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USPTO Changes in Requirements for Declarations of Use (7/25/2016)

We previously reported the Declarations of Use pilot program by the USPTO. Examiners could request additional evidence when they questioned the evidence filed. These requests applied to both national and international registrations. As a result of the pilot program, the goods and services listed in the vast majority of the registrations questioned were limited to those in actual use. The USPTO is now proceeding to make the pilot program procedures part of the official rules. The objective is to have a more precise register of trademarks. Although the entire rulemaking process is not complete, these new regulations are likely to be implemented swiftly.

The key provision is:

The Office may require the owner [or holder of an International Registration] to furnish such information, exhibits, affidavits or declarations, and such additional specimens as may be reasonably necessary to the proper examination of the affidavit or declaration under section 8 [section 71] of the Act or for the Office to assess and promote the accuracy and integrity of the register.

See Federal Register – 6/22/2016 amending TMEP Sections 2.161 and 7.37

This rule gives the USPTO great latitude. Examiners can request additional information from a registrant to determine that the affidavit of use is accurate, and in particular that the mark is in use for all of the goods and services listed in the registration. United States law requires that an application filed on the basis of intent-to-use and converted to use, or based on use, must be in use for all of the goods and services. This is also true for the filing of Declarations of Use.

This new rule will be particularly problematic to foreign registrants where there is a tendency to include items in the list of goods and services that are beyond the scope of the business of the trademark owner. This common practice is because foreign trademark rights are more specifically limited to the actual goods and services listed in the registration. Rather under US law rights are evaluated under a likelihood of confusion analysis which can extend beyond the specific goods and services listed in the registration.

This rule further supports our regular recommendation to trademark owners to list those goods and services that are in actual use for the mark in order to minimize problems with the registration in the future. A likelihood of confusion determination is made on a variety of factors. Importantly, when pursuing an infringement, a trademark owner should not have to defend the registration from attack on the basis of non-use or fraud in the procurement or maintenance of the registration. The mark must be in use for all of the goods and services listed.

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USPTO will suspend examination – Section 2(a)’s Scandalousness and Disparagement Provisions (3/12/2016)

Among the many reasons available to the USPTO to reject trademark applications is Section 2(a) of the Lanham Act, 15 U.S.C. § 2(a). This provision bars registration of marks that consist of or comprise immoral or scandalous matter, or matter which may disparage persons, institutions, beliefs, or national symbols, or bring them into contempt or disrepute.  The constitutionality of provisions of Section 2(a) are the subject of active court litigation and the outcome of these actions is relevant to the issue of registrability of marks in the United States.

In re Brunetti, Case No. 15-1109, (Fed. Cir. filed November 6, 2015) a Federal Circuit appeal denying registration of the mark “FUCT” where the Applicant argued that prohibition of the registration of scandalous marks under Section 2(a) of the Lanham Act is unconstitutional.

Pro-Football v. Blackhorse (No. 15 1874, Fourth Circuit). This is an appeal from the (TTAB) petition granting cancellation of six registrations for word and design marks containing the word, REDSKINS for entertainment services. See our June 20, 2014 blog post for a case analysis.

In re Tam, 808 F.3d 1321, 1358, 117 USPQ2d 1001, 1025 (Fed. Cir. 2015) (en banc), as corrected (Feb. 11, 2016) where the Federal Circuit determined that Section 2(a) barring registration of disparaging marks was unconstitutional.  See our December 24, 2015 blog post for a case analysis. On March 9, 2016, the USPTO filed a request to extend the time to file a Petition for a Writ of Certiorari (Supreme Court No.15A925).

Consistent with USPTO procedures, on March 10, 2016, the USPTO issued guidance to the examiners to suspend action on pending applications involving marks subject to refusal under these provisions in Section 2(a), provided that all other issues raised by the examiner have been resolved. Clearly, the USPTO is waiting for a Supreme Court determination of the constitutionality of Section 2(a) of the trademark statute, namely, can the USPTO deny registration of marks that are scandalous, immoral or disparaging.

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Changes to European Trademarks (3/2/2016)

Update to our December 1, 2015 post Changes to the European Trademark System are Imminent, as of March 23, 2016, the Office of Harmonization in the Internal Market (OHIM) will have a new name. It will be known as the European Union Intellectual Property Office (EUIPO). The Community trade mark will be renamed the European Union trade mark.

A summary of noteworthy changes are as follows:

  • An application covers a single class, but additional classes can be added upon payment of additional per class fees. (The pay for one, get two extra classes for free no longer applies.)
  • Non-displayable signs such as smells and sounds may be registered. (Previously only graphically displayable marks were permitted.)
  • Applicant must clearly and accurately describe the goods and services in the classes in question. (Class headings are no longer permitted.)
  • Certification marks can now be registered.
  • Grounds for Refusal have been expanded. Namely adding, designations of origin, geographical indications, protected traditional terms for wine and traditional specialities. (Previously, there were limited substantive grounds that OHIM could assert to deny registration of a mark. )
  • Opposition Grounds have been expanded. Importantly, a revision of the relevant five year period for proof of use of the earlier mark in opposition proceedings to be the date of filing or the date of priority of the EU trade mark application, not the date of publication of the opposed mark.
  • National offices must implement within seven years procedures for revocation and nullification of national trademarks. (Presently, many EU member countries do not provide an administrative way to cancel a national trademark registration requiring all such proceedings to be in the court.)
  • “Goods-in-transit” procedures to prevent the EU from being used as a transit hub for counterfeit goods. These are new provisions that will require each of the EU member countries to implement in their customs regulations.
  • New prohibitions on the use of signs (marks) in comparative advertising where that advertising is misleading. Comparative advertising is permitted, but is more restrictive.

Again, we note that there are many companies out there fraudulently soliciting for payments. The EUIPO has restated its concern about these Fraudulent Solicitations in light of the potential confusion while the OHIM office changes its name to EUIPO and the CTM trade mark registration is renamed the EU trade mark. See our Fraudulent Solicitations link for additional information about the many entities soliciting misleading payments for services.

The full text of the new directive is available. 

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New Life for Outdated Trademark Registrations (1/19/2016)

On September 1, 2015, the USPTO announced a Pilot Program to Allow Amendments to Identifications of Goods and Services in Trademark Registrations Due to Technology Evolution. The intent of the program is to permit “amendments to identifications of goods/services in trademark registrations that would otherwise be beyond the scope of the current identification” with the “goal of preserving trademark registrations in situations where technology in an industry has evolved in such a way that amendment of the goods/services in question would not generate a public-notice problem.” That is to say, where a trademark registration claims a manner or means or medium of distribution that has changed due to changes in technology, it may be possible to amend the identification of goods and services reflecting the current manner or means or medium of distribution. This is what is being termed an “evolved designation.”

Since commencing the program, the USPTO has published examples of permissible evolved designation amendments. Examples are:

Registration ID Proposed ID Change
Prerecorded audio and video tapes featuring religious topics Prerecorded CDs and DVDs featuring religious topics
Pre-recorded audio cassettes Audio recordings featuring religious content
Pre-recorded audio/video cassettes for use in the field of pre-school and primary education Sound and video recordings for use in the field of preschool and primary education
House mark for use with type face fonts recorded on magnetic and optical media House mark for use with type face fonts on electronic storage media and downloaded provided by means of electronic transmission
Retail store services and on-line retail store services featuring musical instruments, bows, strings, instrument cases, sheet music, books pre-recorded video tapes and pre-recorded CDs featuring musical performances or musical instruction Retail store services and on-line retail store services featuring musical instruments, bows, strings, instrument cases, sheet music, books, video recordings and pre-recorded CDs featuring musical performances or musical instruction
DOS-based application software to manage and forecast inventory for the direct marketing industry Application software to manage and forecast inventory for the direct marketing industry
Videotapes, videocassettes, all on the subjects of ancient peoples and cultures around the world Video recordings on the subjects of ancient peoples and cultures around the world

It may even be possible to change the class coverage of the registration when the proper current description of the goods or services are in a different class from what was originally registered (e.g.: printed publication are class 16 while downloadable publications are class 9).

At the end of the process the USPTO will issue a new registration certificate, maintaining the priority of the original registration.

Requirements:

  • Amendments are made via the post-registration petition to the Director provisions and the certificate of registration amendment provisions with a government fee of $200.00.
  • Amendments cannot be made that would expand the scope of the registration. If the registration is limited to a specific subject matter, then the amendment would continue with the same subject matter, merely altering the distribution mechanism.
  • The registrant must have discontinued the prior technology and the designation is removed from the description in the registration. Otherwise, the registrant would be compelled to file a new application.
  • The amendments must conform to the current USPTO practice requirements for proper descriptions of goods and services.
  • A US registration based on an International Registration (Madrid Protocol), must conform with the underlying IR during the first five years of registration. However, US registrations based on national foreign registrations are not similarly limited.
  • There are a number of technical requirements, including:
    •     A request for a waiver of what is known as the “scope rule” which essentially permits only restrictions to identifications that would not require republication;
    •     A declaration that that the registrant will not file (or re-file) an incontestability affidavit for at least five years from the amendment acceptance date for the evolved designation;
    •     Submission of a specimen showing current use of the mark in commerce, along with the dates of first use of the evolved designation along with a declaration in support. (Note: the original first use dates would continue in the registration); and
    •     The request for the amendment must be filed electronically.

Once accepted by the USPTO, the amended registration will be published in the Official Gazette along with other Section 7 amendments.

The USPTO has considered third party harm considerations, and in the amendment examination process will:

  •     Conduct a search for possible conflicting marks;
  •     Require that the incontestability status applicable to any evolved designation will not apply for five years;
  •     Provide a mechanism for interested parties to comment about proposed amendments prior to acceptance, and
  •     Publish the proposed amendments on its website allowing interested parties to comment for thirty days.

What does this mean for trademark owners?

    Depending upon the specific circumstances, it may be more prudent to file a new application claiming not only the new delivery mechanism, as an example, but additional goods and services that may be of interest to the registrant. Often, business changes over time, and trademark owners typically expand their product offerings.

    When filing either a Section 8 (use) or 9 (renewal), it may be more prudent to delete the goods and services that are no longer of interest.

    Ultimately, it really depends on the exact wording in the registration, and on what goods and services the trademark owner is using the mark that will determine the best procedure to deal with changes in technology.

Depending upon how many trademark owners take advantage of the pilot program will determine if the trademark office will continue with this special procedure. So, if you have any trademark registrations that claim outdated technology (or need to claim new technology), and could benefit from this program, feel free to contact us for a consultation.

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Federal Circuit Approves Disparaging Marks for Registration (12/24/2015)

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.

 

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New infringement claim against appropriation artist Jeff Koons (12/22/2015)

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..

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Who Stole the Milano Cookie from the Cookie Jar? (12/8/2015)

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.

 

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Trademark Trolls & Trademark Bullies (12/4/2015)

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.

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Changes to the European Trademark System are Imminent (12/1/2015)

A major revision to the European Union trademark system that will affect both Community trademarks (CTM) and individual country trademarks (of EU member states) is imminent. Some of the changes are administrative and some legal, while others directly affect trademark filings and renewals. A summary of the changes is as follows:

Administrative:

  • The Community Trademark will be renamed European Union Trade Mark
  • OHIM (the name of the trademark office as of the date of this post) will be renamed to European Union Intellectual Property Office

Changes Affecting Trademark Filing and Renewal:

  • Goods and services will have to be specifically described. Filing for class headings &/or listing all of the goods in a class will no longer be permitted.
  • There will be separate fees for each class in which trademark registration is sought, as is already the case in the United States. (As of the date of this posting, a single trademark application could include up to three classes for no additional fee.)

Legal:

  • All National offices will be required to implement administrative procedures for trademark cancellation. (Until now, trademark cancellation has only been possible in some countries via court proceedings.)
  • Some of the changes will require EU member states to harmonize their laws regarding trademark infringement and remedies, as well as make it somewhat easier for trademark holders to stop infringing goods from coming into the EU or being distributed thereafter. Also in the package, which can be viewed online, are directives aimed at protecting the public from overzealous and overreaching trademark owners.

Although still proposed, the new regulations, as my recent trip to Europe made clear, are destined to be implemented quickly — possibly as early as Q2-2016, although EU member states will have three years in which to implement them. This is the first significant change to the European trademark system in more than 20 years.

From my perspective, these are all welcome changes, with the possible exception of additional fees for filing in multiple classes. However, the goal of the fee change is laudable. By modestly reducing the cost of trademark registration, while adding fees where more than one class is claimed in an application or renewal, the European Union Intellectual Property Office hopes to discourage overbroad trademark claims — a typical problem in the EU. Our clients have often faced the situation where they wish to clear their marks for use in the EU, but are blocked by a substantially similar mark covering a class that isn’t even in use. Hopefully the new regulations will clear out a lot of this “dead wood.”

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LLC Operating Agreements Specific to Your Company’s Needs (12/1/2015)

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.

 

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