Court Finds Trademark Infringement against Fictional Restaurant

When IJR Capital Investments filed an intent-to-use trademark application for THE KRUSTY KRAB for restaurant services in December 2014, it never imagined that it was walking into a federal lawsuit. That’s because federal courts lack jurisdiction over trademark infringement matters until the defendant actually uses its trademark in commerce. WarnerVision Entertainment v. Empire of Carolina, 101 F. 3d 259 (2d Cir., 1996) (A trademark holder cannot prevent a party who has filed an intent-to-use application from using its mark “on the grounds that [the trademark holder] has used the mark subsequent to the filing of the ITU application.”)

Nevertheless, on November 23, 2015, Viacom sent IJR a cease and desist letter, demanding that IJR drop THE KRUSTY KRAB name and withdraw the pending trademark application. Not long after, Viacom filed suit in the United States District Court, Southern District of Texas.

“The Krusty Krab,” as any cartoon-watcher knows, is the name of a fictional under-the-sea restaurant in “SpongeBob SquarePants” that airs on Viacom’s Nickelodeon network. Since 1999, the façade of “The Krusty Krab” (shown here) has been shown in 166 of 203 aired episodes, was depicted in two SpongeBob SquarePants feature films, and was licensed for consumer products. However, while Viacom’s “The Krusty Krab” does not actually provide any restaurant services, it does offer a fictional “Krabby Patty” to cartoon characters.

On summary judgment, Judge Gray H. Miller held that although Viacom never registered THE KRUSTY KRAB, it was still entitled to trademark protection as a “specific ingredient of a successful TV series” that the “public directly associates with the plaintiff or its product.” (Previously, courts have held that “Kryptonite” and “Daily Planet” are protected by common law trademark rights because they have been a “staple of the Superman character and story” and “regularly appeared on licensed consumer merchandise over they years.” DC Comics v. Kryptonite Corp., 336 F. Supp. 2d 324, 332 (S.D.N.Y. 2004); DC Comics v. Powers, 465 F. Supp. 843, 845, 847 (S.D.N.Y. 1978).)
THE KRUSTY KRAB, Judge Miller ruled, merited trademark status because it acquired “distinctiveness,” or “secondary meaning,” by Viacom’s exclusive use of the name in numerous episodes over the course of 17 years; its expenditure of $197 million in advertising expenses and gross earnings of $470 million for the two SpongeBob SquarePants films; and by numerous print and Internet advertisements for “The Krusty Krab” licensed consumer merchandise.

In other words, because Viacom used THE KRUSTY KRAB widely (and with heavy advertising), the name is capable of being associated, in the minds of consumers, with a particular source of goods and services, here, Viacom.

From these facts, but ignoring the essential principle that to sue for trademark infringement the plaintiff must be able to show actual use by the defendant, Judge Miller ruled that there was a “likelihood of confusion” between Viacom’s “The Krusty Krab” and the same mark that IJR intended to use, and therefore IJR was guilty of trademark infringement. Judge Miller made a mistake of law, not fact: “The court finds that IJR has not used the mark in commerce,” he wrote.

Of course, the minute that IJR would use “The Krusty Krab,” Judge Miller’s decision would in all likelihood hold. Although Viacom’s restaurant is merely fictional, Judge Miller wrote, “Context here is critical, because a consumer seeing either Viacom’s or IJR’s marks will likely think of a restaurant. Consumers may mistakenly believe that IJR’s restaurant is an officially licensed or endorsed restaurant, similar to how Viacom’s parent company, Viacom, Inc., through its subsidiary Paramount Pictures Corporation, has licensed its marks for restaurants, including Bubba Gump Shrimp Co., a seafood restaurant chain inspired by the 1994 film “Forrest Gump.” Moreover, survey evidence submitted by Viacom showed that 30% of restaurant-going consumers nationwide believed that a restaurant called “The Krusty Krab” would be “operated, affiliated with, connected to, or approved or sponsored by Viacom.

What Judge Miller should have done is dismiss the case for lack of subject matter jurisdiction, and directed Viacom to bring its complaint to the United States Patent & Trademark Office (USPTO), where it could initiate an opposition proceeding against IJR’s trademark application at the appropriate time. Instead, Judge Miller, who was appointed by George W. Bush, bent the law and made an apparent bow to corporate power. However, further skirmishes, including an appeal from his decision, appear likely. A week after Judge Miller’s decision, Viacom filed three use-based trademark applications in the USPTO. A week after that, IJR asked the USPTO to extend its time to commence use of “The Krusty Krab,” which extension the USPTO is likely to grant. It appears to us that IJR could win the battle, but will lose the war.

The Line Between Trademark Infringement and Parody

 

The Second Circuit Court of Appeals affirms that a canvas tote bag with a graphic image of Louis Vuitton’s trademark is parody, not trademark infringement.

Louis Vuitton Malletier, S.A. v. My Other Bag, Inc., 16-241-cv, 2d Circuit Court of Appeals, Dec. 22, 2016.

Trademarks facilitate purchasing decisions by consumers by signaling that behind certain goods or services stands a particular source. Of course, trademarks can also be used as decoration on t-shirts and other goods; but sometimes, the decoration itself is the trademark — that is, it uniquely identifies the source. Like the red soles of Christian Louboutin, Louis Vuitton’s configuration of the interlocking letters, “LV,” surrounded by flower-like symbols (the “Toile Monogram” design) serves as both decoration and trademark.

Trademark law exists to prevent competitors from copying trademarks for two reasons: first, to protect the consumer’s decision-making process; and, second (in the words of Supreme Court Justice Breyer) to help “assure a producer that it (and not an imitating competitor) will reap the financial, reputation-related rewards associated with a desirable product. The law thereby encourages the production of quality products and simultaneously discourages those who hope to sell inferior products by capitalizing on a consumer’s inability quickly to evaluate the quality of an item offered for sale.” Qualitex Co. v. Jacobson Products Co., Inc., 514 U.S. 159, 163-4 (1995).

In May 2014, Louis Vuitton Malletier, S.A. (“LVM”) sued My Other Bag, Inc. (“MOB”), for reproducing graphics of LVM leather bags on one side of MOB’s canvas tote bag. The other side of the MOB bags read “My Other Bag…” — a reference to the long-standing joke occasionally seen on bumper stickers on unglamorous cars, e.g., “My other car is a Porsche.” MOB used graphics of two different LVM bags, shown here, one with the Toile Monogram design trademark, and the other with the checkerboard “Damier” design, but instead of an interlocking “LV,” MOB used its own initials. Picturing an LVM bag on the side of a canvas tote bag was a joke, but LVM didn’t find it funny.[1] In fact, LVM’s case against MOB is the latest in a series of failed litigation brought by LVM against parodies.

In 2006, LVM went after Haute Diggity Dog, LLC, a small business that manufactured and sold pet products, many of them parodying famous marks, including “Chewy Vuiton” dog toys, which took the form of little plush “handbags” suggesting (but not mimicking) LVM’s Toile Monogram design. (Among other differences, Haute Diggity used an interlocking “CV” instead of “LV”.) LVM claimed trademark infringement and “trademark dilution,” a cause of action granted to famous marks to punish “blurring” (i.e., misappropriating a mark for use on a dissimilar product) and “tarnishment” (misappropriating a mark for use on low quality or unsavory products). LVM also claimed copyright infringement, since the Toile Monogram, as a design existing apart from handbags, is protected by copyright. In addition to objecting to the use of the Toile Monogram mark on dog toys, LVM claimed that the toys were also likely to tarnish LVM’s marks because they “pose a choking hazard for some dogs.”

The District Court slapped down LVM’s claims, and the Fourth Circuit Court of Appeals agreed: “Chewy Vuiton” dog toys were successful parodies,[2] and the distinctiveness of LVM’s marks was not threatened by “Chewy Vuiton.” Parody, a form of fair use, is a complete statutory defense to a charge of trademark dilution, but not against trademark infringement (e.g., passing off a product under a third party’s trademark, thereby leading consumers to believe that the product came from the trademark owner).

In 2007, LVM sent a cease and desist letter to Danish artist Nadia Plesner, for selling t-shirts and posters to raise money for the charity “Divest for Darfur.” The artwork showed a malnourished child holding a chihuahua dressed in pink in one arm, and carrying on the other arm a bag that resembled Louis Vuitton’s “Audra” bag, with an altered Toile Monogram design. (Here, the interlocking “LV” was replaced by an interlocking “SL” for the name of the artist’s campaign, “Simple Living.”) Plesner was living in Holland at the time.

Unable to afford to go to fight a court case, Plesner stopped selling the t-shirts and posters. In 2010, however, she repainted the Darfur child in a painting that she titled “Darfurica,” which was exhibited for the first time in the Odd Fellow Palace in Copenhagen in January 2011. By the end of the exhibit, she received an injunction, obtained (unbeknowst to Plesner) by LVM from a court in The Hague. Plesner was ordered to stop showing the painting in the gallery and online, and to pay 5,000 Euros per day until she complied. In May, she went to The Hague and made her case. A month later the court reversed the injunction and ordered LVM to pay part of her legal costs.

Louis Vuitton’s attack on Plesner’s artwork is a real head-scratcher, given that Mattel tried a similar thing in 1999 when it sued artist Tom Forsythe, who produced a series of photographs of a nude and provocatively posed Barbie in or around various household appliances. (She ends up in a blender.) Mattel lost and was ordered to pay the artist $1.8 million in legal fees.

Unlike LVM`s case against Plesner, the case against MOB involved not a work of art, but a commercial product. MOB’s purpose was parody, but to LVM, MOB was merely trading on the strength of the Toile Monogram mark. As in LVM`s failed litigation against Haute Diggity Dog, LVM also claimed both “trademark dilution” and copyright infringement claim.

In order to prove trademark infringement, LVM needed to prevail on a host of factors used to analyze whether the use amounts to an infringement. In the Second Circuit, courts use the “Polaroid Factors,” a set of criteria first mentioned by Judge Friendly in the 1961 case, Polaroid Corp. v. Polarad Electronics Corp., 287 F.2d 492 (2d Cir., 1961). “The problem of determining how far a valid trademark shall be protected with respect to goods other than those to which its owner has applied it,” Judge Friendly wrote, “has long been vexing…”

Where the products are different, the prior owner’s chance of success is a function of many variables: the strength of his mark, the degree of similarity between the two marks, the proximity of the products, the likelihood that the prior owner will bridge the gap [i.e., begin selling directly competing products], actual confusion, and the reciprocal of defendant’s good faith in adopting its own mark, the quality of defendant’s product, and the sophistication of the buyers. Even this extensive catalogue does not exhaust the possibilities — the court may have to take still other variables into account.

Polaroid Corp. v. Polarad Electronics Corp., supra, 287 F.2d at 496.

LVM failed to prevail on any of the Polaroid Factors. Although LVM`s handbags and MOB’s canvas tote bags could theoretically be purchased by the same consumers, there is an enormous gulf between the quality of the products, their prices, and the venues in which they are sold. LVM was unable to come up with any convincing evidence of consumer confusion – and consumers were considered sophisticated enough to know that LVM, whose handbags run upwards of one or two thousand dollars, was not the source of an inexpensive canvas tote bag prominently marked “My Other Bag.” The court also found that there was no likelihood that MOB would be entering the luxury handbag market (i.e., “bridge the gap”).

Unsurprisingly, given the Haute Diggity Dog decision, LVM lost both in the District Court and on appeal to the Second Circuit. LVM attempted to argue that the District Court erred by finding that MOB’s use of the Toile Monogram design was parody, but the Second Circuit would have none of it. “At the same time that they mimic LV’s designs and handbags in a way that is recognizable,” the Second Circuit wrote,

they do so as a [graphic image] on a product that is such a conscious departure from LV’s image of luxury—in combination with the slogan “My other bag”—as to convey that MOB’s tote bags are not LV handbags. The fact that the joke on LV’s luxury image is gentle, and possibly even complimentary to LV, does not preclude it from being a parody.

In any event, the nature of MOB’s business—it sells quite ordinary tote bags with [graphic images] of various luxury-brand handbags, not just LVM’s, printed thereon—and the presence of “My other bag,” an undisputed designation of source, on one side of each bag,  independently support summary judgment for MOB on this designation-of-source issue.

LVM fared no better on its copyright claim: “MOB’s parodic use of LVM’s designs,” the Court held, produces a “new expression and message that constitutes transformative use.”

Parodists should probably thank LVM for losing cases involving trademark parody in two federal jurisdictions. In 1994, the Supreme Court ruled in Campbell v. Acuff-Rose Music, Inc. that rap group 2 Live Crew’s appropriation of Roy Orbison’s song, “Pretty Woman,” was not copyright infringement, but parody. (As with trademark dilution, parody is a statutory defense against claims of copyright infringement.) Since that decision, the courts have come to embrace the idea that parody should also be permitted (at least under some circumstances) as a defense to trademark infringement. Despite this trend, it has been the practice of many major trademark owners to make overbroad claims and excessive threats, sometimes commencing litigation knowing that the parodist can’t afford to fight, and will quickly give in to their demands. Hopefully, this most recent decision, which has received ample publicity, will make companies like LVM think twice before engaging in such tactics.

Endnotes

[1] The Toile Monogram was first registered with the United States Patent and Trademark Office in 1932. While LVM’s case against MOB was pending in New York, the General Court of the E.U. invalidated the Damier Trademark because it was “a basic and banal feature composed of very simple elements” and lacked any brand-specific features. It is also likely unprotectable in the United States.

[2] For trademark purposes, “[a] ‘parody’ is defined as a simple form of entertainment conveyed by juxtaposing the irreverent representation of the trademark with the idealized image created by the mark’s owner … A parody must convey two simultaneous — and contradictory — messages: that it is the original, but also that it is not the original and is instead a parody. People for the Ethical Treatment of Animals v. Doughney, 263 F.3d 359, 366 (4th Cir. 2001). This second message must not only differentiate the alleged parody from the original but must also communicate some articulable element of satire, ridicule, joking, or amusement. Thus, [a] parody relies upon a difference from the original mark, presumably a humorous difference, in order to produce its desired effect. Jordache Enterprises, Inc. v. Hogg Wyld, Ltd., 828 F.2d 1482, 1486 (10th Cir.1987) (finding the use of “Lardashe” jeans for larger women to be a successful and permissible parody of “Jordache” jeans).” Louis Vuitton Malletier S.A v. Haute Diggity Dog LLC, 507 F. 3d 252 (4th Cir. 2007). (Internal quotes omitted.)

Federal Circuit Approves Disparaging Marks for Registration

On December 22, 2015, the Lanham Act’s prohibition on the registration of disparaging trademarks was held unconstitutional by the Federal Circuit, paving the way for federal registrations for REDSKINS, HEEB, N.I.G.G.A. and other marks previously denied federal trademark status.

In re Simon Shiao Tam, Case No. 14-1203 (Decision filed on December 22, 2015)

The United States Court of Appeals for the Federal Circuit declared Section 2(a) of the Lanham Act (15 U.S.C. § 1052(a)) unconstitutional. Section 2(a) bars the US Patent and Trademark Office (“USPTO”) from registering scandalous, immoral or disparaging marks.[1]

The case came to the Federal Circuit by way of appeal from a decision by the Trademark Trial and Appeal Board (“TTAB”) in In Re Simon Shiao Tam. The TTAB upheld the USPTO’s refusal to register the name of Mr. Tam’s Asian-American dance-rock band, the SLANTS. Mr. Tam purposely named his band with a pejorative term in order to make a statement about racial and cultural issues. A panel of the Federal Circuit upheld the TTAB decision earlier this year, but shortly thereafter, the Court granted, sua sponte, a rehearing en banc on the issue of constitutionality. Oral argument was held on October 2, 2015.

The Federal Circuit decision was resolute: “Many of the marks rejected as disparaging convey hurtful speech that harms members of oft-stigmatized communities. But the First Amendment protects even hurtful speech.” Thus, the court concluded,

[t]he government cannot refuse to register disparaging marks because it disapproves of the expressive messages conveyed by the marks… The government regulation at issue amounts to viewpoint discrimination, and under the strict scrutiny review appropriate for government regulation of message or viewpoint, we conclude that the disparagement proscription of § 2(a) is unconstitutional. Because the government has offered no legitimate interests justifying § 2(a), we conclude that it would also be unconstitutional under the intermediate scrutiny traditionally applied to regulation of the commercial aspects of speech.

Actually, in this case, it isn’t clear that the government disapproved of the expressive message conveyed by the mark. In his application, Mr. Tam stated that the band “feel[s] strongly that Asians should be proud of their cultural heri[ta]ge and not be offended by stereotypical descriptions,” and that their aim was to “reclaim” and “take ownership” of stereotypes.

Despite the message that Mr. Tam intended to convey, the TTAB found that the applied for mark was disparaging to a substantial component of people of Asian descent because “dictionary definitions, reference works and all other evidence unanimously categorize the word ‘slant,’ when meaning a person of Asian descent, as disparaging,” and because there was record evidence of individuals and groups in the Asian community objecting to Mr. Tam’s use of the word.”

The USPTO has refused to register numerous marks on the ground of disparagement — most notoriously REDSKINS for the Washington football team. Other rejected marks include STOP THE ISLAMISATION OF AMERICA, THE CHRISTIAN PROSTITUTE, MORMON WHISKEY, KHORAN (for wine), HAVE YOU HEARD THAT SATAN IS A REPUBLICAN?, RIDE HARD RETARD, ABORT THE REPUBLICANS, HEEB, SEX ROD, MARRIAGE IS FOR FAGS, DEMOCRATS SHOULDN’T BREED, REPUBLICANS SHOULDN’T BREED, 2 DYKE MINIMUM, WET BAC, URBAN INJUN, SQUAW, DON’T BE A WET BACK, FAGDOG, and N.I.G.G.A. NATURALLY INTELLIGENT GOD GIFTED AFRICANS. As with SLANTS, applications for some of these intended marks (e.g., HEEB and N.I.G.G.A.) were filed by people from the very communities that the marks were held to disparage. The application for HEEB, for instance, was filed by a progressive Jewish organization. In that case, the TTAB rejected the applicant’s argument that the Examining Attorney “ignored the context and manner in which applicant’s mark is used when determining whether the likely meaning of applicant’s mark is disparaging to the Jewish community” and that “many of this country’s most established Jewish philanthropies and cultural organizations have openly and actively supported Applicant’s magazine and events through their continued funding and sponsorship.” The Board ruled that “[w]hether a proposed mark is disparaging must be determined from the standpoint of a substantial composite of the referenced group (although not necessarily a majority) in the context of contemporary attitudes.” In re Heeb Media, LLC, 89 USPQ2d 1071 (TTAB 2008) [precedential]. In other words, the particular viewpoint of the applicant was irrelevant to whether the mark was “disparaging.” Given prior decisions, the USPTO’s and TTAB’s rejection of Mr. Tam’s application for SLANTS came as no surprise.

A disparaging mark is defined as one which “dishonors by comparison with what is inferior, slights, deprecates, degrades, or affects or injures by unjust comparison.” In order to determine whether a mark is disparaging, the USPTO considers the following:

(1) What is the likely meaning of the matter in question, taking into account not only dictionary definitions, but also the relationship of the matter to the other elements in the mark, the nature of the goods or services, and the manner in which the mark is used in the marketplace in connection with the goods or services; and

(2) If that meaning is found to refer to identifiable persons, institutions, beliefs or national symbols, whether that meaning may be disparaging to a substantial composite of the referenced group.

Trademark Manual of Examining Procedure, § 1203.03(b)(i) (Jan. 2015 ed.)

Viewpoint Discrimination

The Federal Circuit found that since the test for disparagement is determined by whether “a substantial composite of the referenced group would find the mark disparaging,” it is “clear that it is the nature of the message conveyed by the speech which is being regulated. If the mark is found disparaging by the referenced group, it is denied registration.” Under principles of constitutional law, regulations that are not content neutral, i.e, that target speech based on its communicative content, are upheld only if the government proves they are narrowly tailored to serve compelling state interests. Viewpoint discrimination, which targets the substance of the particular viewpoint being expressed, is subject to even greater scrutiny. The Federal Circuit found that Section 2(a) “amounts to viewpoint discrimination, and under the strict scrutiny review appropriate for government regulation of message or viewpoint, we conclude that the disparagement proscription of § 2(a) is unconstitutional.”

The Court’s decision is ultimately hinged on its finding that the effect, if not the very purpose, of Section 2(a) is to disfavor certain viewpoints. According to the government, Section 2(a) is important because the government disagrees with the message that disparaging marks convey, based on how the message is received by an identifiable community or portion thereof. Although the government claimed that the USPTO doesn’t reject marks based on their viewpoints, this appears to be true only with respect to the narrow category of racial, religious and sexual epithets.

The Court cited several examples that it claimed were examples of viewpoint discrimination: the refusal to register 2 DYKE MINIMUM and registration of DYKES ON BIKES; the refusal to register SLANT and the registration of CELEBRASIANS and ASIAN EFFICIENCY, and the refusal to register STOP THE ISLAMISATION OF AMERICA and the registration of THINK ISLAM. However, DYKES ON BIKES was registered (after refusal by the USPTO and reconsideration in the TTAB) because the applicant was able to present evidence that the lesbian community did not consider DYKES to be disparaging, and also because the USPTO’s own evidence merely suggested that it “might” be disparaging. The comparison between SLANT and CELEBRASIONS or ASIAN EFFICIENCY also falls short: this is a comparison between a mark consisting of a pejorative term and two marks that contain no pejorative terms. Viewpoint discrimination, however, was apparently determinative in refusing to register STOP THE ISLAMISATION OF AMERICA. In refusing to register the latter mark, the TTAB “explained that the ‘mark’s admonition to ‘STOP’ Islamisation in America ‘sets a negative tone and signals that Islamization is undesirable and is something that must be brought to an end in America.’” That decision, the Court found, was a moral judgment “based solely and indisputably on the mark’s expressive content.”

Common Law Trademark Rights are Insufficient and Discourage Free Expression

The government attempted to counter this argument on three grounds. First, that Section 2(a) doesn’t prohibit free speech, “but leaves Mr. Tam free to name his band as he wishes and use this name in commerce;” second, that trademark registration constitutes a kind of government speech; and third, that trademark registration is a government subsidy, which (if true) the government may have the right to withhold.

With respect to the first argument, while it is true that Mr. Tam can continue to use his band name, it is not true that he can do so “as he wishes.” As the Court rightly found, Section 2(a) registration “bestows truly significant and financially valuable benefits upon markholders,” citing B&B Hardware, Inc. v. Hargis Industries, Inc., 135 S. Ct. 1293, 1300 (2015); Park ’N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 199–200 (1985) (valuable new rights were created by the Lanham Act); and McCarthy on Trademarks at § 19:9, :11 (“Registration of a mark on the federal Principal Register confers a number of procedural and substantive legal advantages over reliance on common law rights.”)

As examples of the rights that registration bestows upon the registrant, the Court cited the exclusive nationwide right to use the mark anywhere there is not already a prior user that precedes registration. (15 U.S.C. §§ 1072, 1115). By contrast, marks protected by common law rights are “limited to the territory in which the mark is known and recognized by those in the defined group of potential customers,” citing McCarthy on Trademarks at § 26:2. Without a federal trademark registration, a competitor can swoop in and adopt the same mark for the same goods in a different location. Non-registrants also have no prima facie evidence of their trademark’s validity, ownership and exclusive use. (See 15 U.S.C. § 1057(b)). Federal marks become incontestable after five years; common law trademarks never become incontestable. Finally, a common law trademark owner cannot stop importation of goods bearing its mark, or recover treble damages for willful infringement. (See 15 U.S.C. §§ 1117, 1124.) Nor can the common law trademark owner prevent “cybersquatters” from misappropriating its mark in a domain name. (See 15 U.S.C. § 1125(d).)

Given the limited protection that common law marks receive, if a group fears that a mark might be deemed offensive or disparaging by the USPTO, it will be less likely to adopt the mark, at least in part because the group may not be able to establish exclusive nationwide ownership. There is also a disincentive to choose a mark that might be deemed offensive or disparaging because litigating to obtain registration can be expensive and futile. (The USPTO does not give refunds for applications that are refused.)[2]

Furthermore, the Court pointed out, “the disincentive does not stop there, because the disparagement determination is not a onetime matter. Even if an applicant obtains a registration initially, the mark may be challenged in a cancellation proceeding years later. Thus, after years of investment in promoting a registered mark and coming to be known by it, a mark’s owner may have to (re)litigate its character under § 2(a) and might lose the registration.”

Although the Court didn’t squarely address the subject, common law rights in a band name offers the band no real protection at all. It is fairly commonplace in the music industry for start-up bands inadvertently to adopt the same or a similar name as another band in some other city. Consider two bands with the same name, one popular in and around New York City, the other hailing from Austin, Texas, and popular in the Southwest. Each band is able to co-exist within its respective geographic area. But if one signs with a nationally distributed record company, or even begins releasing records that receive national distribution, it can be hit by a trademark infringement claim from the other. Typically what happens is that the more successful band ends up changing its name. (To give a famous example, one of two bands called Hybrid Theory was forced to change its name in order to avoid a trademark dispute. The band members chose Linkin Park as their new name, probably a fortuitous result.) The problem can also have international implications. The U.S. applicant who is refused registration in the USPTO will face registration difficulties, resulting in many thousands of dollars in legal fees, where it also filed trademark applications internationally, either under the Madrid Protocol or via direct country filings, using the U.S. application as the filing basis, as is ordinarily the case.

In short, a denial of registration is tantamount to punishment, with an added effect of inhibiting people from engaging in potentially disparaging speech in the first place.

Trademark Registration is Not Government Speech

The government’s second argument — that trademark registration is government speech — is specious. As the Court pointed out, trademark registration is, like copyright registration, a regulatory activity that does not involve either approval or endorsement by the U.S. government. One cannot distinguish between trademark from copyright registration on the basis that trademark is “commercial speech” (and thus subject to greater regulation) because advertising and other utterances by businesses are protectable by copyright regardless of their viewpoint. As the Court pointed out,

[T]he logical extension of the government’s argument is that these indicia of registration convert the underlying speech into government speech unprotected by the First Amendment. Thus, the government would be free, under this logic, to prohibit the copyright registration of any work deemed immoral, scandalous, or disparaging to others.

The government cited Walker v. Texas Division, Sons of Confederate Veterans, 135 S. Ct. 2239 (2015) to support its contention that trademark registration is government speech, but the facts of that case are easily distinguishable. There, the Supreme Court found specialty license plates to be government speech, even though state law permitted individuals and organizations to request their own expressions, because “[t]he history of license plates shows that, insofar as license plates have conveyed more than state names and vehicle identification numbers, they long have communicated messages from the States.” (Examples include “Live Free or Die,” “The Show Me State,” and “Land of Opportunity.”) Furthermore, the Supreme Court observed that the State of Texas “places the name ‘TEXAS’ in large letters at the top of every plate,” designs the license plates, and requires vehicle owners to display them. As a consequence, the Supreme Court reasoned, “Texas license plate designs ‘are often closely identified in the public mind with the State.’” In addition, the Supreme Court found that “a person who displays a message on a Texas license plate likely intends to convey to the public that the State has endorsed that message.”

No one seriously views trademark registration as speech by the government endorsing or approving the mark or the goods and services thereunder. Anyone who did would have to explain why the government was endorsing these registered marks: RADICALLY FOLLOWING CHRIST IN MISSION TOGETHER (4759522); THINK ISLAM (4719002); GANJA UNIVERSITY (4070160); CAPITALISM SUCKS DONKEY BALLS (4744351); TAKE YO PANTIES OFF (4824028); and MURDER 4 HIRE (3605862). (The Federal Circuit named just a few but examples are legion.) Furthermore, as the government stated in its brief, “the USPTO does not endorse any particular product, service, mark, or registrant” when it registers a mark, and “just as the issuance of a trademark registration by this Office does not amount to government endorsement of the quality of the goods to which the mark is applied, the act of registration is not a government imprimatur or pronouncement that the mark is a ‘good’ one in an aesthetic, or any analogous, sense.”

Trademark Registration is not a Government Subsidy

The government contended that “trademark registration is a form of government subsidy that the government may refuse where it disapproves of the message a mark conveys.” However, the benefits of trademark registration are not monetary: trademark registration does not involve government funding or a concession to use or benefit from government property. That the USPTO is partially funded by appropriations does not make it a subsidy. Moreover, since 1991, all of the USPTO’s operating expenses associated with registering marks “have been funded entirely by registration fees, not the taxpayer.” The fact that some federal funds are spent on PTO employee benefits such as pensions, health insurance, and life insurance, is not enough to make it a subsidy. Nor is the benefit of being able to seek enforcement of a trademark by the U.S. Customs and Border Patrol. The analogy, the Court persuasively argued, is again copyright:

Under the logic of the government’s approach, it follows that the government could refuse to register copyrights without the oversight of the First Amendment. Congress could pass a law prohibiting the copyrighting of works containing “racial slurs,” “religious insults,” “ethnic caricatures,” and “misogynistic images.”

As a Regulation Aimed at Commercial Speech, Section 2(a) is Unconstitutional

The government’s main objection to the Court’s trademark-copyright analogy is that § 2(a) is intended to regulate commercial speech. However, the regulation of commercial speech is only permissible where the government has some compelling interest (e.g., to prevent misleading claims about a product or service) and the statute has been “narrowly tailored to achieve that objective.” Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 555–56 (2001). “Under a commercial speech inquiry, it is the State’s burden to justify its content-based law as consistent with the First Amendment,” said the Federal Circuit, citing Sorrell v. IMS Health Inc., 131 S. Ct. 2653, 2667 (2011).

On its face, the Court found, Section 2(a) “does not address misleading, deceptive, or unlawful marks. There is nothing illegal or misleading about a disparaging trademark like Mr. Tam’s mark.” Indeed, the government’s entire interest in § 2(a) appears to be the denial of registration to trademarks whose messages the government disapproves.

Conclusion

Whether or not the Supreme Court lets the Federal Circuit’s decision stand, the Federal Circuit’s view that Mr. Tam was unjustly refused registration is compelling:

[I]t seems clear that the result as to Mr. Tam this case exemplifies how marks often have an expressive aspect over and above their commercial-speech aspect. Mr. Tam explicitly selected his mark to create a dialogue on controversial political and social issues. With his band name, Mr. Tam makes a statement about racial and ethnic identity. He seeks to shift the meaning of, and thereby reclaim, an emotionally charged word. He advocates for social change and challenges perceptions of people of Asian descent. His band name pushes people. It offends. Despite this—indeed, because of it—Mr. Tam’s band name is expressive speech.

On the other hand, if Mr. Tam can now register SLANTS for a salutary purpose, there is no constitutional justification that would prohibit an organization to register the same word for a racist purpose, for example, “No Slants Allowed.” Nor would there be a constitutional justification for preventing registration of REDSKINS for a football team. (The owner of the REDSKINS trademark certainly claims not to have disparaging intent.) It seems to us that Congress could narrowly prohibit the registration of racial, religious and gender-based epithets that disparage “a substantial composite of the referenced group” on a viewpoint-neutral basis (i.e., regardless of the trademark applicant’s purpose in using the epithet), but Section 2(a) reaches too far when it prohibits disparaging messages whose words, standing alone, are not inherently disparaging. Of course, whether Congress should pass a law prohibiting the registration of epithets is another matter. The marketplace of ideas may be the best way to determine the worth of any mark.

The fight over Section 2(a) is far from over. The case is expected to be appealed to the Supreme Court and, of course, Congress may look for a legislative solution, leading to further litigation. In addition, the Federal Circuit limited its holding to the disparagement provision of Section 2(a), “[r]ecognizing, however, that other portions of § 2 may likewise constitute government regulation of expression based on message, such as the exclusions of immoral or scandalous marks…”

FOOTNOTES

[1] Section 2(a) provides in full as follows:
No trademark by which the goods of the applicant may be distinguished from the goods of others shall be refused registration on the principal register on account of its nature unless it —
(a) Consists of or comprises immoral, deceptive, or scandalous matter; or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute; or a geographical indication which, when used on or in connection with wines or spirits, identifies a place other than the origin of the goods and is first used on or in connection with wines or spirits by the applicant on or after one year after the date on which the WTO Agreement (as defined in section 3501(9) of title 19) enters into force with respect to the United States.
[2] At WebTM, our basic registration fee covers office actions, but not appeals to the TTAB or interventions by third parties. Buyer beware: some registration services charge high fees for office actions, which are issued in a majority of trademark applications. What looks like a cheap deal could turn into disaster.

 

New infringement claim against appropriation artist Jeff Koons

Appropriation artist Jeff Koons is back in court, this time for a 1986 painting from his “Luxury and Degradation” show for his work, entitled “I could go for something Gordon’s.” The work is a re-painting and reconfiguration of a Gordon’s Gin advertisement from that same year. Koons’ show, and the work in particular, is not about selling gin, but about how advertising seduces the consumer and presents false promises of the fulfillment of desire. The work is on display on the Whitney Museum website, with commentary on the work and Koons’ series in general.
luxury_and_degradation_e.2013.0050_i_could_go_for_something_gordon_s_792On December 14, 2015, photographer Mitchel Gray filed suit in the U.S. District Court, Southern District of New York, against Koons and auction house Phillips Auctioneers, LLC, for copyright infringement related to the creation, display and sale of the work and Artist Proof which sold “approximately $2.1 million” in 2008. According to Gray, he only discovered the infringement in July 2015.

The Copyright Act has a statutory limit on damage claims accruing more than three (3) years prior to the filing of the lawsuit. What that means is that in order to recover against Koons and Phillips, not only must Gray prove that Koons’ work is not “transformative,” but also Gray must show that he was not on “constructive notice” of Koons’ appropriation. Constructive notice means he should have known of the appropriation. Koons’ attorneys will undoubtedly argue that the appropriation was open, public and notorious, and that Gray should have known of it prior to December 2012.

For an explanation of what is “transformative,” see our posts here (on a Second Circuit’s ruling about “transformative” art; and here (on the Second Circuit’s ruling that the Google book-scanning project was non-infringing.)

See also, Psihoyos v. John Wiley & Sons, Inc., 748 F. 3d 120 (2nd Cir. 2014) for a discussion of the three year limitations on damages being based on discovery of the infringement..

Who Stole the Milano Cookie from the Cookie Jar?

On December 2, 2015, Pepperidge Farm filed suit against Trader Joe’s in Connecticut federal district court, alleging that Trader Joe’s Crispy Cookies infringe on Pepperidge Farm’s Milano cookie configuration trademark and causes “dilution by blurring,” a term of art in trademark law that indicates “an association arising from the similarity between a mark and a famous mark that impairs the distinctiveness of the famous mark.” Trademark Dilution Revision Act of 2006 (“TDRA”), Section 43(c), Lanham Act, 15 U.S.C. § 1125(c)(2)(B) (2006). Some might call the TDRA a license to bully, but in this case Pepperidge Farm has hardly picked on a small fry.

Pepperidge Farm’s trademark, which registered on September 28, 2010, but was first used (and first used in commerce) on December 31, 1977, is described in the registration as follows:

The mark consists of a configuration of a cookie comprised of a filling sandwiched between two oval-shaped cookies. The notch depicted near the upper portion of one of the cookies represents a small portion of the cookie that bumps out of the otherwise flat contoured surface.

Both the mark (the “Milano Configuration”) and a specimen cookie are pictured below. Pepperidge Farm Milano TMcontends that its Milano Configuration is famous, and it may well be: a well-regarded treatise on trademark law, McCarthy on Trademarks, argues that a mark is famous if “it is known to more than fifty percent of the defendant’s potential customers.” Marks that have been determined to be famous include VICTORIA’S SECRET, BEANIE BABIES, WAWA, COCA-COLA, THE GREATEST SHOW ON EARTH, 7-ELEVEN, NIKE, BUICK, DUPONT and KODAK.

Famous marks are generally afforded a greater scope of protection than non-famous marks. Indeed, if Pepperidge Farm is able to show that the Milano Configuration is famous, then in order to win on its claim of “dilution by blurring,” at least in the Second Circuit where this case has been brought, Pepperidge Farms will not need to prove that Crispy Cookies are visually substantially similar to Milano cookies.* Rather, it will only need to prove that they are similar enough, along with other factors weighed in Pepperidge Farm’s favor, including:

  • the degree of inherent or acquired distinctiveness of the Milano Configuration;
  • the extent to which Pepperidge Farm is engaging in substantially exclusive use of its Milano Configuration;
  • the degree of recognition of the the Milano Configuration;
  • whether Trader Joe’s use of the Milano Configuration is intended to create an association with the Milano Configuration; and
  • any actual association between the Crispy Cookie and the Milano Configuration.

(*Note: Some circuits still require substantial similarity as a threshold test for trademark dilution.)

crispy cookiesWhether Crispy Cookies are similar enough to the Milano Configuration is a judgment call. In the complaint, Pepperidge Farm describes the Crispy Cookie as “a chocolate filling sandwiched between two rounded rectangular cookies, mimicking an overall oval shape.” The use of of the word “oval” is somewhat misleading, as the Crispy Cookie is more rectangular than oval, and it doesn’t contain the Milano’s famous notch, as can be seen in the image below. How a jury comes out on that question is anyone’s guess.

To bolster its infringement and dilution claims, Pepperidge Farm also contends that Trader Joe’s mimics Pepperidge Farm’s packaging. Displayed on the package of Crispy Cookies (see below) are three cookies upright in a fluted (apricot-hued) paper cup, but there are no fluted paper cups in Trader Joe’s packaging: the cookies sit in a plastic tray. Pepperidge Farm uses fluted (white) cups inside the package, but has not shown fluted cups on its packaging since the 1990s. Pepperidge Farm further claims that Trader Joe’s upright bag is intended to mimic that of the Milano, when most cookie packs are oriented horizontally.

Current packagingPepperidge Farm’s argument that Trader Joe’s use of an image of Crispy Cookies sitting in a fluted (albeit apricot-hued) paper cup to create an association in consumers’ minds is not a bad one, given that the actual Crispy Cookies packaging includes no fluted paper cups inside. However, claiming that the image on Trader Joe’s packaging is mimicking the image on Pepperidge Farm’s packaging from twenty years ago seems to be a stretch.

As a separate claim, Pepperidge Farm alleges that Trader Joe’s product is “likely to cause confusion, mistake, and/or deceive purchasers, potential purchasers, and the relevant public and trade at the time of purchase, as well as post purchase as to the source or sponsorship or approval of the Infringing Product, and/or as to its affiliation with Pepperidge Farm.” Pepperidge Farm will have a very difficult time convincing a judge or jury that any significant consumer confusion could arise at the time of purchase, given the sophistication of consumers of Milano cookies, few people shopping at Trader Joe’s will think that Milano cookies were inside the Crispy Cookies bag or that Pepperidge Farm was affiliated with Trader Joe’s. Most people will recognize Crispy Cookies as a merely competing product, with biscuits of similar texture and color, and chocolate filling — configurations not owned by Pepperidge Farm. However, if the Milano Configuration is famous, the question won’t be consumer confusion at the time of purchase, but consumer association. Regardless of whether the Milano Configuration is famous, Trader Joe’s will surely have its greatest difficulty in a post-purchase context, where consumers may not see the associated packaging. As with many trademark infringement suits involving claims of fame and similarity, the case will likely be determined by consumer surveys.

The TDRA poses the greatest risk of liability to Trader Joe’s because Pepperidge Farm’s burden of proof regarding the similarity of the two products will be so much lower. Moreover, in most instances, the statute provides only for an injunction against further dilution; but if Pepperidge Farm can show that Trader Joe’s sought willfully to trade on Pepperidge Farm’s reputation or to cause dilution, then Pepperidge Farm may be able to recover Trader Joe’s profits and, if the facts revealed in the case are egregious enough, legal fees. Recovery of profits and an award of legal fees is also possible if the jury finds that the Milano Configuration is not famous, but the configuration of Crispy Cookies is substantially similar to the Milano Configuration, and Trader Joe’s acted intentionally and egregiously. It wouldn’t be a surprise to see Trader Joe’s withdraw its Crispy Cookies from the marketplace in the near future, at least in their present form.

 

Trademark Trolls & Trademark Bullies

Trademark Trolls

You have to expect it. There are domain name trolls who register domain names in an attempt to extract money from its rightful owner; and there are patent trolls, who attempt to enforce patent rights far beyond their patent’s actual value or contribution to prior art. Enter the trademark troll and trademark bully.

Trademark trolls attempt to (or actually do) register a mark with the intent of demanding payment from companies that have adopted the same or similar marks, often in another country. This is common in China. For example, as reported by Peter Mendelson in the International Trademark Association (INTA) Bulletin on December 1, 2015, Li Dao Zhi (Li), a Shanghai company, registered the mark Ka Si Te (a transliteration of “Castel”) in China in 2002, a year after French winemaker Castel Frères SAS began selling wine under the mark, Zhang Yu Ka Si Te. It wasn’t until 2005 that Castel Frères was aware of Li’s registration. Castel filed a request to cancel based on Li’s non-use, but while the request was pending, Li initiated use and sued Castel for infringement. The Court ruled in favor of Li and ordered Castel to pay over USD $5 million, but the Chinese high court suspended the decision and fine and ordered the case retried.

Similar situations in China, few with happy endings, have affected such companies as Tesla Motors and New Balance Athletic Shoes.

As this problem is not necessarily limited to China, but can happen in any country (particularly those in which a trademark belongs to the party who is “first to file”), the lesson is that whenever a company is contemplating doing business in a country, that company should apply to register its marks well in advance of entering the marketplace. (Winemaker Castel actually entered the Chinese market in 1998, possibly tipping off Li that there was a trademark up for grabs.) WebTM files and prosecutes trademark applications in the United States and worldwide directly through the Madrid Protocol and National applications through local counsel. (“Prosecutes” in this context means doing the necessary work to see that a mark is registered.) A description of our services and a listing of our fees are provided elsewhere on this website.

 

Trademark Bullies

Trademark bullies are a bit different from trolls. The trademark bully is the company that sends cease and desist letters to, or actually sues, other companies, claiming infringement on their trademarks beyond what is really justified. Most trademark bullies are big companies with well-known or “famous” trademarks, and big budgets to go after smaller companies. While the law recognizes that “famous” marks (a term of art in trademark law) are entitled to a wider scope of protection than regular trademarks, many companies use their power to go beyond what the law really provides, knowing full well that the smaller company won’t have the resources or economic interest to fight.

arcuateSometimes, of course, these companies send cease and desist letters or initiate actions with good cause. In other cases, there is clear overreaching. Levi Strauss is a good example of a trademark bully when it comes to their back-pocket “Arcuate” trademark, shown at left. Levi Strauss has, over the years, gone after dozens of companies (including our clients) for allegedly mimicking the Arcuate mark, and has been successful (mainly by settlement) in the pretrial phases of most of those cases. The resolve of Levi Strauss to create a wide scope of protection around its Arcuate mark can be seen in a litigation it brought against Abercrombie & Fitch Trading Co. in 2007. In that case, Levi Strauss alleged that Abercrombie’s back pocket design (below right) was confusingly similar to the Arcuate mark, and therefore infringing. Levi Strauss also alleged that Abercrombie’s mark would dilute the distinctiveness of the Arcuate mark, which is “famous.” (Whether a mark is “famous” is determined by looking at such factors as general public recognition, duration of use, amount of advertising and promotion, and the economic value of the mark. The term applies only to widely recognized trademarks.)

Having the resources to fight, Abercrombie took the case to trial, where the jury ruled in favor of Abercrombie, finding that although the Arcuate mark is famous, the two marks were not confusingly similar. However, that still left the question of trademark dilution, which is decided by courts, not juries, under a special statute designed to protect famous trademarks, the Trademark Dilution Revision Act of 2006 (the “TDRA”), Section 43(c) of the Lanham Act, 15 U.S.C. § 1125(c). To that end, the jury gave an advisory (non-binding) opinion that the two marks were not so similar that they were essentially the same mark, and the District Court found in Abercrombie’s favor. Levi Strauss appealed to the Ninth Circuit, arguing that the District Court’s requirement for applying the TDRA (i.e., that the two marks be so similar so as to be essentially the same mark) was in error. The Ninth Circuit agreed, ruling that neither a finding that the two marks were essentially the same, nor even a finding of confusing similarity, was required before Abercrombie could be found guilty of violating the TDRA. Abercrombie’s mark only needed to be similar enough in the court’s eyes, based on such criteria as the degree of fame and distinctiveness of the mark. Levi Strauss ultimately won the case, but had the Arcuate mark not been famous, the lower court decision would have stood. (The back-pocket design for which Levi Strauss went after our client wasn’t even a tenth as close to the Arcuate mark as Abercrombie’s mark was.)

a&fThe United States Department of Commerce looked at the issue of trademark bullying in 2010-2011, but concluded that if there was any overreach, it was better dealt with by Rule 11 sanctions (for bringing a frivolous lawsuit) or awarding of attorneys’ fees to prevailing parties. Three factors make this suggestion rather unhelpful. First, courts are reluctant to decide what is frivolous when a claim is “colorable” (i.e., not stark raving mad). Second, the “American rule” provides that legal fees are not awarded to a prevailing party unless expressly authorized by statute, this wasn’t the most helpful of suggestions. Section 35(a)(3) of the Lanham Act provides that courts “may award reasonable attorney fees to the prevailing party” in exceptional cases, but courts rarely find that a case is “exceptional,” and many require evidence of fraud or bad faith (e.g., evidence that the plaintiff knew that it had no case and brought it anyway for malicious reasons).

The issue of trademark bullying is still alive, however, and there is probably greater awareness today of the problem of trademark bullying with websites such as www.lumendatabase.org, dedicated to exposing overreaching practices of (mostly) economically powerful trademark holders. In 2014, the Supreme Court visited the issue of when legal fees should be awarded to a defendant in a patent case, involving a statute with the exact same discretionary language as in the Lanham Act. In Octane Fitness, LLC v. Icon Health and Fitness, Inc., 134 S.Ct. 1749 (2014), the Supreme Court reversed the Federal Circuit’s definition of the “exceptional case” as one which was, by clear and convincing evidence, “objectively baseless” and brought in “subjective bad faith.” (In support of its decision, the Supreme Court pointed to the Federal Circuit’s decision Noxell Corp. v. Firehouse No. 1 Bar-B-Que Restaurant, 771 F.2d 521 (D.C. Cir. 1985), a trademark case that defined “exceptional” under the Lanham Act as “uncommon” or “not run-of-the-mill.” Oddly enough, the Federal Circuit didn’t even discuss Noxell in its decision in Octane Fitness.)

While the reasoning in Octane Fitness has found its way into a few Lanham Act cases in which attorneys’ fees have been granted to defendants (see, e.g., Fair Wind Sailing, Inc. v. Dempster, 764 F. 3d 303 (3d Cir. 2014) (where the complaint failed to allege sufficient facts to establish trade dress infringement); and Renna v. County of Union N.J., 2015 WL 93800, (D.N.J. 2015) (awarding legal fees to party who displayed the un-registrable seal of Union County, NJ, during a public access TV exposé regarding government shenanigans — but that really was an egregious case), in the Second Circuit (covering New York, Connecticut and Vermont) the prevailing test for awarding legal fees in trademark cases still appears to be the presence of smoking-gun evidence of fraud or bad faith. This is an almost impossible standard to meet except in the worst of circumstances.

If you receive a cease and desist letter and think you are being bullied, don’t simply roll over and sign any document that is demanded by the aggrieved trademark owner. Rather, contact an attorney experienced in handling these matters. (You can contact us. We regularly handle trademark claims of all kinds in addition to bringing trademark infringement lawsuits.) Many times, with a little pushback, satisfactory settlements can be reached or, at any rate, damage can be contained.

LLC Operating Agreements Specific to Your Company’s Needs

If you’re looking for an Operating Agreement for your limited liability company (LLC), you should steer clear of online businesses that offer documents at cut-rate prices or even for free. What looks like a good deal at first could spell disaster for your company.

Many LLC owners, who are called “Members,” don’t fully understand the importance of an Operating Agreement in protecting their best interests and intentions. Because the LLC form offers business and venture start-ups a large degree of flexibility in the areas of taxation and management, decisions on those topics should be carefully considered. A well-drafted LLC Operating Agreement will address many issues, among them whether the company will be managed by certain Members as managers, or by all Members; the degree to which Members or managers have the right to bind the LLC; what conditions should precede a distribution of profits; whether a Member should be permitted to vote by proxy; restrictions on Members transferring partial shares to third parties or leaving the LLC; “drag-along” and “tag-along” rights; “reverse-vesting” that can penalize a Member who leaves the LLC early; dispute resolution; and jurisdiction and venue where any lawsuit between Members, or by Members against the LLC, must be brought.

In order to protect Members adequately, these issues will need to be addressed in a nuanced manner, not as boilerplate. Many Operating Agreements available online, and many provided by law firms, merely regurgitate provisions from the applicable LLC statute that would apply in the absence of an Operating Agreement. (Every state has an LLC statute.) The value of an Operating Agreement, however, lies in defining the relationship between Members beyond (and in lieu of) the statutory “default” position. The issues mentioned above are rarely adequately addressed in statutes passed by lawmakers.

Recently, I went through the motions of creating an Operating Agreement via one online service provider (which I’ll refer to as “Cut-Rate”), and the result was a disaster. In the interactive process, Cut-Rate asked whether the LLC will be taxed as a partnership or a corporation — and you have to choose one, even though that choice does not need to be made in an Operating Agreement and should not be made without consulting an accountant. Cut-Rate then goes on to ask, “How will decisions be made by the Members?,” but it offers only two options that “apply to contract based decisions as well as other voting situations that are not contract based:”

– All decisions require a majority vote based on percent of ownership. (Note: If any Members have a majority ownership, they will be able to make the decisions without the input of the other Members); [OR]

– All Members will have an equal vote, regardless of percent of ownership, including contract decisions that may bind the LLC.

Neither of these options is necessarily desirable, but Cut-Rate fools you into thinking that there are no other possibilities. Nevertheless, Members may want to allow each Member to incur expenses under a certain amount, but require notice to, or even consent of, the other Members for larger expenditures or certain kinds of expenditures; or they may want some decisions to be subject to approval by a majority or a supermajority, and other decisions to be unanimous. The choices should be governed by factors such as how the Members see themselves as having, or sharing, decision-making power, the type of business the LLC will engage in, and what roles Members play in the business of the LLC. But Cut-Rate considers none of this.

Limited options are not the only problem with the Cut-Rate’s instant Operating Agreement. Although I chose “All Members will have an equal vote,” I was unpleasantly surprised to find the following provision, which could override any intention of the Members to have an equal say in important business decisions — for example, entering into a long-term lease or taking a bank loan:

Members as Agents. All Members are agents of the Company for the purpose of its business. An act of any Member, including the signing of an instrument in the Company’s name, binds the Company where the Member executed the act for apparently carrying on the Company’s business or business of the kind carried on by the Company in the ordinary course, unless the Member had no authority to act for the Company in the particular matter and the person with whom the Member was dealing knew or had notice that the Member lacked authority. An act of a Member binds the Company, however, even where the Member executed the act not apparently for carrying on the Company’s business or business of the kind carried on by the Company in the ordinary course only if the act was authorized by the other Members.

In the first long sentence of this paragraph, a Member’s act binds the LLC unless “the person with whom the Member was dealing knew or had notice that the Member lacked authority” — something that in most situations would never happen. (Think about it: if you’re going to enter into a binding contract, are you going to tell the other party, “oh, I don’t have authority to do this”?) The second sentence may or may not nullify the first sentence, depending on what the judge, jury, arbitrator or mediator thinks about it, but for my money, I don’t think so. Rather, it concerns a completely separate issue, i.e., where a Member acts outside the course of ordinary business. In that event, the provision states, the Member’s act is only binding on the LLC if the act was “authorized by the other Members.” Authorized how? By majority? By unanimous decision? Cut-Rate’s Operating Agreement doesn’t say.

Another glaring example of Cut-Rate’s inadequacy is the manner in which it deals with competition by non-managing Members with the business of the LLC. If you choose the managed-by-managers option, then a Member who isn’t a manager is not restricted from setting up or assisting a competing business, and owes no duty of good faith to the LLC or to other Members, even if that Member has access to the LLC’s confidential information, such as its business and marketing plans. For managers, Cut-Rate’s Operating Agreement creates a completely unnecessary “Board of Managers” and provides that Managers can engage in a competing business as long as a majority of the “Board” approves. However, this is exactly the kind of decision regarding which Members should want a unanimous vote by all Members, not just the managers. Unfortunately, Cut-Rate doesn’t offer that as an option.

Cute-Rate also falls down on the job in the area of dispute resolution. The Operating Agreement provides that “All Members” agree to enter into mediation before filing a lawsuit, but it’s not obligatory: if a Member doesn’t show up, then the parties can just file suit. If the parties do show up and they can’t resolve their dispute after one session, then they need to file suit to resolve the issue. These are bad options. Lawyers and businesspeople who have experience with LLCs will know that there is a range of possibilities for resolving stalemates, without having to resort to litigation, which can spell the death of the LLC.

Finally, Cut-Rate and other online document companies do their clients a disservice by not providing them with the basis for making even those limited decisions that are being offered. As I was reading through Cut-Rate’s cursory explanations, I thought to myself that few customers will understand the legal implications of what they are reading and that if they knew what decisions were being made for them, they would close their browsers and seek professional guidance.

At WebTM, we have ample experience in preparing Operating Agreements that meet our clients’ needs at a reasonable cost. We avoid legal jargon wherever possible to create documents that are understandable by non-lawyers, without introducing fatal ambiguities that are typical of online documents offered at cut-rate prices or available for free. Even better, our clients are pleased to discover that they actually understand what has been drafted for them, and so will be able to make use of it in their businesses.

 

Authors Guild v. Google: Understanding Transformative Use

Authors Guild et al v. Google, Inc.
United States Court of Appeals for the Second Circuit
Docket No. 13-4829-cv

 

On October 16, the Second Circuit Court of Appeals ruled in favor of Google, Inc.’s book scanning project (the “Library Project”) in Authors Guild v. Google, Inc. (hereinafter “Author’s Guild”), upholding the District Court’s decision which found that Google’s activities were “highly transformative” and therefore “fair use.”

Depending upon your perspective, “fair use” is either a defense to a claim of copyright infringement or an affirmative right of the public to use a copyrighted work in certain ways. In either case, a “fair use” is one that may be freely engaged in without having to obtain permission from the copyright owner.

Section § 107 of the Copyright Act does not define “fair use,” but provides examples of uses that might be considered fair, and a set of criteria (the “four factors”) that were first suggested in a decision by Justice Joseph Story in Folsom v. Marsh, a case from 1841.[1] The statute mentions copying “for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research,” but this list is only suggestive, not exhaustive, and in some circumstances even these uses may not fall under “fair use.” The four factors, which may be given varying weight, are:

(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.

One might ask what the word “transformative” has to do with “fair use,” when the word isn’t mentioned in the statute. The answer, in part, goes back to an article written by Judge Pierre Leval (the same judge who wrote the Author’s Guild decision) entitled “Toward a Fair Use Standard,” published in the Harvard Law Journal in 1990.[2] In that article, Judge Leval seizes upon the words of Justice Story that a fair appropriation would be one that “superseded the objects” of the original. In other words, Leval argued, the question “turns primarily on whether, and to what extent, the challenged use is “transformative. The use must be productive and must employ the quoted matter in a different manner or for a different purpose from the original.”[3] Judge Leval then goes on to criticize the Supreme Court in Harper & Row, Publishers, Inc. v. Nation Enterprises (471 U.S. 539, 547 (1985)) for choosing the fourth factor as the “single most important” factor under the “fair use” test. “Quoting,” Judge Leval wrote,

is not necessarily stealing. Quotation can be vital to the fulfillment of the public-enriching goals of copyright law. The first fair use factor calls for a careful evaluation whether the particular quotation is of the transformative type that advances knowledge and the progress of the arts or whether it merely repackages, free riding on another’s creations. If a quotation of copyrighted matter reveals no transformative purpose, fair use should perhaps be rejected without further inquiry into the other factors. Factor One is the soul of fair use. A finding of justification under this factor seems indispensable to a fair use defense. The strength of that justification must be weighed against the remaining factors, which focus on the incentives and entitlements of the copyright owner. [Citations omitted.]

Four years later, when the Supreme Court had an opportunity to revisit the “fair use” doctrine in Campbell v. Acuff-Rose Music, 510 U.S. 569 (1994), the Supreme Court adopted Judge Leval’s reasoning:

[The first factor] asks, in other words, whether and to what extent the new work is “transformative.” Although such transformative use is not absolutely necessary for a finding of fair use, the goal of copyright, to promote science and the arts, is generally furthered by the creation of transformative works. Such works thus lie at the heart of the fair use doctrine’s guarantee of breathing space within the confines of copyright, and the more transformative the new work, the less will be the significance of other factors, like commercialism, that may weigh against a finding of fair use. [Citations omitted.]

Fast forward to 2015, and Judge Leval was faced with the question of whether the Library Project’s scanning and permitting consumers to view “snippets” of books against the copyright owner’s wishes constituted fair use. Now sitting on the Second Circuit Court of Appeals, Judge Leval faced three questions: (1) was Google’s copying (digitizing) the books an infringement of copyright; (2) are snippet views showing 3-line excerpts from the books an infringement of copyright; and (3) does Google’s commercial interest override any finding of the transformative nature of the Library Project.

The first question was quickly dispatched with a reference to the Second Circuit’s decision in Authors Guild, Inc. v. HathiTrust, 755 F. 3d 87 (2d Cir. 2014), and the observation that the digital copies made by Google are not publicly accessible and therefore could not serve as a market substitute for the originals (or potentially licensed derivatives). The sole purpose of digitalization, the Second Circuit found, was to allow “searchers to identify and locate the books in which words or phrases of interest to them appeared:”

As with HathiTrust (and iParadigms), the purpose of Google’s copying of the original copyrighted books is to make available significant information about those books, permitting a searcher to identify those that contain a word or term of interest, as well as those that do not include reference to it. In addition, through the ngrams tool, Google allows readers to learn the frequency of usage of selected words in the aggregate corpus of published books in different historical periods.

The Second Circuit had “no doubts” that the copying was transformative, and “fair use,” at least when practiced by the not-for-profit HathiTrust. It was less clear about “snippet view,” but ultimately concluded that it, too, was transformative. On the one hand, Google’s snippets are “designed to show the searcher just enough context surrounding the searched term to help her evaluate whether the book falls within her scope of interest (without revealing so much as to threaten the author’s copyright interests).” On the other hand, although “snippet view” “does not give searchers access to effectively competing substitutes,” the court did recognize

that the snippet function can cause some loss of sales. There are surely instances in which a searcher’s need for access to a text will be satisfied by the snippet view, resulting in either the loss of a sale to that searcher, or reduction of demand on libraries for that title, which might have resulted in libraries purchasing additional copies. But the possibility, or even the probability or certainty, of some loss of sales does not suffice to make the copy an effectively competing substitute that would tilt the weighty fourth factor in favor of the rights holder in the original. There must be a meaningful or significant effect “upon the potential market for or value of the copyrighted work.” 17 U.S.C. § 107(4).

Furthermore, the type of loss of sale envisioned above will generally occur in relation to interests that are not protected by the copyright. A snippet’s capacity to satisfy a searcher’s need for access to a copyrighted book will at times be because the snippet conveys a historical fact that the searcher needs to ascertain. For example, a student writing a paper on Franklin D. Roosevelt might need to learn the year Roosevelt was stricken with polio. By entering “Roosevelt polio” in a Google Books search, the student would be taken to (among numerous sites) a snippet from page 31 of Richard Thayer Goldberg’s The Making of Franklin D. Roosevelt (1981), telling that the polio attack occurred in 1921. This would satisfy the searcher’s need for the book, eliminating any need to purchase it or acquire it from a library. But what the searcher derived from the snippet was a historical fact. Author Goldberg’s copyright does not extend to the facts communicated by his book. It protects only the author’s manner of expression. [Citation omitted.] Google would be entitled, without infringement of Goldberg’s copyright, to answer the student’s query about the year Roosevelt was afflicted, taking the information from Goldberg’s book. The fact that, in the case of the student’s snippet search, the information came embedded in three lines of Goldberg’s writing, which were superfluous to the searcher’s needs, would not change the taking of an unprotected fact into a copyright infringement.

Even if the snippet reveals some authorial expression, because of the brevity of a single snippet and the cumbersome, disjointed, and incomplete nature of the aggregation of snippets made available through snippet view, we think it would be a rare case in which the searcher’s interest in the protected aspect of the author’s work would be satisfied by what is available from snippet view, and rarer still—because of the cumbersome, disjointed, and incomplete nature of the aggregation of snippets made available through snippet view—that snippet view could provide a significant substitute for the purchase of the author’s book.

The key to understanding the Court’s conclusion that “snippet view” would not have a significant impact on the copyright owner’s interest lies in understanding what “derivative rights” are granted to a copyright owner. § 106 of the Copyright Act grants to the copyright owner the exclusive right:

• making copies of the work (or if a sound recording, making “phonorecords,” a term that encompasses digital files)
• preparing derivative works.
• distributing copies or phonorecords to the public by sale or rental, lease or lending;
• for literary, musical, dramatic and choreographic works, pantomimes, motion picture and other audiovisual works, to perform the work publicly;
• for literary, musical, dramatic and choreographic works, pantomimes, and pictorial, graphic or sculptural works, including individual images of a motion picture or other audiovisual work, to display the work publicly; and
• for sound recordings, to perform the work publicly via digital audio transmission.

The phase “derivative works” is not defined in the law, but its scope is suggested by examples that include “a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgement, [or] condensation” and “any other form in which a work may be recast, transformed or adapted.” 17 U.S.C. § 101. As the Second Circuit points out, “derivative works generally involve transformations in the nature of changes of form,” rather than changes of purpose that defines “transformative” use. Using a book’s expressive content for purposes of criticism or commentary, or to provide information about the text, are examples of transformative purposes and are not considered derivative works. Weighing this definition against the manner and method of Google’s “snippet view,” the Court concluded that “the Plaintiffs’ authorship of their works does not include an exclusive right to furnish the kind of information about the works that Google’s programs provide to the public.”

In answer to the last question – whether Google’s commercial motives disqualify its claim of “fair use,” the Court relied primarily on Campbell v. Acuff-Rose Music, as well as the Second Circuit’s own precedents. In Campbell, the Supreme Court emphasized that because most “fair use” activities were carried on for profit, the commercial or nonprofit character of a work was “not conclusive” but merely “a fact to be weighed along with others in fair use decisions.” Moreover, the Supreme Court taught, “the more transformative the [new] work, the less will be the significance of other factors, like commercialism, that may weigh against a finding of fair use.” Based on this reading, the Second Circuit concluded:

[W]e see no reason in this case why Google’s overall profit motivation should prevail as a reason for denying fair use over its highly convincing transformative purpose [as well as] the absence of significant substitutive competition, as reasons for granting fair use.

What the Court meant by “significant substitutive competition” are opportunities for exploitation that would have been open the copyright holder’s right but for Google’s use. In fact, the Court found no such opportunities. Just as copyright owners have no right to control critical reviews of their works, and cannot own the facts that are contained in their works, so they cannot restrict others from furnishing information about their works, so long as in doing so there is no substantial taking of expressive content. Ultimately, the Second Circuit’s decision rested on the limited nature of Google’s “snippet view” which, it found,

does not provide searchers with any meaningful experience of the expressive content of the book. Its purpose is not to communicate copyrighted expression, but rather, by revealing to the searcher a tiny segment surrounding the searched term, to give some minimal contextual information to help the searcher learn whether the book’s use of that term will be of interest to her.

Any broader use of the copyright owners’ texts by Google would almost surely have required licensing. (For this reason, the key findings of the Second Circuit with respect to “snippet view” are reproduced below.)[4]

__________

[1] Folsom v. Marsh, 9 F. Cas. 342, 348 (C.C.D. Mass. 1841)
[2] Pierre N. Leval, “Toward a Fair Use Standard,” 103 Harv. L. Rev. 1105 (1990).
[3] Id., see Leval’s analysis under Factor 1.
[4] “Google has constructed the snippet feature in a manner that substantially protects against its serving as an effectively competing substitute for Plaintiffs’ books. In the Background section of this opinion, we describe a variety of limitations Google imposes on the snippet function. These include the small size of the snippets (normally one eighth of a page), the blacklisting of one snippet per page and of one page in every ten, the fact that no more than three snippets are shown—and no more than one per page—for each term searched, and the fact that the same snippets are shown for a searched term no matter how many times, or from how many different computers, the term is searched. In addition, Google does not provide snippet view for types of books, such as dictionaries and cookbooks, for which viewing a small segment is likely to satisfy the searcher’s need. The result of these restrictions is, so far as the record demonstrates, that a searcher cannot succeed, even after long extended effort to multiply what can be revealed, in revealing through a snippet search what could usefully serve as a competing substitute for the original.

“The blacklisting, which permanently blocks about 22% of a book’s text from snippet view, is by no means the most important of the obstacles Google has designed. While it is true that the blacklisting of 22% leaves 78% of a book theoretically accessible to a searcher, it does not follow that any large part of that 78% is in fact accessible. The other restrictions built into the program work together to ensure that, even after protracted effort over a substantial period of time, only small and randomly scattered portions of a book will be accessible. In an effort to show what large portions of text searchers can read through persistently augmented snippet searches, Plaintiffs’ counsel employed researchers over a period of weeks to do multiple word searches on Plaintiffs’ books. In no case were they able to access as much as 16% of the text, and the snippets collected were usually not sequential but scattered randomly throughout the book.

“Because Google’s snippets are arbitrarily and uniformly divided by lines of text, and not by complete sentences, paragraphs, or any measure dictated by content, a searcher would have great difficulty constructing a search so as to provide any extensive information about the book’s use of that term. As snippet view never reveals more than one snippet per page in response to repeated searches for the same term, it is at least difficult, and often impossible, for a searcher to gain access to more than a single snippet’s worth of an extended, continuous discussion of the term.

“The fact that Plaintiffs’ searchers managed to reveal nearly 16% of the text of Plaintiffs’ books overstates the degree to which snippet view can provide a meaningful substitute. At least as important as the percentage of words of a book that are revealed is the manner and order in which they are revealed. Even if the search function revealed 100% of the words of the copyrighted book, this would be of little substitutive value if the words were revealed in alphabetical order, or any order other than the order they follow in the original book. It cannot be said that a revelation is “substantial” in the sense intended by the statute’s third factor if the revelation is in a form that communicates little of the sense of the original. The fragmentary and scattered nature of the snippets revealed, even after a determined, assiduous, time-consuming search, results in a revelation that is not “substantial,” even if it includes an aggregate 16% of the text of the book. If snippet view could be used to reveal a coherent block amounting to 16% of a book, that would raise a very different question beyond the scope of our inquiry.

Exercise Methods Are Not Protected by Copyright

Whether it’s yoga, karate, Pilates or any other form of movement or exercise, the copyright laws do not protect the modalities themselves. Copyright protection can only be secured for the manner in which they are described, and even then, protection is limited.

In 1979, Bikram Yoga’s founder, Bikram Choudhury, published Bikram’s Beginning Yoga Class, which included descriptions, photographs, and drawings of his “Sequence” of twenty-six poses and two breathing exercises. The copyright was registered in the U.S. Copyright Office in 1979. In 2002, using a supplementary registration form, he registered the “compilation of exercises” contained in the book.

In 2002 and 2005, respectively, Mark Drost and Zefea Samson took Bikram’s 3-month teacher training course. In 2009, they formed Evolation Yoga, LLC, which offers “hot yoga,” among others. As the defendants admitted, Hot Yoga, like Bikram, “includes 26 postures and two breathing exercises and is done for 90 minutes, accompanied by a series of oral instructions, in a room heated to approximately 105 degrees Fahrenheit.”

Choudhury sued in 2011, claiming infringement on his copyrighted works. In 2012, the District Court granted defendants’ motion for partial summary judgment on the copyright claim, ruling that “Sequence is a collection of facts and ideas” that is not entitled to copyright protection. The Ninth Circuit affirmed that decision.[1]

Processes, systems, methods and ideas are not protected by copyright

The Copyright Act expressly excludes protection for “any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.”[2]

Choudhury describes his “Sequence” is a “system” or a “method” designed to “systematically work every part of the body, to give all internal organs, all the veins, all the ligaments, and all the muscles everything they need to maintain optimum health and maximum function.” In Bikram’s Beginning Yoga Class, Choudhury explains that he “arrived at the sequence of postures” after “[researching] the diseases and the postures and after many years of research and verification . . . using modern medical measurement techniques.” The book tells readers that “Bikram’s twenty-six exercises systematically move fresh, oxygenated blood to one hundred percent of your body, to each organ and fiber, restoring all systems to healthy working order, just as Nature intended.” An essential element of Choudhury’s system is the order in which the poses and breathing exercises are to be performed.

Because the Sequence “is an idea, process, or system designed to improve health,” the Court found it ineligible for copyright protection. The Court repeated this basic principle throughout its decision like a mantra.

Beauty and Grace do not make exercise sequences copyrightable

Choudhury argued to the court that his arrangement of postures is “particularly beautiful and graceful” and therefore should be protected by copyright.

“The performance of many ideas, systems, or processes may be beautiful: a surgeon’s intricate movements, a book-keeper’s careful notations, or a baker’s kneading might each possess a certain grace for at least some viewers. Indeed, from Vermeer’s milkmaid to Lewis Hine’s power house mechanic, the individual engrossed in a process has long attracted artistic attention. But the beauty of the process does not permit one who describes it to gain, through copyright, the monopolistic power to exclude all others from practicing it. This is true even where, as here, the process was conceived with at least some aesthetic considerations in mind… [J]ust like [a] recipe, the Sequence remains unprotectable as a process, the design of which primarily reflects function, not expression.”

The order and sequence of exercises are not copyrightable.

The court applied the same reasoning to Choudhury’s claim that the actual selection and order of the exercises and positions were protectable as a “compilation:”

“As we have explained, the Sequence is an idea, process, or system; therefore, it is not eligible for copyright protection. That the Sequence may possess many constituent parts does not transform it into a proper subject of copyright protection. Virtually any process or system could be dissected in a similar fashion.”

Finally, the court noted that according to Choudhury’s own descriptions of his method, “the very selection and arrangement of poses and breathing exercises for which he claims copyright protection” were compelled by medical and functional considerations… The Sequence’s composition renders it more effective as a process or system, but not any more suitable for copyright protection as an original work of authorship.”

Thus, it “makes no difference that similar results could be achieved through a different organization of yoga poses and breathing exercises.” Although Choudhury could have chosen from “hundreds of postures” and “countless arrangements of these postures” in developing the Sequence, “the possibility of attaining a particular end through multiple different methods does not render the uncopyrightable a proper subject of copyright.”

Whether it’s Bikram Yoga, meditation exercises, or Pilates, methods of exercise and movement are not protected by copyright

The Bikram decision is not the first decision to teach that methods of exercise or movement cannot be protected by copyright, and it may not be the last, given the number of exercise and movement modalities in the marketplace looking to protect their businesses through intellectual property laws.

What is protected by copyright, then? The particular words and photographs contained in a manual or book are clearly copyrightable, but the ideas they express are not. Thus, particular descriptions of exercises or movements enjoy only a limited scope of protection, given that there are only certain ways that they can be described. Photographs, on the other hand, because they involve composition, angle and lighting, are likely to enjoy a broader scope of protection. In short, the copyright for an exercise, movement, or teacher training publication does not extend to the choice, sequence or method of exercise, the method or sequence of teaching, or the particular ways in which the exercise or movements are performed or taught. The copyright does, however, protect against piracy and unauthorized distribution of publication, including (most typically) via the Internet.

The Bikram decision can be accessed at:
http://cdn.ca9.uscourts.gov/datastore/opinions/2015/10/08/13-55763.pdf

___________________

[1] Bikram’s Yoga College of India, L.P. and Bikram Choudhury v. Evolation Yoga, LLC, Mark Drost and Zefea Samson, No. 13-55763, Ninth Circuit Court of Appeals, October 8, 2015. On appeal from the U.S. District Court, Central District of California (No. 2:11-cv-05506-ODW-SS).

[2] 17 U.S.C. 102(b).

 

Copyright gone amok: Privacy policies, tweets & selfies

Copyright is a limited monopoly on the right to copy, disseminate, create new works from and exploit works protected under copyright law, e.g., photographs, paintings, drawings, sculpture, mixed media works, video, film, musical compositions, sound recordings (but currently only sound recordings made after Feb. 15, 1972), and literary works and other writings that have at least a modicum of creative expression. With the rise of the Internet, the number of people creating and disseminating matter that is potentially protectible under copyright law — let’s call them “disseminators” — has increased exponentially. At the same time, an uncountable number of disseminators, both individual and corporate, have sought to extend the bounds of copyright protection, often to the point of absurdity.

Take for instance the typical website Terms of Use and Privacy Policy. There is a belief out there that these are protected by copyright. Indeed, even law firms whose practice focuses on intellectual property have a bad habit of placing copyright notices on their Terms of Use and Privacy Policy pages, despite the fact that these documents consist of legal notices, statements of law and instructions to the user. They don’t contain protectible matter because there is no original authorship. The content is driven by law, potential and imagined liabilities, and convention. Moreover, they are written with the intent to fulfill a function, not to create literary expression. There might be ways to create literary expression out of such documents, but the result would probably qualify as parody.

Even more to the point, who would ever issue a cease and desist letter or threaten to sue over someone copying their Terms of Use or Privacy Policy? And knowing you would never go after someone for re-using a terms of use or privacy policy, why would you put a copyright notice on it? Lawyers and others who perpetuate the notion that there is a copyright interest in these documents contribute to the overall misunderstanding among the public of the very spirit and purpose of copyright law. Copyright law appropriately sets the bar very low for the amount of expression that it takes to qualify as protectible, but many legal documents don’t — and shouldn’t — qualify.

***

techdirt made some news this past week by attempting to register the copyright for the following Tweet:

Monkey bar fallacy: a bad person using something makes it bad. E.g., users of monkey bars include: children, TERRORISTS #tor

The Copyright Office declined registration, probably because the Tweet falls under the what-is-not-protected-by-copyright categories, “works consisting entirely of information that is common property” and “short phrases.” Definitions, which the Tweet appeared to be, are not protected by copyright because words or short phrases belong to no one, at least when they aren’t used as trademarks. Note, however, that text that may accompany a definition, such as sentences using the word being defined, may be protected. In addition, “monkey bar fallacy” is a short phrase. This isn’t to say that no Tweets are copyright-protectible. It simply means that techdirt‘s “a-bit-of-data department” (which sought the registration) picked a bad example.

One thing about that article really bothered me. It kept referring to “copyrighting” something. You can’t “copyright” anything. You can register a copyright (at least in the United States), but something either is or isn’t protected by copyright. (Copyright isn’t copywrite, which is writing copy for advertising and marketing.) This goes along with using “trademark” as a verb. You brand a product or service; you register a trademark.

***

And that brings us to the selfie taken by a nameless crested black macaque using a camera that he appropriated from a British wildlife photographer named David Slater. Slater went to Indonesia in 2011 at great expense, but the way he tells it, he was not a co-author of the macaque’s selfie. Rather, the macaque grabbed Slater’s camera and began taking thousands of selfies, a few of which turned out to be brilliant. (Surely this validates, at least in principle, the infinite monkey theorem.)

Actually, the photographs have been around since 2011, but Slater, the owner of the camera, recently got into a dispute with the Wikimedia Foundation when one of the photos was added to the Wikimedia Commons collection of public domain images. The Foundation refused to remove the photo and for good reason. It was made entirely by the macaque, without any contribution whatsoever from Slater other than being there. Slater wasn’t responsible for the framing, the angle, the lighting, the focus or the snap of the shutter. Here was Slater’s dubious factual rationale (and specious legal rationale) for why he should be considered the “author” of the photographs:

It was my artistry and idea to leave them to play with the camera and it was all in my eyesight. I knew the monkeys were very likely to do this and I predicted it. I knew there was a chance of a photo being taken.[1]

This contradicts another, more recent, account that he apparently gave the Washington Post:

One day, he said, he set up a tripod and walked away for a few moments. When he returned, the monkeys had grabbed his camera and started snapping pictures.[2]

The latter sounds more like the truth. One can imagine Slater standing around, nervously hoping he would get his camera back in one piece. But even if Slater “predicted” that one of the macaque would take cute selfies — in fact, all but a handful of the thousands of images snapped were out of focus and otherwise unusable — neither the ownership of tools nor predictions will confer copyright ownership. Think of it this way: if someone stole your paintbrush that you cleverly left outside an art school and used it to paint a masterpiece, do you really think you could claim that you were the copyright owner?

The lack of a legitimate copyright claim hasn’t stopped Slater or his news agency, the Caters News Agency, from claiming that Slater owns the copyright. The shame of it is that the Huffington Post paid for use of the image, as if paying for an image in the public domain were a noble act.[3] When Slater tried to go after techdirt in 2011, techdirt correctly stood on its legal rights,[4] just as the Wikimedia Foundation has now done.

For better or worse, copyright law does not recognize works created by animals. Only people and corporations qualify. Of course this is bad news for elephants who make and sell their paintings, if only for peanuts.

 

End notes.

[1] See, https://www.techdirt.com/articles/20110714/16440915097/photographer-david-slater-claims-that-because-he-thought-monkeys-might-take-pictures-copyright-is-his.shtml

[2] See, http://www.washingtonpost.com/news/the-intersect/wp/2014/08/06/if-a-monkey-takes-a-selfie-in-the-forest-who-owns-the-copyright-no-one-says-wikimedia/

[3] http://www.huffingtonpost.com/2014/08/06/monkey-selfie_n_5654752.html

[4] See also, https://www.techdirt.com/articles/20110712/01182015052/monkeys-dont-do-fair-use-news-agency-tells-techdirt-to-remove-photos.shtml and https://www.techdirt.com/articles/20110706/00200314983/monkey-business-can-monkey-license-its-copyrights-to-news-agency.shtml

Improper Descriptions of Use in TM Registrations

The United States Patent and Trademark Office (“USPTO”) is currently considering ways to ensure that trademark registrants claim only those goods and services for which they are actually using their marks. All the proposals involve time and expense to the trademark owner. For that reason alone, it’s important to get registration – and subsequent Declarations of Use – right the first time. But there’s more you need to know…

Trademark registration in the United States, unlike most of the rest of the world, is based on use: that is, the USPTO requires that the registrant actually use (or have a bona fide intent to use) its mark in U.S. commerce on all the goods and/or services listed in the application. In order to enforce that requirement, the registrant is required to attest to such actual use through post-registration “Declarations of Use” under Section 8 of the Trademark Act. Declarations of Use must be filed between the 5th and 6th anniversaries of registration, between the 9th and 10th anniversaries of registration, and in each successive ten-year period thereafter. For a fee, the registrant may file within a six-month grace period, but failure to file a Declaration will result in cancellation of the registration.

Normally, a registrant submits a specimen showing use of the mark on one of the goods and/or services listed in each class of goods/services listed on the registration, and attests that “[t]he mark is in use in commerce on or in connection with all of the goods or services listed in the existing registration for this specific class…”

The Declaration also gives the registrant the opportunity to delete goods and services that are not in use or to explain an excusable failure to use the mark in connection with particular goods or services. The registrant is warned that “willful false statements and the like are punishable by fine or imprisonment or both” and “may jeopardize the validity of this document.”

In fact, the penalty can be severe if the registrant’s mark is ever challenged by a third party in a cancellation proceeding before the Trademark Trial and Appeal Board. If the mark is not being used in connection with all the listed goods and services, the entire registration may be cancelled on the basis of non-use and falsely representing that the mark was in use when it wasn’t.

Even given that risk, the USPTO is aware that many registrants are not using their trademarks on all the goods and services listed on their registrations. This is particularly the case with registrants under Section 44(e) (registrations based on a foreign registration) and Section 66(a) (registrations based on Madrid Protocol). In many countries outside the U.S., the registrant, aiming to obtain a greater scope of protection, will register its mark using descriptions of goods and services that are much broader than the USPTO permits, with the only risk being the deletion of some goods or services from the registration after the first 3 or 5 years. We have assisted numerous non-U.S. clients in avoiding this potential pitfall in their United States registrations by querying them closely as to actual use and narrowing the description of goods and services where appropriate.

Recently the USPTO completed a pilot program, which was really a spot check of 500 randomly selected registrations for which Declarations of Use were being filed. The results confirmed our observation in practice that non-U.S. registrants who obtain their registrations based on a foreign registration or the Madrid Protocol often have difficulty understanding the requirements of the USPTO.

Among the 500 registrants was a statistically significant sample of registrations under Trademark Act Sections 1(a) {use-based}, 44(e) {foreign registration based}, 66(a) {International Registration/Madrid Protocol based}, and 1(a) and 44(e) combined (dual basis). Each of the selected registrants was required by the USPTO to submit proof of their marks for two additional goods and/or services per class, in addition to the specimen(s) submitted with their Declarations of Use. If the registrant failed to submit the required proof or requested that goods and/or services be deleted, the USPTO asked for additional proof.

The results were striking. The majority of foreign-based registrations – 56% of Section 44(e) registrants, 61% of Section 66(a) registrants and 63% of dual basis registrants – ended up requesting deletion of goods and/or services that they weren’t using. In contrast, 27% of Section 1(a) registrants requested deletions of goods and services. The latter figure is still unacceptably high, however, and highlights the necessity among trademark registration service providers to take the time to limit their clients’ descriptions of goods and services to those that the client is actually using or has an excusable reason for not using. Had any of these registrants’ marks been challenged by third parties, their U.S. registrations could have been cancelled.

Aereo and Disruptive Innovation

Under copyright law, among the exclusive rights that are held by copyright holders is the right of public performance. In some cases, the copyright holder is free to negotiate any fee or royalty that it desires for public performance, or even refuse such performance outright, while in other cases, the copyright holder must accept statutorily mandated royalties.[1] Until the innovation of cable, public performance simply entailed providing a copyrighted work directly to the public (as in a movie theater or nightclub) or broadcasting it over the airwaves.

In an effort to bring cable systems within the scope of the Copyright Act, Congress amended the Copyright Act in 1976 by clarifying that to “perform” an audiovisual work meant “to show its images in any sequence or to make the sounds accompanying it audible.” The “Transmit Clause” was also added, specifying that an entity performs a work publicly when it “transmits” a performance to the public, i.e., communicates the performance “by any device or process whereby images or sounds are received beyond the place from which they are sent.” These changes were necessary in the age of technology in order for copyright holders to maintain their statutory monopoly on public performance rights of their works: there are many ways to transmit a performance other than by traditional broadcast. In 1976, of course, Congress was thinking of cable delivery. The Internet was barely even conceived.

In 2012, along came a service called Aereo, launched by Barry Diller’s IAC/Interactive Corp., a $3 billion company. The idea behind Aereo’s service was simple: “an automated system consisting of routers, servers, transcoders, and dime-sized antennae” that allowed consumers to watch television programming whose signals are relayed by Aereo to its customers via the Internet. The reality is a little bit more convoluted:

Respondent Aereo, Inc., sells a service that allows its subscribers to watch television programs over the Internet at about the same time as the programs are broadcast over the air. When a subscriber wants to watch a show that is currently airing, he selects the show from a menu on Aereo’s website. Aereo’s system, which consists of thousands of small antennas and other equipment housed in a centralized warehouse, responds roughly as follows: A server tunes an antenna, which is dedicated to the use of one subscriber alone, to the broadcast carrying the selected show. A transcoder translates the signals received by the antenna into data that can be transmitted over the Internet. A server saves the data in a subscriber-specific folder on Aereo’s hard drive and begins streaming the show to the subscriber’s screen once several seconds of programming have been saved. The streaming continues, a few seconds behind the over-the-air broadcast, until the subscriber has received the entire show.

Convoluted though Aereo may be, the Supreme Court’s decision on June 25, 2014, that Aereo’s service infringed on copyrighted programming was a no-brainer. That’s because Aereo did not simply act as equipment provider, but transmitted each particular program that a subscriber selected to watch. The dissent (written by Scalia, and joined by Thomas and Alito), believed that because transmission was triggered by the subscriber, Aereo’s transmission could not be deemed a transmission at all and viewed Aereo as akin to having a library card. (It’s a bit difficult to square that view with the actual wording and intent of the law.) The majority opinion, written by Breyer and joined by Roberts, Kennedy, Sotomayor, Ginsburg and Kagan, found Aereo’s service to have an “overwhelming likeness to the cable companies targeted by the 1976 amendments,” with the only difference being that cable systems transmit programming continuously, while the Aereo system transmits them only when “a subscriber indicates that she wants to watch a program. Only at that moment, in automatic response to the subscriber’s request, does Aereo’s system activate an antenna and begin to transmit the requested program.” The majority found the distinction to be unimportant, in part because in both systems the method is invisible both to broadcasters and subscribers alike. (As a cable subscriber, you can only watch those channels to which you turn your dial. As an Aereo subscriber, you can only watch those channels you click on.)

There has been some recent fury in the press characterizing the decision as an attack on “disruptive innovation,” a currently vaunted theory that purports to understand how technological innovation really happens. See, e.g., Michael Wolff’s article in USA Today, Concept of disruption under attack, July 7, 2014. Wolff claimed that Aereo was akin to Google and suggested that  opposition to it is an attack on the future. (“Clever ideas are the future. Established ones are the past. Choose your side,” Wolff says.)

However, Aereo was not doing “disruptive innovation” — and neither was Google. Google developed search engine technology that depended on aggregating information from existing websites and publications and provided the means for people to find that information. The argument that Google was infringing copyright by copying information to facilitate searches has nothing to do with the theory of disruptive innovation, which is “the selling of a cheaper, poorer-quality product that initially reaches less profitable customers but eventually takes over and devours an entire industry.”[2] Google wasn’t disrupting or cannibalizing an already existing marketplace.

It might be that Aereo offered a poorer-quality product and reached less profitable customers, but it did nothing more than re-route the information for which cable operators – which do on land what Aereo was doing online – pay license fees. Actually, the fact that the Supreme Court viewed Aereo as substantially similar to cable companies has recently given Aero’s lawyers new hope:

The high court concluded that the streaming service was so similar to cable companies, which are required to negotiate a deal if they want to carry broadcasters’ programming, that it could not simply pluck signals from the airwaves without paying. That’s significant, Aereo says, because the classification also means that it’s “now entitled’ to work out a deal — which broadcasters, in turn, must negotiate in good faith. Indeed, Aereo says, its eligibility for what’s known as a compulsory license ‘must be decided on an immediate basis or [its] survival as a company will be in jeopardy.”[3]

As for the supposedly new “attack” on “disruptive innovation,” this is mere palaver. Aereo was not innovative, but clever — actually too clever by half. For quite a few years now, services that take copyrighted content and re-distribute it without paying royalties or fees to the copyright holders have regularly been found by courts to run afoul of copyright law, regardless of how popular the service is.

It can also be said that Barry Diller’s IAC/InterActiveCorp hardly fits the model for a company engaged in disruptive innovation. IAC/InterActive’s revenues exceed $3 billion per year. Founded in 1995, and traded on NASDAQ, it is very far from being a feisty startup (the standard bearer for disruptive innovation).[4] Diller’s strategy was likely a calculated risk that if he didn’t slip through a loophole, he could get big enough to bring the content providers to the table. With Aereo’s latest argument, as the case goes back to the lower court on remand, he just might succeed.

___________________________________

[1] The reasons for statutorily mandated royalties are beyond the scope of this article, but see our post, Copyright 2014: Understanding the Issues. It should also be noted that while copyright owners of audiovisual works and musical compositions do have the exclusive right to control public performance of their works, sound recording copyright holders currently have that right only for public performance via the Internet (and not via land-based radio stations). That exception may well be eliminated in the near future.

[2] This is a quote from Jill Lepore’s article, The Disruption Machine (The New Yorker, June 23, 2014), criticizing the theory of “disruptive innovation,” but her description is accurate. See http://www.newyorker.com/reporting/2014/06/23/140623fa_fact_lepore?currentPage=all

[3] http://www.deadline.com/2014/07/aereo-says-court-decision-entitles-it-to-license-network-programming/

[4] For a thumnail sketch of IAC/InterActive, see http://en.wikipedia.org/wiki/IAC/InterActiveCorp

REDSKINS Marks Cancelled, Found to Disparage Native Americans

REDSKINS

On June 18th, the United States Trademark Trial and Appeal Board (TTAB) granted a petition to cancel six registrations for word and design marks containing the word, REDSKINS for entertainment services. The action, Amanda Blackhorse, Marcus Briggs-Cloud, Philip Gover, Jillian Pappan, and Courtney Tsotigh v. Pro-Football, Inc., Cancellation No. 92046185 (June 18, 2014) (“Blackhorse”), was brought by six Native Americans (later narrowed to five), who argued that the word “Redskin” was disparaging to Native Americans. Two of the three judges on the TTAB panel agreed and one dissented.

This was the second cancellation action brought by Native Americans against trademarks owned by the Washington Redskins. In the first, Harjo v. Pro Football, Inc., brought in 1992, the TTAB granted the petition for cancellation, but the federal courts ruled that the petitioners were barred by the doctrine of laches — i.e., they had waited too long after reaching the age of majority to file their action.

The registrations sought to be cancelled in Blackhorse were registered between 1974 and 1990. When the petition was filed in 2006 (shortly after the federal courts dismissed the Harjo petition), each of the petitioners had only recently reached the age of majority. Laches was no longer at issue.

Under 15 USC § 1052 of the Lanham Act, marks that “may disparage” persons or institutions “or bring them into into contempt or disrepute” are forbidden from being registered. Moreover, while the Lanham Act requires many cancellation petitions to be brought within five years of registration of the disputed mark, it provides no statute of limitation for cancellation petitions based on disparagement. Under 15 U.S.C. § 1064(3), such petitions may be brought “[a]t any time.” In the final Harjo appeal, Pro-Football, Inc. v. Harjo, 415 F.3d 44 (2005),the Court speculated that Congress “may well have denied companies the benefit of a statute of limitations for potentially disparaging trademarks for the very purpose of discouraging the use of such marks,” citing In re Riverbank Canning Co., 25 C.C.P.A. 1028, 95 F.2d 327, 329 (1938), which noted that the “field is almost limitless from which to select words for use as trademarks, and one who uses debatable marks does so at the peril that his mark may not be entitled to registration.”

Nevertheless, there was no fixed test for determining whether a mark is disparaging until Harjo. As re-stated in Blackhorse, the test is two-fold:

  1. What is the meaning of the matter in question, as it appears in the marks and as those marks are used in connection with the goods and services identified in the registrations?
  2. Is the meaning of the marks one that may disparage Native Americans?

In answer to the first question, the TTAB found that REDSKINS, even when used in connection with the presentation of football games, clearly refers to Native Americans. This is demonstrated by the design marks (visible on Washington Redskins helmets and elsewhere) and by the use of Native American garb and headdresses by the Washington Redskins’ band and cheerleaders (called “Redskinettes”).

In answering the second question, the TTAB noted that in addition to other evidence, it must take into account the views of a “substantial composite,” but not necessarily a majority, of the group which the mark is claimed to disparage. In addition, it had to find that REDSKINS was disparaging in connection with entertainment services (i.e., the presentation of football games) at the time the marks were registered.

Petitioners submitted two types of evidence to prove their case. General evidence as to the meaning of the word REDSKINS consisted of dictionary definitions, reference books and testimony from experts in linquistics. Specific evidence as to the views of Native Americans consisted of personal testimony and letters, newspaper articles and official records, including a 1993 Resolution of the National Congress of American Indians declaring that the REDSKINS trademarks were “offensive and disparaging.” The evidence left no doubt in the minds of the majority that REDSKINS was disparaging at the time the marks were filed. The respondent’s argument, that REDSKINS had acquired a separate meaning as the name of a football team, thereby neutralizing any disparaging effect, was rejected.

The dissent, on the other hand, believed that the petitioners failed to prove that the term was disparaging at the time of registration when used in connection with football. Furthermore, he said, dictionary definitions that labelled REDSKIN as “usually offensive” left open the possibility that it might not be in certain contexts, one of which could be football.

The TTAB ruling does not affect the ability of the Washington Redskins owner to continue using its REDSKINS trademarks. The only issue at stake in the case was whether federal law permitted registration of the mark in the US Patent and Trademark Office, thereby invoking the additional protections that registration provides. There is no question but that the USPTO made the right decision. Indeed, no federal agency should put a stamp of approval on conduct (or a trademark) that plainly disparages a segment of the population on the basis of race, religion, ethnicity, gender or sexual orientation.

Amazon Enters the Music Streaming Market

As Paul Bonanos predicted in Billboard magazine on April 10, 2014, Amazon has now officially entered the music streaming market through Amazon Prime, which now boasts over one million songs (tens of thousands of albums), unlimited listening, no ads and, of course, no extra charge for Amazon Prime members. As Amazon states in its press release:

Prime members can choose exactly which songs and albums to listen to, or they can sit back and listen to hundreds of expert-programmed Prime Playlists…. Prime members can also download songs from the Prime Music catalog to their mobile devices for offline playback on planes, trains and anywhere they’re without an internet connection

Prime Music is a bit different from that of other streaming services in that Amazon won’t be providing listeners with new releases, but only music that has already been released for some months, and then only a selection of participating record companies’ catalogs. For this, Amazon was able to negotiate lump sum payments, rather than royalties based on the number of plays. For now, Universal’s releases, which account for 36.7% of the market in sound recordings, will not be included in Amazon Prime. (According to Bloomberg, Universal considered Amazon’s lump sum offer too low.)

It remains to be seen how much money paid by Amazon to Warner Music Group and Sony Music Entertainment will filter down to their artists and whether their artists are even being advised that their music was offered as part of the deal.

 

Do we need the Songwriter Equity Act?

The House will hold hearings today, June 10th, and again on June 25th on royalties payable to copyright holders of musical compositions by terrestrial and digital media services. The Songwriter Equity Act is expected to be the focus of the June 10th hearings. The bill, introduced by Rep. Doug Collins (R-GA, the “Most Conservative Georgian in Congress”), is the House version of a bill introduced in the Senate by Orrin Hatch (R-Utah) and Republican Senators from Tennessee, Lamar Alexander and Bob Corker.

Collins says he is hoping for “swift and thorough consideration” of the bill, which would determine how Copyright Royalty Judges set compulsory royalties for the following reproductions of music compositions:

  • Mechanical royalty rates for the reproduction of musical compositions by way of CDs, vinyl records and similar devices,
  • permanent downloads,
  • ringtones,
  • limited downloads
  • interactive streaming

If passed, the law would require that the Copyright Royalty judges

establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. In establishing such rates and terms, the Copyright Royalty Judges shall base their decision on marketplace, economic, and use information presented by the participants. In establishing such rates and terms, the Copyright Royalty Judges may consider the rates and terms for comparable uses and comparable circumstances under voluntary license agreements.

What does this mean in practice?

First, Copyright Royalty Judges are currently prohibited from considering the royalties paid for the use of sound recordings by interactive digital services. (For an explanation of the licensing differences for interactive vs. non-interactive digital transmissions, see our previous post.) This is not necessarily a bad thing, but setting musical composition royalties against sound recording royalties is a zero-sum game, albeit one in which sound recordings owners are currently the clear victors. Some leveling of the playing field may be called for — keeping in mind, however, that songwriters invest very little money, if any, in writing a song, while sound recording owners spend (and risk losing) substantial sums of money before they have a finished sound recording.

Second, the Songwriter Equity Act would strike from the law the section that currently sets the mechanical royalty rate at 9.1 cents (for reproductions of musical compositions and digital downloads). This is probably a bad thing. The current rate of 9.1 cents is comparable or higher than the compulsory mechanical licensing rates of other countries, including the United Kingdom, where music is at least as cherished and important an industry as in the United States.

Moreover, gutting the current method for determining mechanical royalties will, if the rate is raised substantially, cause financial harm to any recording artist who records a cover version of a song. The reason why mechanical royalties were established to begin with is that lawmakers realized that there were no “willing sellers” — i.e., songwriters who were willing to let anyone record their song. But because copyright law is a limited monopoly that must also serve the public interest by advancing the arts, etc., lawmakers decreed that once a musical composition was recorded, anyone can re-record it, provided they remain faithful to the original. The compulsory mechanical royalty sets the terms by which cover versions can exist.

Typically record companies limit the amount of mechanical royalties they are willing to pay their recording artists. (Were recording artists to demand higher mechanical royalty rates, record companies would simply reduce their artist royalties. Again, it’s a zero sum game.) That means that if a recording artist were to release 10 songs, 8 of which were written by the recording artist and 2 of which were cover versions written by others, the artist wouldn’t simply give up a proportional share (i.e., 20% ) of the available mechanical income. Rather, the percentage would depend upon how high the rate was set vs. how much was left over for the songs penned by the recording artist. So much for songwriter equity. Add to this the fact that an uncountable number of recording artists are subject to a statutory rate fixed at the time they made their deals, while the statutory rate for licensed works (for cover versions and samples) are rarely fixed. Those recording artists will see their publishing income slip even further if the Songwriter Equity Act is passed. (Of course, Congress could, for instance, preserve the mechanical royalty for records and downloads, but still raise rates for streaming services.)

Although the goal of higher royalties for songwriters is laudable, at least in the abstract, attempting to set royalties according to what “a willing buyer and a willing seller” would do is a complete fiction, given the monopoly power of the performing rights organizations (which control 100% of performing rights income) and three major record companies (which collectively control 75% of the market for sound recordings). Streaming services pay 60-70% of their income to recording companies not because they are “willing buyers” to the record companies’ “willing sellers,” but because they can’t succeed without offering their subscribers the majors’ sound recordings.

The Songwriter Equity Act is, not surprisingly, opposed by the Digital Media Association (DiMA), which includes Pandora, Google, Apple and Amazon. According to the DiMA’s Executive Director Lee Knife, the Songwriter Equity Act and other currently proposed legislation in this area “create additional anomalies” and “cater to the unique interests of only a limited group of stakeholders.” What he means by the latter — and he is correct — is that any increase in royalties is likely to be felt only by the richest publishers and the most popular artists.

Copyright Reform 2014: Understanding the Issues

Over the past year, Congress has been reviewing various provisions of the Copyright Act, including those affecting how copyright royalty rates for radio and streaming services are determined, in order to assess whether reforms are necessary or desirable. The U.S. Department of Justice recently announced that it would review the anti-trust consent decrees that determine what ASCAP and BMI are able to collect on behalf of publishers and songwriters. (More on that below.) The Copyright Office has also gotten involved, soliciting comments from rights holders and the public. (The comment period closed on May 23rd.) For the most part, however, the public is left scratching its collective head: are there serious issues at stake or is this just another rights grab by copyright holders? This post is intended to provide the reader with some perspective in the current discussions and, in particular, the issues surrounding music streaming services like Pandora and Spotify.

Some Basics: Musical Compositions vs. Sound Recordings

Every song involves two sets of copyrights: the copyright in the musical composition and the copyright in the sound recording, which is a particular performance of the musical composition. The musical composition copyright is owned by a music publisher or songwriter, while the sound recording copyright is owned by the record company that records it or the artist whose performances are embodied on it.

The scope of rights that goes along with each of these copyrights is slightly different. Owners of musical compositions have the right to receive compensation from public performances of the musical composition. Owners of sound recordings, however, have that right only with respect to digital (cable, satellite and web-based) transmissions and cannot claim any public performance royalties when their recordings are played on “terrestrial” radio and television stations. To complicate matters a little further, sound recordings made prior to 1972 are not protected under copyright law, but under state unfair competition and anti-piracy laws. When Congress passed the 1976 Copyright Act, it decided that “pre-1972 sound recordings” should be entitled to federal copyright protection only in 2047. That date was subsequently amended to 2067, at which time state law protections for sound recordings will also be pre-empted. Nobody really knows why Congress did it that way.[1]

How is Income from Musical Compositions and Sound Recordings Generated?

The main income streams for musical compositions are:

  • mechanical royalties (i.e., royalties paid by record companies to publishers for the right to make each physical or digital copy of a sound recording bearing the publisher’s musical composition);
  • synchronization fees (i.e., the reproduction and use of a musical composition in “synchronization” with visual images, as in the case of videoclips, films, television programs or commercials);
  • public performance royalties, i.e. the broadcasting or transmission of musical compositions via broadcast and cable radio and television; Internet simulcasts of “terrestrial” broadcasts; satellite; both non-interactive and interactive Internet streaming; and in restaurants, clubs, retail stores or other establishments that have live or pre-recorded music;
  • fees and royalties from third party licenses (e.g., uses in video games and software, theatrical productions and audio-only commercials); and
  • sheet music royalties.

The main income streams for sound recordings are:

  • record sales (including downloads);
  • synchronization fees (i.e., the reproduction and use of a sound recording in “synchronization” with visual images);
  • fees and royalties from third party licenses (e.g., uses in video games and software, theatrical productions and audio-only commercials);
  • public performance royalties for sound recordings broadcast or transmitted by (1) eligible nonsubscription services (i.e., noninteractive webcasters and simulcasters of “terrestrial” broadcasters that charge no fees); (2) preexisting subscription services (i.e., residential subscription services which began providing music over digital cable or satellite television before July 1998); (3) new subscription services (i.e., noninteractive webcasters and simulcasters that charge a fee, as well as residential subscription services providing music over digital cable or satellite television since July 1998; and (4) preexisting satellite digital audio radio services (i.e., SiriusXM Radio).; and
  •   interactive Internet streaming royalties and fees.

How Are Royalty Rates Determined?

Synchronization fees and royalties and fees for third party licenses are unregulated and determined separately by the rights holders, i.e., the owners of the musical compositions and sound recording, in negotiation with the licensee. (Owners of musical compositions and sound recordings negotiate their own deals, but generally they do so in parity with each other.)

Mechanical royalty rates for the reproduction of musical compositions by way of CDs, vinyl records and similar devices, permanent downloads, ringtones, limited downloads, and the rates for interactive streaming are set by Copyright Royalty Judges. For physical records and permanent downloads, the rate is currently 9.1 cents per musical composition or 1.75 cents per minute of playing time or fraction thereof, whichever is greater. These rates have remained unchanged since 2006. For ringtones, the rate is 24 cents. The formulas for calculating rates for musical compositions embodied in limited downloads or transmitted via interactive streaming are highly complex, as a quick glance at 37 C.F.R. §§ 385.10 – 385.17 will confirm.

Public performance royalties for musical compositions, which include royalties on non-interactive streaming, are governed by consent decrees with ASCAP and BMI that are overseen by the U.S. Department of Justice’s Antitrust Division. The consent decrees, which date back to 1941, were the result of actions brought against ASCAP and BMI to address their substantial monopoly power over the market for public performances. (Together they control about 95% of the market, with a third performing rights organization, SESAC, taking up the slack.) The actual rates under the consent decree, however, are regularly addressed in court. In January 2012, for instance, the U.S. District Court in Manhattan, which is the court with jurisdiction over the consent decrees, approved a settlement that set the fees radio stations must pay to ASCAP through 2016.[2]

Royalty rates for sound recordings are subject to far less regulation. The use of sound recordings in interactive streaming isn’t subject to any kind of control. Interactive service providers (such as Spotify) therefore must obtain licenses directly from the sound recording copyright holders at whatever rate can be negotiated. All other public performance royalties for sound recordings are statutorily mandated to be set either through voluntary negotiations between sound recording owners and service providers or by trial-type hearings before the panel of three Copyright Royalty Judges who use a number of criteria that attempt to take into account the concerns of rights holders, service providers and consumers.[3]

The current battle over copyright royalties focuses on rates regulated by statute and/or determined under the consent decrees and by Copyright Royalty Judges. For those who have a knee-jerk reaction to any royalty rate that might be set by a government body or a court, there are good reasons either to maintain the status quo or to use statutory and jurisprudential mandates to level the playing field even further between sound recording copyright owners, musical composition copyright owners, recording artists, songwriters and different types of service providers. Even Senator Orrin Hatch (R-Utah), one of the sponsors of the Songwriter Equity Act, saw no reason to eliminate the ASCAP and BMI consent decrees, which ensure that songwriters receive 50% of public performance income earned by their musical compositions.

Who are the Rights Holders?

The market in sound recordings is largely dominated by the three “Majors,” Universal Music Group (UMG), Sony Music Entertainment and Warner Music Group. Collectively they own the sound recordings that account for 75% of the market, with Universal currently controlling nearly half that — 36.7%. This figure does not include sound recordings owned by independent labels that are distributed through the Majors, and thus underestimates the actual power the three majors wield in the marketplace.[4]

With two exceptions, the Majors generally earn the lion’s share of income earned from sound recordings, ceding a small percentage to their recording artists. The first exception is synchronization income, where the royalty split is usually 50-50. (The Majors also have a variety of ways to reduce the recording artist’s share of this income, but those wrinkles and tricks are beyond the scope of this article.) The second exception is in public performance of sound recordings via cable, satellite and the Internet, where the micropayments that accrue are distributed by an organization called Sound Exchange on a rather more equitable basis: 50% to the copyright owner, 45% to the featured artist or artists, and 5% to non-featured performers. Copyright owners and featured artists are paid directly by Sound Exchange, but non-featured artists are paid only through one of two unions, the American Federation of Musicians (AFM) or the American Federation of Television and Radio Artists (AFTRA). Note that Sound Exchange public performance royalties are different from the royalties that non-interactive streaming services like Spotify have to pay to sound recording copyright owners. In the latter case, the owners, not the artist, are likely to earn the greater share.

The market with respect to musical compositions is also dominated by the Majors through their publishing affiliates, which collectively account for 65.2% of that market.[5] Income distribution from music publishing tends to be more evenly distributed between companies and songwriters than on the sound recording side. Although there are many exceptions (as well as plenty of royalty-reducing wrinkles and tricks), 50% of royalties earned in respect of musical compositions go to publishers and 50% go to songwriters. (Some songwriters do much better than this if they can negotiate an administration deal, some do worse.) The 50-50 basis is also how ASCAP, BMI and SESAC distribute public performance royalties they collect from radio, television, restaurants, clubs, retail stores and other establishments that have live or pre-recorded music.

The Lawsuits over Pre-1972 Recordings

As mentioned above, owners of pre-1972 sound recordings do not enjoy a federally protected right to license public performances over terrestrial radio and television. The issue for these owners (who will not be copyright holders until 2067) is how to get paid now. The Turtles, who recorded the pop hit “Happy Together” in 1967, filed class action suits in August 2013 in New York, California and Florida on behalf of all owners of pre-1972 sound recordings whose works are played by SiriusXM. The suits allege that their public performance rights are covered by state statute or common law. A month after they filed suit, Capitol Records, Warner Music Group, Sony Music Entertainment, UMG Recordings, and ABKCO Music & Records, also filed a similar suit in California state court alleging infringement of California statutory and common law copyright. Given that there is no express exclusive right of public performance for sound recordings under any state law, the suits are likely to turn on whether making copies of those sound recordings for sole purpose of facilitating transmission amounts to bootlegging. There is a substantial likelihood that these suits will be dismissed. (A motion for summary judgment is pending before Judge McMahon in New York.)[6]

Are Current Royalty Rates Fair?

In order to answer the question of whether the rates are fair, one needs to take into account a number of facts about the current music business and how the various rights holders envision their future. ASCAP and BMI are not collecting the public performance royalties they were a decade ago because the advertising revenues of terrestrial radio and television stations have steadily declined, and it is on the basis of revenues that the performing rights organizations earn their royalties. Currently, terrestrial music stations pay ASCAP 1.7% of “revenues subject to fee from radio broadcasting,” which basically means all revenue received by the station from advertising and promotion, less a 12% deduction to cover costs attributable to administration and commissions.[7]

Unlike terrestrial radio stations, Pandora has to pay ASCAP 1.85% of its annual revenue.[8] ASCAP, not to mention all its publishers and songwriters, was unhappy with the decision: it asked for 3% for 2014 and 2015. Based on Pandora’s net profits, it is difficult to see why the publishing industry believes that non-interactive streaming services should pay more than terrestrial radio. But according to ASCAP’s CEO, John LoFrumento, the fact that Apple agreed to pay songwriters and publishers 10% of its revenues for iTunes Radio in a direct deal (i.e., without resort to the rate court) proves that the “market rate” for online streaming is much higher than what Pandora was ordered to pay. As it is, Pandora will pay a total of about 4% of its revenue to the music publishing industry and another 50-60% to record companies (and most of that to the Majors).[9]

With the help of this rather lengthy introduction, the reader will hopefully be well-disposed to consider these additional facts and circumstances:

The Record Industry is in Crisis. For the Majors and other sound recording owners whose economic survival is based on the sale and exploitation of sound recordings, streaming appears to be their best, and for the foreseeable future maybe their last, hope. Although downloads have made up some of the loss in physical record sales, the iTunes and Amazon model of selling individual tracks destroyed the prospect of record companies being able to sell albums to consumers. Why buy an album when you can buy the few great songs on it for a third or a quarter of the price? But ever since the advent of the LP, it was in album sales that record companies have earned their money.

Now, of course, consumers don’t even want to buy downloads, but are preferring in ever greater numbers to being able to access a wide range of music on their computers, tablets and mobile photos. The preference is a response to a number of factors, among them, the Majors’ policy (only partially abandoned) to force digital rights management on purchased downloads; the fact that the purchaser doesn’t own the download (it’s “licensed,” not owned) and can’t legally share it with others; and efforts by the Majors (through the RIAA) to teach the public through well-publicized litigation that consumers who receive purchased music from others may be liable for copyright infringement. It’s no wonder that consumers have come to prefer streaming services. The market has spoken: “Just give me the music and let me listen to it when and where I want.” That leaves record companies trying to wrest from streaming services the income they’re losing from album sales. Publishers are in a similar position, because when albums were sold they could earn mechanical royalties on music compositions that would never receive radio play or any other licensing opportunities.

Streaming Services Aren’t Profitable. It’s no secret that Pandora and Spotify aren’t profitable. Nor will they be for the foreseeable future if they have to rely on subscriptions from listeners. In March, Recon Analytics said that Beats Music could become profitable if it had 5-10 million subscribers.[10] That assessment, however, was based on Beats Music’s subscription fee at the time, which was $119.88 per year. Now that Beats Music is owned by Apple (and can take advantage of Apple’s unlimited deep pockets), the subscription price has slipped to $99.00, and if competition heats up between streaming services, it may go even lower. That means Beats Music will need many more subscribers — not merely 20% more, because more subscribers also means that Beats Music has to pay higher royalties to rights holders. Moreover, even the $99.00 per year price is unrealistic, given that the average music fan spends between $48 and $64 per year on music.[11] It’s a tall order to expect consumers to pay for streaming two times what they would pay for purchased music.

Although Pandora hopes to turn a profit in 2014, if it does, it will not do so from subscription sales. People tend to be impressed by Pandora’s revenue figures, which were $194.3 million for the first quarter of 2014, but $140.6 million of that was from advertising revenues and Pandora posted a net loss for the quarter of $28.9 million. Pandora paid “only” 55.7% of its revenues for content acquisition (which includes payments to ASCAP and BMI) in the first quarter of 2014, far lower than the 74.5% it spent in the first quarter of 2013, but whether Pandora will sustain that lower rate seems doubtful in the face of strong opposition to lower rates from the record and music publishing industries, as well as recording artists and songwriters.[12]

This problem of unsustainable royalty obligations is not limited to Pandora. Online music services that offer interactive streaming, like Spotify, are generally paying 60-70% of their revenue for content licensing.[13] Despite such large payouts, Spotify and other streaming services has been excoriated by artists including David Byrne, Thom Yorke, Bette Midler and Coldplay, among many others. Independent artists and songwriters are also disgusted. In addition to earning literally almost nothing from the streaming services, they have accused Spotify of ” giving independent and unsigned musicians a lower royalty rate than major label musicians for the same number of streams.” (Note that on the musical compositions side, the ASCAP and BMI consent decrees prohibit this kind of discrimination.)[14]

In the face of all this opposition, no one really expects that streaming services are going to be paying less to rights holders at any time in the future. The solution, then, appears to be in selling advertising revenue, linking streaming services with mobile deals and bundling — i.e., offering music streaming services together with other services, like paid-for downloads. Stand-alone streaming services might also sell users’ behavioral data (i.e., what they listen to) to advertisers and others who “could use that information to better target their advertising.”[15]

The most viable business model, however, will be to offer streaming services as part of much bigger packages, as Amazon may do with Amazon Prime, which for $99 a year, gives its customers free two-day shipping.

By bundling product shipping, video and music together, Amazon can deftly hide the price of each of the services from consumers, encouraging them to buy all instead of none — and overcoming signup barriers music services have always faced…[16]

Just as cable companies offer its subscribers bundles of channels they’ll never watch (just so they can receive those that they want), so Amazon could offer its customers an overall package price covering 2-day shipping, music and video streaming and e-book lending.[17] Few customers will use all those services to maximum benefit, but their money will fund content acquisition across the board. Of course, Amazon could also subsidize its streaming service by bundling it with paid-for downloads, thereby fostering greater customer loyalty. This is what Amazon did with Amazon Prime, “where the company makes up for its losses on shipping costs by turning casual Amazon customers into frequent buyers.”[18]

Then there is Apple, which is in the position to subsidize its streaming services through selling far more profitable platforms and devices (iPhones, iPads, Apple computers and Beats headphones) on which to use those services. It is only because Apple doesn’t need to earn a profit on music streaming that it could offer publishers and songwriters a much higher royalty rate than its competition, and then turn around and make deals with recording artists like Coldplay, The Black Keys and Beyoncé, who have given iTunes varying degrees of exclusivity to their music.[19] Standalone streaming services like Spotify and Pandora are no match for this kind of integrated market power.

There’s no such thing as a benevolent monopoly. When companies have monopoly power, they use it. First, it’s no secret that the Majors (and not publishers) earn most of the money paid by streaming services to rights holders. This is solely due to the fact that public performance rights for musical compositions and public performance rights for non-interactive streaming of sound recordings are regulated, while the use of sound recordings in interactive streaming is not. Consequently, services offering interactive streaming have to cut deals with each of the Majors, who use their monopoly power to extract high fees and other terms (such as high advances and royalty guarantees) from the service providers.

Second, it is manifestly clear that if music publishers could use their monopoly power in the same way as the Majors, they would. Under prodding from publishers, in 2011, ASCAP tried to get around the consent decree royalty structure by allowing its members to withdraw new media services (i.e., digital rights) from ASCAP’s performing rights licenses, but it was rebuffed by the court. Had ASCAP succeeded, the Majors’ publishing affiliates could have negotiated “steep license fees, which ASCAP could then use to establish higher royalties in the rate court” for independent publishers. Independent publishers were understandably less enthusiastic, as they knew that the big three publishers would take a disproportionate piece of the royalty pie, leaving crumbs for the independents.[20]

Third, using their monopoly power, the Majors have and will continue to set an extremely high bar for new entrants in the music streaming business. Similarly, Amazon and iTunes will continue to use and extend their monopoly power market to shut out their competition wherever they can.

Some Conclusions.

Congress needs to decide whether the current state of affairs needs to be addressed through legislation. Do publishers and songwriters receive too little a share of the overall royalty pie? The answer appears to be “yes.” Are the Majors extracting too much money from streaming services? To the extent that they leave independent companies and artists with a disproportionately lesser share of royalties, the answer also appears to be “yes.” Congress should consider leveling the playing field for sound recording copyright owners in general, much as the consent decrees leveled the playing field for publishers and songwriters by ensuring that performing rights royalties for publishers and songwriters are paid at the same rate, rather than a rate determined by the relative negotiating power publishers.

However, Congress also needs to decide whether greater competition among streaming services is itself a worthy goal and whether that goal can co-exist with the royalty rates that record companies, music publishers, recording artists and songwriters say they need. To put this into proper perspective, any talk of “fair market value” is empty rhetoric given the high degree of concentration in the music recording and publishing industries and, increasingly, music streaming services. “Fair” is simply whatever the market will bear at any given moment, and one can hardly begrudge rights holders from negotiating the highest possible royalty rates and then engaging in tactics intended to push those rates even higher. What is clear is that rights holders do not view the stand-alone streaming service, whether interactive or non-interactive, to be a viable business model because such a service could never generate the revenues that rights holders want. Rights holders are also aware that consumers will only pay so much for music streaming and that their only viable recourse is to require the streaming services to seek alternative sources of income.

Congress must also address whether terrestrial radio and television should continue to be exempt from paying performing rights royalties for sound recordings. That exemption was won by broadcasters back in 1970 and maintained ever since then under the theory that radio play gives record companies free promotion, which stimulates record sales. However, the rationale fails to be persuasive when digital broadcasters are required to pay such royalties. If Congress decides that terrestrial radio must pay, then it will also need to decide how rates will be set — whether by statute, rate courts or private negotiation, where the Majors can freely exercise their monopoly power. (The latter seems unlikely.)

Finally, Congress should bring pre-1972 recordings under federal copyright law now, so that the owners of these recordings can participate in sound recording performance royalties. Ending state and common law protections for pre-1972 recordings would also reap a positive benefit to the public, since at the moment, there are no pre-1972 recordings in the public domain and won’t be until 2067. Admittedly, it would open up a can of worms: Congress would have to decide exactly when pre-1972 recordings would enter the public domain and under what criteria. Due to the piecemeal way in which Congress has historically dealt with copyright laws, copyrightable works (other than sound recordings) published without a copyright notice prior to January 1, 1978, are currently in the public domain, as are works that were published with a copyright notice between 1923 and January 1, 1964, but never renewed via registration at the Copyright Office. (Works published after 1977 are not required to be registered and enjoy copyright terms ranging from 70 years from the death of the author, 95 years from the date of publication, or 120 years from the date of creation, depending on a number of factors.)[21] Obviously, copyright protection for pre-1972 recordings cannot depend upon whether they were released with copyright notices – none were – but Congress will have to determine, somewhat arbitrarily, when their copyright terms will expire. Congress will have to address other problems as well, such as what to do about orphan works and the extent to which statutory damages should apply to infringements.[22]


[1] Federal Copyright Protection for Pre-1972 Sound Recordings, A Report of the Register of Copyrights, December 2011, pp. vii and 13-16,  http://www.copyright.gov/docs/sound/pre-72-report.pdf

[2] “Federal Court Approves Radio Industry Settlement with ASCAP,” http://www.radiomlc.org/pages/4795848.php

[3] The explanation here is necessarily simplified. For a more complete explanation, see http://www.soundexchange.com/service-provider/licensing-101/#sthash.n4MSXwCV.dpuf. For a look at procedural regulations governing the Copyright Royalty Board, see http://www.loc.gov/crb/fedreg/2005/70fr30901.html.

[4] Comments of Public Knowledge and the Consumer Federation of America, “In the Matter of Music Licensing Study: Notice and Request for Public Comment,” Docket No. RM 2014-3, before the United States Copyright Office (hereinafter, “Public Knowledge”), p. 11, http://www.publicknowledge.org/assets/uploads/documents/PKCFAComments.pdf

[5] Id., p. 16

[6] In April of 2013, a New York appellate court decided that the Digital Millennium Copyright Act’s “safe harbor” provisions did not protect a website with user-generated content from claims of infringement on pre-1972 recordings on the grounds that pre-1972 recordings do not enjoy protection under federal copyright law. The New York high court, called the New York Court of Appeals, declined an appeal from the appellate court decision. Eric Goldman, “More Evidence That Congress Misaligned the DMCA Online Copyright Safe Harbors (UMG v. Grooveshark),” April 24, 2013, http://www.forbes.com/sites/ericgoldman/2013/04/24/more-evidence-that-congress-misaligned-its-online-copyright-safe-harbors-umg-v-grooveshark/. The United States District Court, Southern District of New York, reached a similar conclusion in a case involving the video-sharing service, Vimeo. An appeal of that decision is pending before the 2d Circuit Court of Appeals. See, Richard L. Crisona, S.D.N.Y. Intellectual Property Law, http://ipblog.abv.com/2013/12/court-certifies-interlocutory-questions.html. Nevertheless, the New York courts have not yet decided whether broadcasting pre-1972 recordings online violates New York misappropriation laws or “common law” copyright.

[7] “Federal Court Approves Radio Industry Settlement with ASCAP,” http://www.radiomlc.org/pages/4795848.php

[8] Ed Christman, Rate Court Judge Rules Pandora Will Pay ASCAP 1.85% Annual Revenue, http://www.billboard.com/biz/articles/news/publishing/5937528/rate-court-judge-rules-pandora-will-pay-ascap-185-annual

[9] Id.

[10] Bruce Houghton, Beats Music Added 1000 Subscribers Daily In First Month [Report], 3/20/2014, http://www.hypebot.com/hypebot/2014/03/beats-music-added-1000-subscribers-daily-in-first-month-report.html

[11] David Pakman, The Price of Music, March 18, 2014, http://recode.net/2014/03/18/the-price-of-music/

[12] Stuart Dredge, “Mobile now 76% of Pandora’s business, but profits remain elusive,” April 25, 2014, http://musically.com/2014/04/25/pandora-financial-results-mobile/. Regarding anger by songwriters, see, e.g., http://www.hollywoodreporter.com/earshot/bette-midler-critiques-pandora-spotify-693961 and

[13] Lucas Mearian, “Music industry sucks life from subscription services,” Feb. 14, 2014, http://www.computerworld.com/s/article/9246365/Music_industry_sucks_life_from_subscription_services, quoting a market report from Generator Research.

[14] Public Knowledge, p. 15, 17.

[15] Mearian, footnote 13.

[16] Paul Bonanos, Business Matters: How Amazon Could Have ‘Tens of Millions’ of Paid Streaming Music Subscribers Instantly,” April 10, 2014, http://www.billboard.com/biz/articles/news/digital-and-mobile/6049214/business-matters-how-amazon-could-have-tens-of-millions

[17] Id.

[18] Id.

[19] Andre Mouton, “Can Apple Win Over a Music Industry Burned by Pandora?” http://www.minyanville.com/sectors/technology/articles/Can-Apple-Win-Over-A-Music/5/27/2014/id/55096?refresh=1

[20] Public Knowledge, p. 16.

[21] “Copyright Term and the Public Domain in the United States, 1 January 2010, http://www.copyright.cornell.edu/resources/publicdomain.cfm.

[22] The issues have been greatly simplified in this article for brevity. For a broader discussion of the problem, see, Laura Moy, “Protecting Sound Recording Artists and Getting It Right This Time,” December 4, 2013, https://www.publicknowledge.org/news-blog/blogs/protecting-sound-recording-artists-and-gettin.

Registering Product Configurations as Trademarks

What you need to know if you want to “trademark” a product configuration.

by Lawrence Stanley and Gordon Troy

In an era of fierce competition, brand owners are constantly looking for ways to foster brand identity, distinguish their products from those of competitors, and build and protect their marketing space. One method of doing that is by creating and promoting unique product configurations. Product features that have successfully registered as trademarks in the United States include shapes, designs, colors and smells. The possibilities are wide-ranging.

Furniture manufacturer Knoll has registrations for configurations of a couch, a table, two different chairs and a stool. Chocolate-maker Lindt and Sprungli registered a mark for chocolate in the three-dimensional shape of a closed umbrella. Guitar manufacturers have obtained registered marks for guitar body shapes, pearl fret board inlays and designs encircling the guitar’s sound hole. After taking its case to the Trademark Trial and Appeal Board (TTAB), confectioner Hershey’s succeeded in registering the manner in which squares of its chocolate bars are scored. The TTAB also permitted registration of a fragrance (Plumeria blossoms) for thread and yarn; and allowed Bottega Veneta’s “intrecciato” leather weave design to be published for opposition, potentially paving the way for registration.

One of the attractions of making a key aspect of a product function as a trademark is that it eliminates the need to stamp the brand owner’s logo all over the product in order for it to be recognizable. The most compelling attraction, however, is that it closes off competitors from imitating a brand owner’s  non-functional designs. It is the question of fair competition that leads the United States Patent & Trademark Office (USPTO) and the TTAB to disfavor registration in all but the most compelling instances. As one TTAB judge has observed:

[W]hen one is faced with a putative source indicator such as the configuration of a product or its packaging or any product feature that enhances the attractiveness of the product, it is logical to ask as a first question whether the public interest is best served by refusing to permit a particular feature to be taken from the “public domain.” This is, at root, a public policy question, and turns on whether the non-traditional indicator should remain permanently available for competitors to freely use.

Determining registrability

While product features are almost never inherently distinctive, they can acquire distinctiveness – and hence, trademark status in the US – through exclusive use if they also satisfy certain criteria. A brief explanation of the analytical framework employed by the USPTO to determine the registrability of product configuration trademarks is helpful.

For a trademark to be registrable, it must be “distinctive.” A mark is “inherently distinctive” if its very nature serves to identify a particular source. Yves Saint Laurent’s interlocking “YSL” is inherently distinctive, but the shape of a product, a type of weave or a color must acquire distinctiveness by accruing what is referred to as “secondary meaning” in the mind of the consumer. A bit of a misnomer, “secondary meaning” occurs when the primary significance of the product feature is its association with the brand owner. Section 2(f) of the Trademark Act, 15 U.S.C. 1052(f), permits the registration of a mark “which has become distinctive of the applicant’s goods in commerce,” and provides that the USPTO may accept as prima facie proof of distinctiveness “substantially exclusive and continuous use” of the mark during the five years prior to “the date on which the claim of distinctiveness is made.”

In practice, however, the degree of proof of distinctiveness required by the USPTO will depend upon the particular product configuration. The umbrella-shaped chocolate mentioned above was accepted for registration without the submission of any proof of distinctiveness. But generally speaking, such proof will include declarations showing that the product has been in the marketplace for at least five years; the feature for which registration is sought has been promoted as the applicant’s trademark (as shown by the nature and extent of the applicant’s advertising); and the geographic distribution of the product has been widespread. The USPTO may also require declarations from distributors, shop owners and/or customers who claim to recognize the product feature as originating with the applicant.

A brand owner who can show that the feature for which it seeks registration has acquired distinctiveness may still need to defend against a claim that the mark is “functional.” There are two types of functionality: utilitarian and aesthetic. A product feature is said to have utilitarian functionality when the feature is essential to the use or purpose of the product, is dictated by the functions to be performed, or has a direct bearing on the product’s cost or quality. A
leather strap on a handbag is an example of utilitarian functionality: no brand owner could prevent another from using a leather strap. However, the particular way that the strap is attached to the bag, if non-essential, is capable of acquiring distinctiveness by identifying the brand owner as the bag’s source.

Brand owners who advertise a product feature as making their product more effective or superior to competing products are unlikely to overcome this hurdle. Bose, the company that manufactures “901” speakers, was denied registration of the unique shape of its cabinets despite the fact that it had clearly acquired distinctiveness among consumers in the 27 years that the speakers had been on the market. In upholding the Examining Attorney’s refusal to register, the TTAB found that Bose’s two expired utility patents “repeatedly disclose the utilitarian advantages of this particular configuration” and that its advertisements “tout the utilitarian advantages of the product design.” Aesthetic functionality is more difficult to parse. In general terms, a feature is aesthetically functional if the brand owner’s right of exclusive use would put competitors at a significant non-reputational disadvantage. In other words, trademark protection does not extend to ornamental features of a product that would significantly limit the range of competitive designs available. At the same time, however, “competitors are not guaranteed the greatest range for their creations, but only the ability to compete ‘fairly’ within a given market.” Consequently, the test for aesthetic functionality is both fact-specific and subjective.

In 2013, the TTAB refused registration by Florists’ Transworld Delivery of the color black as applied to packaging for flowers. Colors, the TTAB found, serve an aesthetic function because they carry particular meanings when it comes to flowers. The color black may convey elegance or may be used “on somber occasions, such as the context of death” and there is thus a “competitive need” to use the color black to communicate the appropriate or desired message from the purchaser to the recipient of flowers.

A case in point

When Bottega Veneta (BV) sought US registration of its well-known leather weave in 2007, it must have been confident that its application would sail through the USPTO. BV had been using the intrecciato weave (the term used by the company in its advertising) since 1975. It appeared on over 80% of BV’s leather goods. Sales in the six years prior to the application were US $275 million. Advertising expenditures in the same period totaled US $18 million and many advertisements publicized the uniqueness of the design. Fashion reviewers referred to the intrecciato as BV’s “signature.” In addition, companies selling imitations or near-imitations made reference to BV – a de facto recognition that the weave is a source identifier. As one seller wrote:

Don’t let the woven leather fool you — this is not a Bottega Veneta bag … To the ladies and gentlemen who buy the intrecciato Bottega Veneta bags … everyone knows you’re spending the dough because the intrecciato is “exclusive” at the moment.

Despite the fact that the intrecciato had become distinctive, the mark would not be published for opposition until December 2013. BV’s application and the Office Actions that followed provide a textbook case of what not to do when filing an application to register a product feature and what can go wrong.

BV’s application was filed under Section 44(e) of the Lanham Act, which permits registration under the Paris Convention based on a prior foreign registration, in this case, in Italy. While a 44(e) registration normally grants the applicant certain advantages, BV still had to satisfy the requirements of Section 2(f) that its mark was both distinctive and non-functional.

BV started out on the wrong footing. First, it failed to provide an adequate description of the goods in Class 18. Instead, it recited nearly the entire description of products in the Italian registration (consisting of the full Nice classification heading), thus running afoul of basic USPTO procedure which requires applicants to list in ordinary commercial terms only those goods or services for which the applicant actually uses or has a bona fide intent to use the mark. Second, the description of the mark was inadequate because it failed to describe the mark accurately. The application’s description read: “The mark consists of Interlaced woven strips of leather arranged in a distinctive repeating pattern that is used over all or substantially all of the goods.”

It was this overbroad description, potentially encompassing a wide range of designs of interwoven strips of leather, which led the Examining Attorney to look at BV’s weave generically rather than focusing on the specific nature of the intrecciato and how it differed from the weaves of nearly all of BV’s competitors. His objections to registration set out in five Office Actions attacked BV on every technical and substantive ground available. He argued that the
intrecciato design lacked distinctiveness, could not function as a trademark because it was solely ornamental, and was functional from both a utilitarian and aesthetic perspective. Combing the internet, he found thousands of products with leather weave designs to support his contentions.

In the face of this opposition, BV began amending the description of the mark and the delineation of goods, and gathered evidence that the weave was non-functional and widely recognized as unique in the fashion world. BV easily demonstrated that the intrecciato wasn’t stronger than other weaves and that it provided no economic advantage to BV because it was actually more expensive. The Examining Attorney, however, was unmoved. A weave is a weave is a weave, he found, eventually issuing a Final Refusal.

When the matter reached the TTAB, BV was describing its mark narrowly and precisely: “a configuration of slim, uniformly-sized strips of leather, ranging from 8 to 12 millimeters in width, interlaced to form a repeating plain or basket weave pattern placed at a 45-degree angle over all or substantially all of the goods.” The TTAB criticized the Examining Attorney for failing to distinguish the intrecciato from other weaves: “After carefully reviewing all of the evidence showing weave designs on handbags, there are a very small number that can be considered to have the very same features as those described in applicant’s mark,” the TTAB observed.

By giving a “very narrow reading of the proposed mark,” the TTAB was able to find that the intrecciato was not aesthetically functional because BV’s competitors would be able to use any weave other than the specifically described BV configuration. As for manufacturers and sellers of similar bags uncovered by the Examining Attorney, the TTAB held that if they were not intentionally imitating the intrecciato because their bags have “the look of applicant’s bags” and “it is the association with applicant that consumers want to obtain,” then the best place for them to be heard would be in an opposition following publication of the mark. Following that decision, the mark was published. As of this writing, the mark has been opposed for footwear (Class 25) and BV filed a request to divide the application so that registration may issue for goods in Class 18.

Conclusion

The practitioner applying to register product configuration trademarks must be aware of the hurdles that clients may face and begin to address them in the initial trademark application. While it is always difficult to predict how an Examining Attorney will respond to an application, the client should be advised long in advance what evidence it may need to gather to demonstrate that its unique product configuration functions as a trademark and is registrable as one.

(Initially published in The Trademark Lawyer, March/April 2014. You can download the printed article here: 2014 Trademark Lawyer)

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.