actually effected his purpose of sewing cloth with considerable success. Upon a careful consideration of the testimony, I am disposed to think that he had then carried his invention to the point of patentability. I understand from the evidence that Hunt actually made a working machine in 1834 or 1835. The papers in this case show that Howe obtained a patent for substantially this same invention in 1846.

Notwithstanding this, the Commissioner was forced to refuse Hunt’s belated application, for the reason that an Act of Congress in 1839 had provided that inventors could not pursue their claims to priority in patents unless application was made within two years from the date when the first sale of the invention was made [one year under current law]. Hunt had sold a machine in 1834, and had neglected to make application for his patent till 1853.

Thus it was that one of the grandest opportunities of the century was missed by the man who should rightfully have enjoyed it; the honors and emoluments of the great sewing machine invention passed to a man who neither had invented a single principle of action, nor applied a practical improvement to principles already recognized

* * *

Elias Howe, Jr., acquired the power, by simply patenting another man’s invention, to obstruct every subsequent inventor, and finally to dictate the terms which gave rise to the great Sewing Machine Combination about which the world has heard—and scolded—so much. Howe’s machine was not, even in 1851, of practical utility. From 1846 to 1851 he had the field to himself, but the invention lay dormant in his hands. He held control of the cardinal principles upon which the coming machines must needs be built, and planted himself squarely across the path of improvement—an obstructionist, not an inventor—
and when, in 1851, Isaac M. Singer perfected the improvements necessary to make Hunt’s principles of real utility to the world Howe continued to obstruct and pursue litigation.”

It was no secret that Howe was not the first inventor of the lockstitch sewing machine — according to Hunt, Howe admitted that to him personally. However, Howe was the first to file.

“First to File” under the America Invents Act Doesn’t Mean First to Steal

For those who have been confused into thinking that “first to file” means that someone can simply steal an invention and run to the patent office to file it, the America Invents Act makes it perfectly clear that it is only inventors (or the owners to whom they assign their patents in writing) can file at all. Moreover, where the first party to file “derived” its invention from another, the prior inventor may bring a derivation proceeding. In many respects this will resemble the interference action, but such actions should arise on far fewer occasions.

Provisions of the new law include the following:

I. A Switch to a “First to File” System (with Exceptions)

The PTO will grant patents based on who was “first to file” rather than who was “first to invent.” Thus, where two (or more) inventors file for the same patent, the person who files for it first will be the one who gets it, even if that person’s invention came after that of a competitor. However — and this is a big however — if, prior to filing, the first inventor (or, more likely, the company for which s/he works) makes public disclosures about the invention, that first inventor may defeat the patent application of the first filer provided that such disclosure was made within one year of the first filer’s application to the PTO. In other words, while “first to file” is the general rule, “first to disclose” within the one year grace period may preempt it. Missing here is what exactly will be deemed to constitute “disclosure.” The criteria have yet to be promulgated by the PTO.

Pre-filing disclosures may therefore become crucial under the new law. If an inventor or company keeps its invention secret while deciding whether to file for patent protection and a competitor publicly discloses or files for the patent first, the inventor or company which was actually the first to invent will lose out. Consequently, inventors and companies will have to decide not only when (because they must file for the patent within one year of disclosure) but what to disclose. As the Brookings Institution has noted,

[s]ome companies may find themselves targeted by competitors’ disclosures engineered specifically to foreclose patent opportunities.[1]

For this reason, companies may need to make “preemptive ‘defensive’ disclosures,” taking into consideration their own filing deadlines.

II. Changes in Who May File a Patent Application

Patent applications may now be filed by an inventor’s employer and the employer may also execute any required documents on the inventor’s behalf should the inventor fail or refuse to do so.

III. The Right to Make Supplement Filings

The new law will permit patent owners to request that the PTO initiate a supplemental examination to allow the owner to correct or reconsider information relevant to the patent. This change is intended to limit the extent to which patent infringers can defend against an infringement suit by bringing up what was considered “inequitable conduct” of the patent applicant (e.g., failure to submit to the PTO material *prior art* known by the applicant; failure to explain and translate references in a foreign language; material misstatements of fact in the application or supporting affidavits; or a misdescription of inventorship). The patent owner who invokes the Supplemental Filing provision, may effectively innoculate itself against such “inequitable conduct” claims by third parties.

This provision does not come into effect, however, until one year following enactment of the law.

(*Prior art* means any and all publicly available information that might be relevant to a claim of originality of a patent. Generally speaking, if an invention has been described in prior art, a patent on that invention is not valid. Applicants are required to disclose material prior art in their applications and PTO examiners are bound to consider it.)

IV. Submissions of Prior Art by Third Parties

Third parties seeking to prevent the issuance of a patent for whatever reason will be able to submit to the PTO prior art not disclosed by the applicant, together with “a concise description of the asserted relevance of such submitted document.” However, this is a double-edged sword: while the PTO may find that such prior art prevents issuance of the patent, the PTO may also grant the patent, thereby strengthening it. (The patent is strengthened because, in granting it, the PTO examiner will have considered the disclosed prior art, thereby reducing opportunities for post-grant attacks.

This provision also does not come into effect until one year following enactment of the law.

V. Post-Grant Review Proceedings

Under prior law, there were two patent re-examination procedures which could be brought to challenge the validity of a patent: ex parte and inter partes. In the ex parte proceeding, a third party requests a re-examination of the patent but participates in the proceeding only to the extent that the patent owner responds. In such event, the third party is limited to responding to the patent owner’s statement and has no right of appeal. In an inter partes proceeding, the third party may not only files a submission with the PTO every time the patent owner responds to a PTO office action, but it may also appeal the PTO’s decision. The essential difference between these two proceedings from the standpoint of third parties is that the inter partes proceedings potentially limits the third party’s remedies in federal court should the third party be sued by the patent owner for infringement. For example, the third party cannot assert an invalidity defense based on any prior art which was or could have been raised in the inter partes proceeding.

Under the new law, the ex parte re-examination is left intact, but the inter partes reexamination will be, one year following enactment of the law, replaced by an “inter partes review” to be conducted by the (newly named) Patent Trial and Appeal Board. The burden of proof will also change. Under the old law, the would-be opposer in an inter partes reexamination was required to provide the PTO with information about prior art sufficient to raise a “substantial new question of patentability.” Under the new law, and this provision takes place immediately, the would-be opposer will have to demonstrate “reasonable likelihood that the petitioner woud prevail with respect to at least one of the claims challenged in the petition.” The inter partes review may be brought only nine months (but sometimes longer) following the issuance of a patent.

For challenges within nine months of issuance, there will a “post grant review” procedure. This will be an entirely new way to challenge a patent short of going into federal court. With this procedure, the PTO may grant review if the opposer presents information which, “if not rebutted, would demonstrate that it is more likely than not that at least one of the claims challenged in the petition is unpatentable.” This standard includes not just the assertion of well-established legal arguments of invalidity, but also “a novel or unsettled legal question that is important to other patents or patent applications.”

VI. Elimination of “Best Mode” Disclosure As A Ground for Invalidity

Under both the prior and new law, patent applicants must disclose to the PTO “the best mode contemplated by the inventor of carrying out” the invention. This requirement is based on the traditional view (rooted in Article I, §8, clause. 8 of the U.S. Constitution) that the grant of a patent is conditioned upon the inventor providing enough information to the public to know how the invention is best carried out, or, in patent jargon, “practiced.” Failure to disclose the “best mode” of practice could prevent anyone from later practicing the patent (e.g., when the patent expired after twenty years) or making new inventions based on the information disclosed, and for this reason such failure has been considered by courts as grounds for invalidation.

Under the new law, failure to disclose “best mode” will not be a ground for asserting invalidity. As various commentators have noted, this new provision of the law will likely promote greater secrecy. With no danger of losing a patent for failure to disclose, inventors and companies will disclose only so much of the “best mode” as is necessary to satisfy the particular PTO examiner, keeping the most crucial information for itself.

For an example how the “Best Mode” principle used to be applied, see Wellman, Inc. v. Eastman Chemical Company at Google Scholar.

VII. Expansion of Prior Commercial Use Defense to Infringement

Alleged infringers have, since 1999, been able to avail themselves of the defense of prior commercial use under certain conditions. Under the new law, the defense will be extended to include any subject matter “consisting of a process, or consisting of a machine, manufacture, or composition of matter used in a manufacturing or other commercial process.” The prior commercial use defense may be asserted where the commercial use occurred at least one year prior to the filing of the patent application. This provision will apply only to new patents.

VIII. Fund Diversion

The PTO is one of the few government institutions which takes in more money than it expends. Over the past two decades, Congress has “diverted” about $900 million dollars of the PTO’s revenues to cover non-IP-related expenditures. This practice will continue to some as-yet-unknown degree. On the one hand, the new law provides for the establishment of a Patent and Trademark Fee Reserve Fund which will accumulate all fees in excess of the sums officially appropriated to the PTO for each year. Use of the Fund by the PTO will be a matter of Congressional discretion. On the other hand, the PTO is authorized immediately to add a 15% surcharge to all patent-related fees and the funds collected will be available to the PTO for patent-related purposes. Hopefully, it will be enough to allow the PTO to clear a backlog of cases.

IX. Reduced Filing Fees for the Small and Micro Inventor

The PTO will have the continuing authority to offer a 50% fee reduction to small entities and establish a 75% reduction for a new category of “micro” entities, although when the latter will happen is unclear.

Conclusion

The America Invents Act encourages early filing with the added incentive that filings may be supplemented to correct errors, omissions and new information. There is no reason why this should disfavor the small inventor. The Act leaves intact provisional patents which give inventors twelve months within which to explore the viability of their invention in the marketplace before embarking on a formal patent filing. (The provisional patent is inexpensive and allows filing without a formal patent claim, oath or declaration, or any disclosure of prior art.) And the one year grace period ensures that disclosure within a year of filing a patent will not result in a loss of patent rights. Moreover, by strengthening administrative remedies and raising a patent opposer’s burden of proof, the law may well make post-grant challenges more friendly and accessible to the small inventor. Finally, establishing a lower fee for a new category of “micro inventors” is specifically aimed to help the small inventor. Senator Leahy should be commended for a job well done.

Much of the opposition to the new law was based on the theory that America out-invents the rest of the world because it had a first-to-invent rather than a first-to-file system. The first-to-invent system, some commentators have claimed, favored small inventors. There is little or no evidence to support this. As the New York Times pointed out in an editorial in March of this year, the first-to-invent system already favored

whoever files first for a patent. Of the last three million applications filed, only 113 were granted to entities who filed second but proved they had invented first. In 88 of these cases, the winners were large corporations.[2]

Furthermore, proving who invented first was no easy task. Again, the Times editorial:

According to the patent office, it costs $400,000 to $500,000 to challenge a patent on the grounds of a prior invention.

So much for the small inventor.

The new law will require vigilance on the part of inventors, as well as new strategies for patent filing and litigation for companies large and small. These strategies will need to be developed gradually by closely watching activity in the PTO, the courts and the marketplace. Inventors and companies whose assets include patentable intellectual property must take heed.

———————-

Endnotes

[1] Brookings Policy Brief Series, # 184: “The Comprehensive Patent Reform of 2011: Navigating the Leahy-Smith America Invents Act,” September 2011, http://www.brookings.edu/papers/2011/09_patents_villasenor.aspx

[2] “Patents, Reform and the Little Guy,” New York Times, March 7, 2011, http://www.nytimes.com/2011/03/08/opinion/08tue3.html

Becoming a Top Level Domain Owner

During the first application period, ICANN will accept only 500 applications, while subsequent periods (yet to be established) will be limited to 400 applications. Overall, ICANN has ruled that no more than 1000 new gTLDs may be established per year.

The bar to entry, however, is high.

First, becoming a general Top Level Domain means having the business structure and technical capability for being a registry — that is, a company which (a) establishes policies for domain name allocation, (b) maintains a database of all the domain names registered in the new top-level domain, and (c) generates the zone files necessary to convert second-level domain names to IP addresses. (A relatively simple definition of domain name registry is available here. A second-level domain is the one immediately preceding the final dot. Thus, in “www.webtm.com,” the gTLD is “.com” and the second-level domain is “webtm”.) This won’t be something that companies can simply subcontract. Owners of the new gTLDs will be required to play an active role in managing the website addresses under its domain.

Second, becoming a Top Level Domain is expensive, time-consuming and complicated. The initial application fee is US$185,000 and further fees may be imposed during the application process as determined by ICANN. (For instance, disputes may arise between applicants who attempt to register two strings that ICANN determines are “confusingly simliar” and resolution of such disputes costs money.) Among other requirements, applicants will have to submit audited financial statements and principals will be subject to background screening to confirm eligibility based on “(1) General business diligence and criminal history; and (2) History of cybersquatting behavior.” The criteria used for criminal history evaluation are the same ones used in the banking and finance industry. Following acceptance, new TLD owners will have to sign the “New gTLD Agreement” with ICANN. They will also have to pay a fixed fee of US$6,250 per calendar quarter and transaction fees of twenty-five cents per domain names registered over 50,000.

Meeting the Concerns of Trademark Owners

ICANN estimates that the first gTLDs will come online in 2013. This raises particular concerns for trademark holders, insofar as it potentially opens new doors for cybersquatters and increases the possibility for some trademark owners, for example those whose marks are registered in a single territory, to be pre-empted by a foreign competitor using the same name. Ostensibly, applicants seeking to register gTLDs for actual registered trademarks will not be able to do so without ownership or license from the trademark owners. However, if a trademark owner does not apply for domain name protection in the first round and some applicant obtains a gTLD which is deemed to be “confusingly similar” to the registered mark, the owner of the registered mark may be prevented from later establishing a gTDL using its brand name. The problem is perhaps even more serious for trademarks with limited scopes. For example, the word “Delta” is used a trademark by many companies to designate different types of goods and services. Registration of .delta by any one of them would preclude all others from registering under that trademark.

In the hopes of minimizing the risks faced by trademark owners, ICANN plans to implement objection procedures to give trademark owners an opportunity to object to new gTLDs which are the same or confusingly simlar to the objector’s registered trademark. After the first application period closes in April 2012, ICANN will verify all applications for completeness and will release on its website the list of strings, applicant names, and other application data. At that point it will be up to trademark owners to file a “Legal Rights Objection” with the Arbitration and Mediation Center of the World Intellectual Property Organization (WIPO), a proceeding which will cost up to several thousand dollars in filing fees alone.

Preventing trademark misappropriation in second-level domain registrations inside a gTLD will be somewhat simpler, at least in the initial 60-day “sunrise” period of a new gTLD. When a new gTLDs is launched, it will be required, during that sunrise period, to search the Trademark Clearinghouse being set up by ICANN and if an intended website name matches an entry in the Clearinghouse, send a notice to both the intended website owner and the trademark holder. In addition, the new gTLD will be required to offer dispute resolution for owners of registered trademarks who object to the intended name. (The burden on the new gTLD may be substantial. In the first fifteen minutes of the “.co” gTLD, there were 100,000 applications for new websites.)

A note on the Trademark Clearinghouse: As of this date, ICANN has still not determined who the Trademark Clearinghouse service provider will be or how information will be registered with the Clearinghouse, but at the Trademark Clearinghouse Implementation-Planning Workshop held in Singapore on June 22, 2011, various participants believed that trademark information should be provided by individual trademark owners rather than obtained from national trademark registries, like the Patent & Trademark Office. For more details on these procedures, still in the planning stages, see, the “Module 3 – Objection Procedures” and “Trademark Clearinghouse” in the current version of the Applicant guidebook available here.

With the launching of the new .xxx domain next year for adult entertainment businesses, many non-adult businesses will also want to prevent triple-x associations with their registered trademarks, trade names and product names. They can do so during two periods.

Sunrise A & B:

From September 7, 2011 through 12:00pm ET on October 28, 2011, registered trademarks owners may register URLs identical to their trademarks either for the purpose of opening live adult websites under those names (the “Sunrise A” program) or for the purpose of blocking their trademarks from future registration in the .xxx domain (the “Sunrise B” program). (Sunrise B is also open to adult businesses that don’t support the creation of the .xxx domain.) URLs registered under Sunrise B will resolve to a standard page indicating that the domain is reserved from use through ICM’s Rights Protection Program and the publicly available WHOIS information will reflect the ICM Registry information and not the applicant’s personal information. This way the public will have no reason to think the registrant has moved into the adult entertainment market or availed itself of a .xxx domain.

However, there are two catches. First, the URL to be registered must correspond exactly to the  registered trademark. Businesses cannot, at this stage, block variations, even confusingly similar ones. (For example, Electronic Arts, Inc. the owner of registered trademarks for “EA” and “EA Sports,” would be able to register both ea.xxx and easports.xxx, but not eagames.com.) Second, if a non-adult and an adult business share the same trademark but for different classes of products or services, and both apply during the Sunrise period, the adult business (under Sunrise A) will be notified of the Sunrise B blocking attempt, but will be awarded the .xxx URL. The intent of this procedure, according to ICANN, is to put the Sunrise A registrant on notice that there is a claim. In the event that the Sunrise B business later sues the Sunrise A registrant to block use of the trademark, the latter cannot claim it was an innocent user.

At Network Solutions, Sunrise B registration costs $329.99 with no future fees. Sunrise A registration costs $200.00 for the application, $129.99 per year. Comparative prices may be found at Go Daddy, Enom, and Name.com.

Landrush and General Registration:

Anyone wishing to register URLs that are variations on their registered marks, or URLs of unregistered trademarks, trade names, personal names or product names, must wait until December 6, 2011, at 11:00 am, when general registration begins. Between the close of the Sunrise programs and the beginning of the general registration is a “Landrush” period open only to those who plan on hosting actual adult websites. General registration, however, is open to anyone and will be on a first come, first serve basis. Registration should be done as early as possible, since there will be plenty businesses and individuals worldwide who will grab up as many URLs as they can, as quickly as they can, hoping to sell them later at high prices.

By law, one may not register a URL utilizing a trademark (or confusingly similar variations thereof) belonging to another, whether or not that trademark is registered. Going after a registrant, however, is not always easy. Plaintiffs bear the burden of proving that the URL in question, if not identical, is “confusingly similar” and that the URL was registered and is being used in bad faith. For unregistered marks, the Plaintiff may have to prove that it was the first to use it in the marketplace. Spending a few hundred dollars (or in the case of multiple URL registrations, a few thousand dollars) may be worth it to avoid the prohibitive cost and uncertainty of litigation. It may also be worth it to avoid being associated with a domain reserved for the adult entertainment industry.

Key Dates:

• Sunrise A – September 7, 2011 through 16:00 UTC on October 28, 2011
• Sunrise B – September 7, 2011 through 16:00 UTC on October 28, 2011
• Landrush – November 8, 2011 at 16:00 UTC thru November 25, 2011 at 16:00 UTC
• General Availability – December 6, 2011 at 16:00 UTC

Whether on your company’s website, Facebook, Twitter or third party blogs, endorsements of your products are subject to FTC guidelines issued in 2009.

General Considerations, 16 CFR § 255.1

FTC rule and guidelines require that before a company publishes an advertisement of a product — and this applies to all advertising, online or off — it must have a “reasonable basis” for each claim being made about the product. Both advertisements which make claims about the efficacy of a product (e.g., “you will achieve noticeable results in a few weeks”), and statements by bloggers and consumers attesting to that efficacy (e.g., “I used the product and felt results within a few days!”) are subject to the rule.

“Reasonable basis” means that the company must have objective evidence to support each claim. For medicine, remedies, vitamins, food supplements, reparative cosmetics and diets, “objective evidence” means “competent and reliable scientific evidence,” i.e., studies conducted by qualified persons, using methods that are generally accepted as scientifically valid. Furthermore, any claim regarding the results of using a product must be based on what consumers may generally expect. The matter obviously gets quite tricky when, for example, a study reveals a wide range of outcomes, particularly with regard to varying body types, skin types, ages, etc. But the FTC guidelines provide no further guidance on what will pass the test. The onus, if the FTC comes knocking, will be on the company.

If a claim is not supported by “objective evidence,” the company must conspicuously (i.e., not in fine print) state what the “generally expected results” of the product are, but even these generally expected results must, according to the FTC, be supported by objective evidence. Testimonials from satisfied customers are not considered objective or adequate evidence to support a claim about a product. Moreover, the FTC does not distinguish between claims made (1) directly by your company; (2) via consumer testimonials which appear on your company’s websites, blogs, Facebook pages, etc., or any other website at your company’s behest; and (3) by bloggers if the blogger has been provided with the product by the company, or reviews the product at the company’s request, or receives any kind of compensation, monetary or otherwise. In all three cases, the claims must be supported by objective evidence.  Claims which are not supported by objective evidence may be considered “deceptive” by the FTC.

Rules Applicable to Consumer Endorsements, § 255.2

As noted above, the FTC makes no distinction between consumer and blogger endorsements. They carry the same burdens and are treated as statements by the company whose product is being endorsed. Where a blogger makes a claim about the efficacy or curative properties of a product, the Company may be held responsible by the FTC even if the claim appears only on the blogger’s blog. Companies must therefore be aware of what bloggers (with whom they have been in contact) write and must take steps to correct claims which are not what consumers will generally achieve and are not supported by objective evidence. The FTC, by the way, disfavors the use of disclaimers such as “the results attested to by [the endorser] are not typical” or “may not be achieved by you.” FTC cites research on these disclaimers demonstrating that they have no effect on consumer expectations. However, the FTC doesn’t rule out the possibility that such a disclaimer might be sufficient in some circumstances. It just doesn’t say what those circumstances are.

There is a further rule which companies must heed for advertisements which contain consumer endorsements. Whenever an endorser represents that s/he uses a product, the company may run the advertisement only during the time the endorser actually uses, and continues to use, that product and to have the same opinion about it. (Companies have the obligation to contact the endorser from time to time to find out.) Dated testimonials in a section devoted to consumer comments is likely the best way to sidestep this potential problem –that is, where endorsement are conspicuously dated, there is no implication that product use is either current or ongoing. Videoclips with endorsements should also be conspicuously dated. Companies should ensure that the bloggers they contact also conspicuously date their product reviews.

§§ 255.1 and 255.2 contain several examples which are useful in understanding how the rules are applied:

• A brochure for a baldness treatment consists entirely of testimonials from satisfied customers who say that after using the product, they had amazing hair growth and their hair is as thick and strong as it was when they were teenagers. The advertiser must have competent and reliable scientific evidence that its product is effective in producing new hair growth. The ad will also likely communicate that the endorsers’ experiences are representative of what new users of the product can generally expect. Therefore, even if the advertiser includes a disclaimer such as, “Notice: These testimonials do not prove our product works. You should not expect to have similar results,” the ad is likely to be deceptive unless the advertiser has adequate substantiation that new users typically will experience results similar to those experienced by the testimonialists.
• An advertisement for a cholesterol-lowering product features an individual who claims that his serum cholesterol went down by 120 points and does not mention having made any lifestyle changes. A well-conducted clinical study shows that the product reduces the cholesterol levels of individuals with elevated cholesterol by an average of 15% and the advertisement clearly and conspicuously discloses this fact. Despite the presence of this disclosure, the advertisement would be deceptive if the advertiser does not have adequate substantiation that the product can produce the specific results claimed by the endorser ( i.e. , a 120-point drop in serum cholesterol without any lifestyle changes).
• An advertisement for a weight-loss product features a formerly obese woman. She says in the ad, “Every day, I drank 2 WeightAway shakes, ate only raw vegetables, and exercised vigorously for six hours at the gym. By the end of six months, I had gone from 250 pounds to 140 pounds.”The advertisement accurately describes the woman’s experience, and such a result is within the range that would be generally experienced by an extremely overweight individual who consumed WeightAway shakes, only ate raw vegetables, and exercised as the endorser did. Because the endorser clearly describes the limited and truly exceptional circumstances under which she achieved her results, the ad is not likely to convey that consumers who weigh substantially less or use WeightAway under less extreme circumstances will lose 110 pounds in six months. (If the advertisement simply says that the endorser lost 110 pounds in six months using WeightAway together with diet and exercise, however, this description would not adequately alert consumers to the truly remarkable circumstances leading to her weight loss.)The advertiser must have substantiation, however, for any performance claims conveyed by the endorsement (e.g., that WeightAway is an effective weight loss product).

If, in the alternative, the advertisement simply features “before” and “after” pictures of a woman who says “I lost 50 pounds in 6 months with WeightAway,” the ad is likely to convey that her experience is representative of what consumers will generally achieve. Therefore, if consumers cannot generally expect to achieve such results, the ad should clearly and conspicuously disclose what they can expect to lose in the depicted circumstances ( e.g., “most women who use WeightAway for six months lose at least 15 pounds”).

If the ad features the same pictures but the testimonialist simply says, “I lost 50 pounds with WeightAway,” and WeightAway users generally do not lose 50 pounds, the ad should disclose what results they do generally achieve ( e.g., “most women who use WeightAway lose 15 pounds”).

• A skin care products advertiser participates in a blog advertising service. The service matches up advertisers with bloggers who will promote the advertiser’s products on their personal blogs. The advertiser requests that a blogger try a new body lotion and write a review of the product on her blog. Although the advertiser does not make any specific claims about the lotion’s ability to cure skin conditions and the blogger does not ask the advertiser whether there is substantiation for the claim, in her review the blogger writes that the lotion cures eczema and recommends the product to her blog readers who suffer from this condition. The advertiser is subject to liability for misleading or unsubstantiated  representations made through the blogger’s endorsement. The blogger also is subject to liability for misleading or unsubstantiated representations made in the course of her endorsement.

Material Connections, § 255.5

This section of the regulations requires that companies disclose any material fact that might influence a blogger’s opinion about the product. This applies both to compensation, the promise of compensation, employment by the company (as when an employee posts on a board anonymously, touting his company’s products) and claims that an opinion is candid when it isn’t. “Compensation,” in this context, does not need to be monetary for the disclosure requirement to be triggered. The promise of publicity or some non-monetary reward for a favorable review is also “compensation.”

Again, the FTC provides some nuanced examples:

• An actual patron of a restaurant, who is neither known to the public nor presented as an expert, is shown seated at the counter. He is asked for his “spontaneous” opinion of a new food product served in the restaurant. Assume, first, that the advertiser had posted a sign on the door of the restaurant informing all who entered that day that patrons would be interviewed by the advertiser as part of its TV promotion of its new soy protein “steak.” This notification would materially affect the weight or credibility of the patron’s endorsement, and, therefore, viewers of the advertisement should be clearly and conspicuously informed of the circumstances under which the endorsement was obtained.
• Assume, in the alternative, that the advertiser had not posted a sign on the door of the restaurant, but had informed all interviewed customers of the “hidden camera” only after interviews were completed and the customers had no reason to know or believe that their response was being recorded for use in an advertisement. Even if patrons were also told that they would be paid for allowing the use of their opinions in advertising, these facts need not be disclosed.
• An infomercial producer wants to include consumer endorsements for an automotive additive product featured in her commercial, but because the product has not yet been sold, there are no consumer users. The producer’s staff reviews the profiles of individuals interested in working as “extras” in commercials and identifies several who are interested in automobiles. The extras are asked to use the product for several weeks and then report back to the producer. They are told that if they are selected to endorse the product in the producer’s infomercial, they will receive a small payment. Viewers would not expect that these “consumer endorsers” are actors who were asked to use the product so that they could appear in the commercial or that they were compensated. Because the advertisement fails to disclose these facts, it is deceptive.
• A college student who has earned a reputation as a video game expert maintains a personal weblog or “blog” where he posts entries about his gaming experiences. Readers of his blog frequently seek his opinions about video game hardware and software. As it has done in the past, the manufacturer of a newly released video game system sends the student a free copy of the system and asks him to write about it on his blog. He tests the new gaming system and writes a favorable review. Because his review is disseminated via a form of consumer-generated media in which his relationship to the advertiser is not inherently obvious, readers are unlikely to know that he has received the video game system free of charge in exchange for his review of the product, and given the value of the video game system, this fact likely would materially affect the credibility they attach to his endorsement. Accordingly, the blogger should clearly and conspicuously disclose that he received the gaming system free of charge. The manufacturer should advise him at the time it provides the gaming system that this connection should be disclosed, and it should have procedures in place to try to monitor his postings for compliance.
• An online message board designated for discussions of new music download technology is frequented by MP3 player enthusiasts. They exchange information about new products, utilities, and the functionality of numerous playback devices. Unbeknownst to the message board community, an employee of a leading playback device manufacturer has been posting messages on the discussion board promoting the manufacturer’s product. Knowledge of this poster’s employment likely would affect the weight or credibility of her endorsement. Therefore, the poster should clearly and conspicuously disclose her relationship to the manufacturer to members and readers of the message board.

FTC Enforcement

The FTC can subpoena companies and hold them accountable for violating FTC guidelines. It can issue cease and desist orders, require corrective advertising and impose civil penalties. By all accounts, FTC enforcement is focused on products which are ingested (particularly supplements) and products which claim to cure conditions or diseases (especially cancer). The use of consumer and blogger endorsements which make claims not substantiated by objective evidence is common practice in the health supplements and cosmetics industries, but “everybody does it” is not a defense to an FTC action.

The FTC is not particularly proactive, but responds primarily to consumer complaints. Still, any proceeding — administrative or civil — can be an expensive process and is best avoided by following the guidelines carefully and in good faith.

Section 203 of the U.S. Copyright Act permits “authors” — a term which includes writers, composers and recording artists — who signed away rights to their works on or after January 1, 1978, to terminate their contracts and, to some extent, recapture those rights. This comes as good news to many authors but mostly bad news to book and music publishers and record companies who will either lose valuable back catalog or have to pay higher royalties in order to retain it.

The “Window” of Termination.

Termination of contracts which cover the right of “publication” (including release of records) must be made within a five year window beginning either thirty-five years from the date of execution of the contract, or forty years from the date of publication of the work, whichever term ends earlier. Thus, for someone who signed a deal in 1978 for a book published or a record released in the same year, that window opens on January 1, 2013. On the other hand, for someone who signed a deal in 1978 for a work released in 1980, the window opens on January 1, 2015.

Limitations on Termination.

The right of termination does not apply to “work made for hire.” (For an explanation of “work made for hire” doctrine under the Copyright Act, and in particular as it relates to sound recordings, see, “Statement of Marybeth Peters, The Register of Copyrights, before the Subcommittee on Courts and Intellectual Property Committee on the Judiciary, United States House of Representatives, 106th Congress, 2nd Session, May 25, 2000, available here. Nor does the right of termination apply to derivative works authorized and created prior to termination. So while an author of a book of fiction may terminate his/her contract with a publisher, s/he cannot also terminate an already executed contract between the publisher and a film production company for a motion picture based on the book. (Terminations in the case of sound recordings which contain so-called “samples” will be addressed in a different posting.)

Time for Sending Notice and Filing Notices of Termination.

Before termination can occur, the author of the work (or his or her heirs) must (1) provide written notice to the company or person whose rights are being terminated, and (2) file the termination notice in the Copyright Office prior to the date of intended termination. The notice of termination must be sent to the party who is being terminated not less than two nor more than 10 years prior to the intended date of termination. (See, 17 U.S.C. § 203(a)(4)(A).) If the window of termination opens on January 1, 2013, but notice of termination is sent only on January 1, 2012, then termination cannot take effect until January 1, 2014. Authors should take care to file their notices in the Copyright Office promptly, as notices submitted for filing after the closure of the five-year window will be rejected. (See, 37 C.F.R. § 201.10(f)(4).) Instructions for filing a notice of termination with the Copyright Office are provided in Circular 12, “Recordation of Transfers and Other Documents, available from the Copyright Office website.)

Although termination is required, the filing does not necessarily make the termination valid. Whether termination is valid depends on whether all the requirements (the contents of the notice, the methods of service and the procedure for “recordation” of filing) are satisfied. Needless to say, the termination procedures are full of pitfalls for the lay person and lawyers alike. And the right to terminate is a “use it or lose it” one. A failure to do it just right may invalidate the termination and prevent the recapture of rights.

Termination by Majority

Section 203 also provides that termination is effective only if it is made by the holders of more than 50% of the copyright in the work. This means that where there is more than one author or where one or more of the authors is deceased and the rights have passed to the author’s heirs, there may be a lot of parties who need to sign the termination notice in order to make it effective.

Moreover, when an author dies, it is the Copyright Act, not the author’s last will and testament, which determines who gets the copyright in the creator’s work. In other words, the author’s will could grant the copyrights in his work to a third party, but the authors widow and children can still exercise their termination rights, thereby wresting control of the work away from the third party. Under the Copyright Act, the author’s interest passes to a widow or widower, unless there are children or grandchildren, in which case the widow/er gets half. The other half is then divided equally among the author’s children. If any is deceased, the deceased child’s living children (i.e., the grandchildren of the author) take their parent’s interest divided in equal shares.

Works created by multiple parties may also present difficulties. The author of a sound recording, for purposes of the Copyright Act, is the performers who play on the recording and the record producer who processes the sounds and fixes them in the final recording. In the case of a musical group, if five members signed a single contract (as is usually the case) at least three out of those five would have to agree in order for the termination to be effective. The producer, however, is likely to have signed a different contract — the Producer Agreement — so s/he will have an independent right to terminate his/her grant of rights. If the producer terminates but a majority of the group does not, the group’s record company will have only a non-exclusive right to exploit the works going forward and the producer will be free to grant non-exclusive rights to another record company or even to release it him/herself, so long as the members of the group all receive their respective proportions of the earnings. Theoretically, multiple releases of a single sound recording could end up competing with each other in the marketplace.

A note for the music industry: Most record company contracts contain “work made for hire” language which purport to give the record company copyright ownership of the sound recordings produced under the agreement. However, unless they are made actual employees of the record company, sound recordings do not qualify as work made for hire. Many knowledgeable music industry lawyers believe that this language can be safely ignored as applied to recording artists. “Work made for hire” provisions may, however, be effective for sidepersons who are paid a lump sum for their contributions to a sound recording. In any case, as non-royalty participants, sidepersons are unlikely to be found to be “authors” of the sound recording for purposes of copyright ownership.

Contents of the Notice of Termination.

The notice of termination must contain the following:

• (i) a clear statement that termination is being made pursuant to Section 203 of the Copyright Act;
• (ii) the name(s) and addresses of each assignee (or successor in interest) whose rights are being terminated. (The termination notice must be served by personal service or first-class mail to the last known address of each party whose interests are being terminated. The terminating party must also use reasonable efforts to determine who has ownership rights subject to termination);
• (iii) the date of execution of the original grant;
• (iv) if the grant included the right of publication, the date of publication;
• (iv) the title of each work to which the notice applies;
• (v) the names of the author(s) or their heirs to whom the author’s rights have passed;
• (vi) the original copyright registration number, if available;
• (vii) a brief statement explaining what grant is being terminated;
• (viii) date on which termination is to take effect; and
• (ix) the signatures of the parties holding a majority interest in the copyright.

(See, 17 U.S.C. § 203(a)(4); 37 C.F.R. § 201.10(b)(2) and (3); and 37 C.F.R. § 201.10(d).)

A Gap in the Termination Provisions

On June 6, 2011, the Copyright Office announced an amendment to its termination regulations which are intended to address a perhaps unintended gap left by Congress for works which were the subject of a grant prior to January 1, 1978, but which didn’t come into existence until after January 1, 1978. This covers a substantial number of works delivered under multi-record or multi-book deals and long-term publishing contracts, many of which can extend for longer than a decade. The new regulation provides:

In any case where an author agreed, prior to January 1, 1978, to a grant of a transfer or license of rights in a work that was not created until on or after January 1, 1978, a notice of termination of a grant under section 203 of title 17 may be recorded if it recites, as the date of execution, the date on which the work was created.

(See, 37 C.F.R. § 201.10(f)(5).) See, “Gap in Termination Provisions.”)

The theory behind this amendment makes plenty of sense. First, the termination provisions under Section 304 of the Copyright Act (which will be the subject of a separate posting) apply only to works created prior to January 1, 1978. The way it stands now, neither Section 304 nor section 203 (the one we’re talking about here) allow for termination of works created after January 1, 1978 under a contract made before that date. Second, a contract which grants rights in a work to be created sometime in the future cannot be consummated until something copyrightable comes into existence.

But note that the new regulation covers filing, not sending notice. Unfortunately, this is because the Copyright Office doesn’t actually have the power to declare that authors whose works fall into the gap can actually terminate under Section 203. Rather, the new regulation merely provides a means by which authors of such works (i.e., a contract executed prior to January 1, 1978, but works created after) may go through the motions of termination in the hope that their right will eventually be recognized by Congress or vindicated in the courts. No one knows when or whether this will happen.

Conclusion.

Lawyers as well as lay persons are advised to read carefully the termination provisions of Section 203 of the Copyright Act and the applicable regulations. While authors are not required to terminate their agreements, they may find that termination opens new commercial opportunities for their works or makes possible a favorable renegotiation of the commercial terms of their prior agreements. For now, those authors who works fall into the gap should go through the process of notification and filing just in case their rights are subsequently recognized.

Benelux Trademark Law will not be in force in the BES Countries. A new Trademark Law for the BES countries has been approved and the Benelux Office for Intellectual Property, has been appointed to manage the Trademark Register for the these countries. We await further information as to the processing of trademark applications.

Owners of Netherland Antillean trademark registrations have one year to file maintenance applications (i.e.: until October 10, 2011) for the BES Countries.

At present, International trademark registrations are not affected by this change as it is anticipated that the current international trademark rights in the Netherlands Antilles will be converted into national registrations for the BES Countries, Curaçao and St. Maarten.

Curaçao and St Maarten will also have their own Trademark Law and maintain their own Trademark Registers. The present timetable is unknown, but we shall provide updates as they are available.

The new country of Curaçao is known as Korsou in Papiamentu. St Maarten shares an island with the French oversees territory of St. Martin.

Aruba, which left the Netherlands Antilles in 1986, remains independent and continues as an autonomous state within the Kingdom of the Netherlands.

Under current copyright law, “useful articles” including clothing and accessories are not copyrightable. This is because they have “an intrinsic utilitarian function that is not merely to portray the appearance of the article or to convey information.” 17 U.S.C. § 101. (See Whimsicality, Inc. v. Rubie’s Costume Co., Inc., 891 F. 2d 452 (2d Cir., 1989), finding that children’s costumes were not copyrightable.) However, fabric design elements are copyrightable. (See Knitwaves, Inc. v. Lollytogs Ltd., 71 F. 3d 996 (2d Cir., 1995). In that case, the defendant was found guilty of copyright infringement for copying plaintiff’s stylized oak and maple leaf appliques on children’s sweaters.)

The Innovative Design Act, however, would not grant the same scope of protection to clothing designs that it does to fabric designs. Here the period of protection would be a mere three (3) years, but that is more than enough to eliminate the problem or benefit (depending on which side of the fence you sit) of knock-offs. To be sure, the Innovative Design Act would apply only to new designs, old ones being dedicated by law to the public domain. Moreover, in order to win an infringement suit, a designer will not only have to describe in detail exactly what s/he is laying claim to, but will have to prove in court that:

To uncomplicate the court’s job slightly, the law provides that a knock-off of a truly original work would be infringing regardless of its color or the design of the fabric with which it is made. Finally, the proposed law limits damages to a maximum penalty of $50,000 or $1.00 per copy, whichever is greater, although the law also makes clear that “the damages awarded shall constitute compensation and not a penalty.”

Whether the Innovative Design Act survives the legislative process is anyone’s guess, but it is worth observing here that it is not so much a law that protects the exclusive rights of the designer as one that mandates a compulsory fee for copying. In other words, the creation of knock-offs will continue to be economic decisions, but with the consideration that there might be an added cost should a designer decide to invest a substantial amount of money in lawyers’ fees to start a legal action. Thus one would presume that the law, if passed, will lead to knock-offs of only the most commercially successful products. $50,000 may be a worthwhile price to pay.

Grokster and Kazaa (both of which used the FastTrack protocol) and StreamCast Networks (creator of the P2P application, Morpheus) were next. Although the complaints against them were dismissed in 2003, and the dismissal upheld on appeal, in 2005 the Supreme Court found Grokster guilty. As Justice Souter wrote for the majority: “We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.”

The Grokster decision was unanimous and the Supreme Court remanded the case to the District Court for further proceedings consistent with that decision. Seeing the writing on the wall, Grokster and Kazaa entered into settlement agreements with the plaintiffs, while Streamcast, which refused to give up, was summarily found guilty for copyright infringement. In the meantime, in December 2004, AIMster (subsequently renamed Madster) was shut down by preliminary injunction which eventually became permanent.

Throughout this period, LimeWire (which uses the Gnutella network) continued to distribute and sell its software, which became one of the most popular programs for P2P sharing. Some 58% of P2P music sharing is said to be done via LimeWire. In the wake of the Grokster decision, LimeWire maintained its innocence on the grounds that it merely provided software to be used for legitimate means. Accordingly, it amended its end-user agreement to require intended users of its software to warrant that they “will not use LimeWire for copyright infringement.”

The tactic provided LimeWire with no protection at all. LimeWire was sued in 2006. On Tuesday, May 11th, the United States District Court in Manhattan found LimeWire and its founder, Mark Gorton, guilty of copyright infringement and unfair competition. [1]

There is nothing ground-breaking about the District Court’s decision. LimeWire was damned by the facts. Among other things, the court found that:

And if that didn’t show guilty knowledge enough, LimeWire founder Gorton had taken steps to shield his assets should his company be adjudged guilty.

Although there are other P2P programs currently in use such as BitTorrent, eMule and BitComet, the decision is probably the death knell of entrepreneurial efforts to capitalize on P2P file sharing. This doesn’t mean that file sharing is dead. Far from it. Not only are P2P networks likely to continue to exist (albeit on a level not likely to attract big money investors), but there are also some 3,000,000 music blogs offering free downloads via external links to such file storage sites as Rapidshare, MegaUpload, Hotfile, FileServe, FileSonic, Zshare, narod.ru, Badongo, Mediafire and Deposit Files.  Nearly all of these sites respond to DMCA takedown notices (i.e., notices of removal pursuant to the U.S.’s Digital Millennium Copyright Act), but for days, weeks, months or years the music — virtually anything one might want to download — will be there. (If something isn’t there yet, it will be. Just wait.) And when something is taken down, it will eventually re-appear. It’s a game of whack-a-mole.

In fact, the  magnitude of infringement suggests that the music industry should explore different business models, ones that reconsider pricing and apply globally, not to mention satisfy consumer demand for better quality downloads than companies like iTunes or Amazon offer. P2P file sharing companies were easy enough targets because they were huge businesses. However, the P2P lawsuits simply made file sharing more efficient and more difficult to stop.

Footnote

[1] Because sound recordings made prior to 1972 are not protected under federal copyright law, claims of infringement on such recordings must be made under state anti-piracy and unfair competition laws, as well as federal unfair competition laws. Musical compositions contained on pre-1972 sound recording, however, are protected under federal copyright law.

The Supreme Court in Winter v. Natural Resources Defense Council, — U.S. —-, 129 S.Ct. 365, 374 (2008) held that that the Ninth Circuit’s “possibility” standard in granting preliminary injunctions is too lenient reiterating the standard requires plaintiffs seeking preliminary relief to demonstrate irreparable injury is likely in the absence of an injunction. In the Ninth Circuit, to obtain injunctive relief, a plaintiff must establish (1) a likelihood of success on the merits, (2) a likelihood of irreparable harm absent a preliminary injunction, (3) that the balance of equities tips in favor of issuing an injunction and (4) that an injunction is in the public interest. In the Winter case, the Supreme Court ultimately weighed the public interest factor in favor of the Navy, lifting the limitations imposed on use of “mid-frequency active” sonar during integrated training exercises in the waters off southern California.

Previously in trademark cases, a plaintiff was entitled to a presumption of irreparable harm upon showing a probable success on the merits. See GoTo.com, Inc. v. Walt Disney Co., 202 F.3d 1199, 1204-05 (9th Cir.2000). However, in Winter, the Supreme Court held that “[i]ssuing a preliminary injunction based only on a possibility of irreparable harm is inconsistent with our characterization of injunctive relief as an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” Winter, at 375-76 (emphasis added). A plaintiff is no longer entitled to a presumption of irreparable harm on the ground that it has shown a likelihood of success on the merits. Rather, plaintiff must demonstrate that in the absence of a preliminary injunction, the applicant is likely to suffer irreparable harm before a decision on the merits can be rendered. The mere possibility of some remote future injury would be insufficient under this new test enunciated by the Supreme Court.

A preliminary injunction is an extraordinary remedy never awarded as of right. The court must always balance the competing claims of injury and consider the effect on each party of the granting or withholding of the requested relief. Here, the court has expanded its emphasis upon the public consequences in employing the extraordinary remedy of injunction. Interestingly, the court deemed the Navy’s concerns about the preliminary injunction “speculative” because the Navy had not operated under similar procedures before noting that this is almost always the case when a plaintiff seeks injunctive relief to alter a defendant’s conduct.

It is unclear if the Winter decision overrules the Second Circuit alternative test that a party may obtain injunctive relief if it shows that (1) there are questions so serious, substantial, difficult, and doubtful as to make them fair ground for litigation and thus more deliberate investigation; and (2) the harm that it would suffer is ‘decidedly’ greater than the harm that its adversary would suffer is still valid law. See, Buffalo Courier-Express, Inc. v. Buffalo Evening News, Inc., 601 F.2d 48, 58 (2d Cir.1979).

Since the Winter decision there have been a number of district court and appellate court decisions that have considered this “heightened” standard. It appears that the courts are giving the public interest factor additional attention, but with little change in result. If anything, it would seem that the courts will be careful to more fully address this public interest factor in the future and accordingly it should be addressed in a motion for preliminary relief. Because the very essence of trademark law is to protect the consumer from being confused, there is an inherent public interest in every trademark case to prevent a likelihood of consumer confusion.

Because this is just another avenue for infringers to try and steal trademarks from rightful owners, and since the law on this area is developing we are recommending that our clients immediately create accounts on facebook and register their trademarks as personalized URLs. For example, I have registered: http://www.facebook.com/WebTM. There is nothing particularly interesting at my facebook wall, but it is there.

So if you go and try and register your trademark as a personalized URL, and it is taken, Facebook is providing a means to complain by its “Notice of Intellectual Property Infringement (Non-Copyright Claim)”. If someone adopts your trademark as a personal URL on Facebook, report it immediately. Should you require any assistance in dealing with this, please contact me directly.

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