Mary Siceloff

On September 9, 2015, the United States District Court for the Southern District of New York ruled that Costco was willfully infringing Tiffany & Co.’s trademarks by selling diamond engagement rings bearing the renowned jewelry retailer’s name. The suit started back in 2012 when a patron of Costco in Huntington Beach, California decided to reach out to Tiffany to express her disappointment in Tiffany offering its rings for sale at Costco. She also stated that the rings were being promoted on signs within the store as Tiffany diamond engagement rings. After receiving the complaint and knowing that it did not sell its rings through Costco, Tiffany launched an investigation revealing that the Huntington Beach Costco was in fact displaying diamond engagement rings in a case labeled with the word Tiffany. The investigation also revealed that the Costco salespeople were referring to them as Tiffany engagement rings. Accordingly, Tiffany took action.

According to the Court’s ruling, prior to the lawsuit, Costco promised that it would remove references to Tiffany from its display case signs and even sent a letter to customers who bought the rings offering a full refund if they were not satisfied. Irrespective of these acts, Tiffany filed suit, ironically enough, on February 14, 2013. In response, Costco filed a counterclaim alleging that Tiffany’s trademarks were invalid because they sought to prevent others from using the word “Tiffany” as a generic description of a type of ring setting. Almost a year and a half later, the Court ruled in favor of Tiffany and against Costco. Specifically, Judge Laura Taylor Swain ruled that the evidence established that Costco had infringed Tiffany’s trademarks by selling engagement rings and had confused consumers by using the word Tiffany in display cases. Judge Swain ruled that “Despite Costco’s arguments to the contrary, the court finds that, based on the record evidence, no rational finder of fact could conclude that Costco acted in good faith in adopting the Tiffany mark.”

Under the ruling, Tiffany may now seek damages from Costco through a jury trial. These damages could include disgorgement of Costco’s related profits from the rings, as well as punitive damages. It seems likely that because of the egregious nature of the infringement, a jury will award Tiffany Costco’s related profits, with punitive damages to punish Costco’s seemingly intentional and deceptive conduct. That, however, assumes that the matter gets to the jury. The Court ordered the parties to “make good faith efforts to settle the outstanding issues” and given the unpredictability of juries, I believe the parties will reach a resolution on damages before a jury comes into play. With that said, it is debatable how much leverage Costco has to negotiate at this point with the Court already finding that it infringed Tiffany’s mark.

General Counsel for Tiffany, Leigh Harlan, stated that “We believe this decision further validates the strength and value of the Tiffany mark and reinforces our continuing efforts to protect the brand.” Ms. Harlan’s statements are bolstered by the .55% increase in the Tiffany stock to $82.32 the day after the issuance of Judge Swain’s ruling. Interestingly, Costco’s stock also went up .04% to $141.48 per share the same morning.

This ruling should not come as a surprise to many. The strength of the Tiffany mark in the realm of diamond rings is in my opinion second to none. So when an unpermitted party chooses to use the word Tiffany in conjunction with its sale of diamond rings, consumer confusion is almost inevitable. It would certainly be interesting to see how many consumers were duped into purchasing these Costco rings under the impression that they were getting a Tiffany ring at a substantial discount. Personally, I think it would be more interesting to see how the consumers who purchased these rings pawned them off on their significant others as a Tiffany ring without the distinctive Tiffany Blue Box. But that’s just me.

The Federal Circuit Court of Appeals has established a new test for “divided” patent infringement. Direct infringement of a method patent exists when a single party performs all of the steps of the claimed method. 35 U.S.C. §271(a). Divided infringement occurs when all of the steps are not performed by a single party, but by two or more parties under circumstances such that one party is still responsible for the infringement.

The law of divided infringement has been a subject of much debate. The question is: should direct infringement be expanded so that a single party is liable for infringement of a method claim even if another party performed some of the steps of the method? Those who say “no” argue that one party cannot infringe a method patent if it does not perform all of the steps of the claimed method, and that any other interpretation is so broad that it would make infringers out of innocent parties. Those who say “yes,” however, argue that infringers can escape liability for patent infringement simply by dividing up the steps of the claimed method among two or more parties.

In its previous decision in this case, a panel at the Federal Circuit had held that a party can be liable for divided infringement if it shares a principal-agent relationship, a contract, or a joint enterprise with the other party who performs some of the steps. On appeal to the United States Supreme Court, however, the Supreme Court vacated that decision and remanded the case to the Federal Circuit, stating that the Federal Circuit’s test for divided infringement may have been too narrow.

On remand, in a unanimous, en banc decision, the Federal Circuit established a new, more expansive test for divided infringement. The court held that a party can be liable for infringement of a method claim when another party performs some of the steps of the claimed method in two situations: (1) where the first party directs or controls the actions of the other party; and (2) where the first party and the other party form a joint enterprise.

The court explained that the first situation exists if there is principle-agent or contractual relationship, but also exists if the accused party conditions participation or receipt of a benefit upon performance of the step of the method and determines the manner or timing of the other party’s performance. Under these circumstances, the actions of the other party are attributed to the accused party. The second situation exists if there is a joint enterprise between two or more parties, such that all parties are responsible for acts of the others.

The court emphasized that its new test is a “governing legal framework” and that future cases may present differing factual situations in which liability will be found. The court stated: “[g]oing forward, principles of attribution are to be considered in context of the particular facts presented.”

In this case, plaintiff Akamai Technologies, Inc. owned a patent covering methods of delivering content over the Internet. Akamai sued Limelight Networks, Inc. for patent infringement. At trial, the parties agreed that the customers of Limelight, not Limelight itself, performed two steps of the claimed method – “tagging” and “serving.” The jury found that Limelight infringed the patent based on its finding that Limelight directed or controlled its customers’ performance of the tagging and serving steps. However, the district court entered judgment as a matter of law in favor of Limelight.

On appeal, a panel of the Federal Circuit affirmed the decision on the grounds that Limelight did not directly control its customers’ acts because there was no principal-agent relationship, contract, or joint enterprise.

In its second decision in this case, after the Supreme Court vacated the first decision, the Federal Circuit reversed the district court’s judgment and reinstated the jury’s verdict against Limelight. The court found that Limelight was liable under the new test for divided infringement because there was substantial evidence that Limelight had directed and controlled its customers’ acts. Limelight had conditioned its customers’ use of Limelight’s service on the customers’ proper performance of tagging and serving, and had set forth the manner and timing of its customers’ performance of these steps. These actions satisfied the court’s new test, in which a party can be held to direct or control another’s performance if it conditions participation or receipt of a benefit upon performance of a step of the patented method and also sets forth the manner or timing of the performance. Because Limelight was held to direct or control the acts of its customers, even if Limelight itself did not perform these two steps, the steps were attributable to Limelight. Because all of the steps of the claimed method were either performed by Limelight itself or attributable to Limelight, Limelight was liable for directly infringing Akamai’s patent.

This case provides a new basis for plaintiffs in divided infringement cases to prove liability among multiple actors performing a method claim. The case is also a warning to businesses who believe they are immune from patent infringement because they only perform some of the steps of a claimed method – liability may arise if another party performs the remaining steps.

Companies and employers around the country seek to protect their intellectual property by, among other things, using non-compete provisions in employment agreements. Generally, these provisions are intended to prevent an employee from soliciting or doing business with a former employer’s customer/clients over a set period of time and/or in regard to a set geographical area. Under California law, and specifically Business and Professions Code section 16600, such provisions are unenforceable unless they fall within one of the statutory exceptions, i.e., primarily in connection with the sale of a business interest. For years, although California state courts would refuse to enforce such provisions under section 16600, federal courts in California sometimes applied a narrow court-created exception and allow such provisions to be enforced provided that they were narrowly tailored as to time and geographical area. In 2008, the California Supreme Court unequivocally ruled that such provisions were unenforceable under section 16600 and rejected the “narrowly restricted” exception used by federal courts. (See Edwards v. Arthur Andersen, LP, 44 Cal.4th 937 (2008).)

In response to the Edwards decision, many California companies and employers began to omit such provisions from their new employment agreements or re-write them with specific language restricting an employee from using trade secret information to unfairly compete. However, other companies and employers left their old agreements untouched and in place thinking merely that they would not enforce them should the need arise. A recent court decision, Couch v. Morgan Stanley & Co., Inc. (E.D. Cal. Aug. 7, 2015), reveals the risk an employer or company faces in failing to update their older employment agreements to remove or revise such provisions.

In Couch, plaintiff was employed as a financial adviser for Morgan Stanley Smith Barney from September 2007 until January 2013. At the time of his hire in 2007, he signed an employment agreement that included a provision that he would not solicit customers of Morgan Stanley for one year following the termination of his employment. Although the employment agreement was signed in 2007, Morgan Stanley never updated this particular agreement with plaintiff following the California Supreme Court’s decision in the Edwards case in 2008.

During his employment, plaintiff held and ran for various elected offices. In 2012, he ran for and was elected to a seat on the Kern County Board of Supervisors. Given the time commitments such a position entailed, Morgan Stanley asked plaintiff to choose between serving on the Board or continuing as a financial adviser with the firm. After plaintiff indicated his unwillingness to resign his supervisor seat, Morgan Stanley terminated his employment.

In January 2014, plaintiff filed suit against Morgan Stanley and alleged various claims relating to his termination as well as two claims for interference with prospective economic relations. Plaintiff claimed, among other things, that the inclusion of the non-compete provision in his employment agreement by Morgan Stanley disrupted his potential economic relations with customers following the termination of his employment.

Morgan Stanley moved for summary judgment as to these intentional interference claims and raised a number of arguments. Morgan Stanley argued that plaintiff’s intentional interference claims should fail because: (1) the non-compete provision in the employment agreement was legal under then existing law in 2007; and (2) given that it had never sought to enforce the provision, it had not engaged in any conduct to interfere with plaintiff’s prospective economic relations. The district court rejected both of these contentions.

First, the Court recognized that while the non-compete provision may have been legal under pre-2007 Ninth Circuit case law, Morgan Stanley did not dispute that such provisions had become unlawful after the California Supreme Court’s decision in Edwards. The Court recognized that the California Supreme Court in Edwards specifically ruled that the Ninth Circuit’s “narrow restraint exception” was rejected and that any non-compete was unlawful unless it fell within one of the narrow statutory exceptions to section 16600. The Court continued by noting that neither it nor Morgan Stanley could find any legal authority for the proposition that a non-compete provision entered into before the Edwards decision “remains lawful even though it is unlawful post-Edwards.”

Next, the Court turned to Morgan Stanley’s argument that it had never sought to enforce the non-compete provision. The Court concluded that whether or not Morgan Stanley had ever sought to enforce its provisions was irrelevant. The Court reasoned that California state court cases had repeatedly held (especially post-Edwards) that non-compete provisions are “void and unenforceable under section 16600 and … their use violates section 17200 [of the Business and Professions Code].” Thus, the Court noted that the mere use of an unlawful non-compete provision in an employment agreement constitutes an unfair business practice under section 17200 and could supply the “wrongful act” requirement for an interference claim.

Luckily for Morgan Stanley, the Court granted judgment in its favor after finding that plaintiff could not establish that the inclusion of the non-compete provision in his employment agreement had caused him any damage. It therefore dismissed these claims against Morgan Stanley. Nevertheless, the Court’s reasoning concerning the “use” of such provisions should give companies and employers in California pause. To the extent employers and companies have elected not to revisit their older employment agreements to either delete or revise non-compete provisions, they are at risk of facing unfair business practices claims as well as other potential claims such as interference with prospective economic relations. Companies and employers in California are encouraged to review their older employment agreements to ensure they comply with current California law.

In the bustling craft brew economy brewers are faced with new issues every day. One that recently came to my attention arises when the craft brewery’s brewmaster or head brewer decides to either start his own craft brewery, or go to work for another brewery. While this may not initially seem like a big deal, it gets much more complicated when that brewmaster or brewer is responsible for the creation of your flagship brew. The question arises: who owns the intellectual property rights to that brew? Of course, the brewery is going to say that they have been selling, distributing, and promoting the brew, so it must be theirs. On the other hand, the brewer is going to say that he created it, so it must be his. The truth is that determining who owns the intellectual property rights to the brew formula can get quite complicated, encompassing numerous factors. But it does not have to be.

With a booming industry such as craft brew, it is imperative that the appropriate precautions be taken to protect the craft brewery’s most lucrative asset: the beer itself. In order to protect a brew formula from being taken from your company and utilized by a competitor when one of your brewers, the creator of the formula or not, leaves the company, the formula must be treated as a trade secret. The California Uniform Trade Secrets Act (“UTSA”) defines a trade secret as:

information, including a formula, pattern, compilation, program, device, method, or technique, or process, that:

(1) derives independent economic value, actual or potential, from not being generally known to the public, or to other persons who can obtain economic value from its disclosure or use; and

(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

A brew formula easily fits under the UTSA’s definition of a trade secret. It is obviously a formula that derives its independent economic value from not being generally known to others. Simply stated, the formula is valuable because it is not being duplicated by your competitors. If it was, no one would care if they were drinking Stone IPA or PBR. So the formula alone satisfies the first prong of the UTSA’s test for trade secrets, but the second prong can only be satisfied by the brewery itself. It is the responsibility of the brewery to exercise reasonable efforts to maintain its secrecy. What this means is that you cannot post the formula for your brews on the wall of the taproom, or have articles on your website demonstrating how to replicate your brews. And you definitely cannot invite consumers into your brewery to learn how to make your brews. If you do that, trade secret protection is gone. However, absent such actions, and a requirement that all employees execute a non-disclosure agreement promising not to disclose any of the company’s trade secret or proprietary information, it should be relatively easy to obtain trade secret protection.

This leaves the brewer with one last problem protecting its formulas in the hypothetical described above: the ownership of the formula is disputed. Again, this could be quite complicated if there are no preventive measures taken in the situation. There would likely be a multi-factor analysis concerning whose resources were used, when the formula was developed, and other things of that sort. But with the proper agreements in place, it will be clear that the brewery owns the intellectual property rights. In most technology and science based companies, the employees and independent contractors are required to execute employment contracts requiring assignment of the employee’s invention rights. In plain English, this means that after signing such an agreement, any invention created by the employee, including beer formulas, in the scope of his or her employment, and/or utilizing the resources of the company, belongs to the company—not the individual. This instantly clears up the hypothetical posed above absent some exceptional circumstances that exceed the scope of this article. This, however, would not necessarily cover the situation where the brewer creates the brew prior to joining your brewery, but that would simply require an assignment of the intellectual property rights therein. Once that is taken care of, the brew becomes the intellectual property of the company and subject to the UTSA protections discussed above.

Although I have discussed this process as simple and straightforward, it should be left to the care of legal professionals. Again, the intellectual property rights to a brewery’s flagship brew may be its most valuable asset. If that asset was lost, there may not be anything to separate that brewery from the others. So it is of the utmost importance that appropriate measures be taken to ensure that these rights are protected. It may seem unnecessary now, but no one should wait until they have become a cautionary tale.