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.)

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

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.

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.

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).

 

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.

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.

 

How Apple Conspired with Publishers to Raise Prices for eBooks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Endnotes.

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

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

Auletta, Ken. “Publish or Perish: Can the iPad topple the Kindle, and save the book business?” New Yorker, April 26, 2010
http://www.newyorker.com/reporting/2010/04/26/100426fa_fact_auletta

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fourth Circuit Decision Threatens Current Phase of Google AdWords Program

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trademark Holding Companies: Speculative Benefits, Certain Pitfalls

From time to time clients ask us whether they should “protect” their trademarks from their company’s liabilities by setting up a separate trademark holding company. Often they have heard about tax savings or read something online suggesting that any company with substantial trademark assets to protect ought to be segregating them into a separate corporate entity. Except in exceptional circumstances, however, the trademark holding company is a bad idea.

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

No Tax Savings in New York.

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

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

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

Limitations on Liability.

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

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

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

Legal Pitfalls of Licensing through Trademark Holding Companies

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

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

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

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

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

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

The LimeWire Decision & The End of Entrepreneurial P2P.

For a dozen years, Internet entrepreneurs have launched business after business attempting to capitalize on the concept of file-sharing.  Napster was sued in 1999, a preliminary injunction against it was granted in 2000 and it was found guilty of copyright infringement in 2001.

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

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

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

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

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

  • 93% of the music files actually downloaded via LimeWire are under copyright;
  • LimeWire knew that the primary use of its software was to share copyrighted music;
  • LimeWire advertised itself as a replacement for Napster, Kazaa and Morpheus, thereby promoting LimeWire’s infringing capabilities;
  • LimeWire provided search functionality permitting users to search for categories such as “Top 40” which, inevitably, are protected by copyright law;
  • LimeWire employees occasionally offered users technical information about obtaining music files which the employees knew were under copyright; and
  • LimeWire took no steps to mitigate users’ infringing activities.

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

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

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

Footnote

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

Does a likelihood of irreparable injury standard make the availability of injunctive relief in trademark cases more difficult?

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

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

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

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

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