Blog: The IP Law Blog

Another intellectual property dispute has arisen in the brewing industry. This time, however, the battle took place on Canadian soil. British Columbia based Pacific Western Brewing (“PWB”) sued renowned Mexican brewery Cerveceria del Pacifico (“CDP”), arguing the latter’s name was confusingly similar to PWB’s various brew-related trademarks. For those who do not know, Cerveceria del Pacifico is the brewery responsible for Cerveza Pacifico Clara, better known as Pacifico. Although the claim concerns numerous PWB marks, the lawsuit seems to center on the alleged similarity between their Pacific Pilsner marks and CDP’s Pacifico marks. After analyzing the merits of this case, I cannot understand why PWB felt the need to pursue this lawsuit. Aside from both marks generally using the word “Pacific,” the marks are vastly different.

First, Cerveza Pacifico Clara  is clearly distinct from Pacific Pilsner. Even if you compare the commonly used name Pacifico to Pacific Pilsner, the marks are distinguishable, albeit slightly more similar. Further, the respective design marks are distinct. Pacifico’s mark is generally presented against a bright yellow background with the words appearing in red and a different shade of yellow. The logo also features a lifesaver encompassing a hill with the port city of Mazatlan’s lighthouse hill, known locally as Cerro Del Creston. In contrast, Pacific Pilsner’s mark is generally presented against a white background with the words appearing in red and iridescent blue. Although the PWB designs vary slightly, they consistently include a sailboat. Based on these descriptions, it should be clear that the marks are patently distinguishable.

Justice Luc Martineau, who presided over the case, disagreed with PWB’s assertions. Justice Martineau said the first impression given by CDP’s mark for Pacifico “is of its obviously foreign origin” and that it’s “highly stylized with many distinctive design elements, including strong and contrasting colours [sic] and font in red, gold, blue, green, and yellow.” Justice Martineau also stated that the mark “differs visually, phonetically, and semantically” from all of the marks PWB uses for its Pacific beers. According to Justice Martineau “There is no resemblance in the design or colour [sic] elements. In short, the overall impression created by the mark is that of an imported beer originating from Mexico.”

Martineau also dismissed PWB’s allegation that CDP committed a fraud on the register when it represented that Pacifico was first sold in Canada as early as April 1986. Dismissing this allegation, Justice Martineau noted that PWB failed to challenge an affidavit from CDP that it first introduced its beers to Canada in 1986, at a Mexican restaurant called Ole Cantina.

Later, in December 1989, Pacifico was first listed with the British Columbia Liquor Distribution branch. Then, in August 1990, a registration protecting the mark was issued. This is important because Justice Martineau found that PWB’s delay of almost 25 years to bring its claims weighed heavily against a finding of likelihood of confusion and eventually ruled in favor of CDP. PWB has subsequently filed an appeal of the decision in the Federal Court of Appeal, but based on Justice Martineau’s ruling, as well as the clear distinction between these marks, the trial court is unlikely to be overturned.

This copyright case pitted two big YouTube content brands against each other over issues of fair use. On one side is Equals Three, LLC, a YouTube content studio and channel created and owned by Ray William Johnson, an early YouTube content pioneer. The Equals Three channel has over 10 million subscribers and over 3 billion total views making it one of the most viewed channels on YouTube. Equals Three produces YouTube comedy content. A typical program involves a host who gives an introduction to a particular video clip, shows parts of video clips (which are usually shown in edited form and inset within a decorative graphical frame) and tells humorous or provides humorous commentary about the events and people presented in the clip. Each program is roughly five minutes long and typically features three segments, each of which centers around a different video.

One the other side is Jukin Media, Inc. Jukin is a digital media company that primarily acquires user generated video content and distributes and monetizes such content over multiple online platforms and traditional media outlets, produces and licenses. Jukin acquires the user-generated content by using a research and acquisitions team of eleven people to scour the internet for videos likely to become sensationally popular. Once Jukin acquires the rights to user-generated content, it uploads the video to its YouTube channel and its own websites. Jukin makes money from these videos by ad-supported or subscription-based platforms. Jukin also licenses these videos to other digital, television and cable shows.

Jukin claimed that Equals Three unlawfully used ninteen Jukin owned or controlled clips in one or more Equals Three episode. Jukin instated numerous Content ID claims with YouTube against various Equals Three episodes. These claims prevent Equals Three from monetizing the episodes at issue and allows Jukin to receive all advertising revenue related to such episodes. Equals Three filed a complaint for a declartory judgment that its use of Jukin’s videos was fair use.

In determining whether the use of a work is a fair use, courts consider the following factors: (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.

The Purpose and Character of the Use

This factor measures whether a work is “transformative” in nature; whether it “adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message.” The more transformative the new work, the less will be the significance of the other factors that may weigh against a finding of fair use.

Equals Three claims that its episodes are transformative because they are parodies of the Jukin videos. Jukin argues that the episodes are not parodies because they do not critique Jukin’s videos. With the exception of one of Jukin clip, the court disagreed with Jukin. The court held that:

the episodes comment upon or criticize Jukin’s videos…[they] directly respond to and highlight humorous aspects of Jukin’s videos. The episodes do so via the host’s reactions to the videos, jokes, narration, costumes and graphics. The host’s narration does not simply recount what is shown in Jukin’s videos; instead the host makes comments about Jukin’s videos that highlight their ridiculousness by creating fictionalized narratives of how the events transpired, using similes, or by directly mocking the depicted events and people.

However, with regard to one clip – a clip of the first person to obtain an iPhone 6 in Perth, Australia promptly dropping the phone upon opening the packaging – the court did not find Equals Three’s use transformative. Equals Three said it used this footage for the purpose of making two points: (1) don’t be the first person to do something new; and (2) the iPhone 6 packaging is absurd. The court finds that these two “general, broad points” are not directly aimed at criticizing or commenting on the video and thus not transformative.

Nature of the Copyrighted Work

This factor looks at what type of work it is (i.e., is it a creative work or something else) and whether this is a type of work that falls closer to the core of copyright’s protection. In dicta, the court questioned whether the “point and shoot” variety of user generated content is a creative work or a factual recitation (which is not as close to the core of copyright’s protection as is a creative work). Ultimately the court concludes that the nature of the Jukin clips is creative, but the clips’ creative nature is “not particularly important where the new work is highly transformative.”

Amount and Substantiality of the Portion Used

The third factor examines the quantitative amount and qualitative value of the original work used. Jukin argued that while Equals Three may have not used all of the clips, it used the most important parts of the clips. Equals Three argued that it used no more of the clips than was necessary to create its parody episode. The court agreed finding that Equals Three did not use more than reasonably necessary to “convey enough of the events to allow the host’s jokes, comments, and criticisms to make sense to the viewer and resonate.”

Market Harm Through Substitution

This factor examines whether the use harms the potential market for or value of the original work because it has created a market substitute. That is, does the new work diminish demand for the original work by acting as a substitute for it. Market harm cannot be established by allowable commentary and criticism. Also, damage to a licensing market caused by fair use is not recognizable under this factor.

While the transformative nature of Equals Three’s videos makes cognizable market harm less likely, the court was unable to say that it is completely implausible that at least some viewers would substitute Jukin’s videos with Equals Three’s videos. The court noted that both videos are meant to be humorous and it could imagine a fine line between the demand for the humorous original and the humorous new work commenting thereon. Nevertheless, the court found that Jukin failed to show actual evidence of any such harm; and where market harm is hypothetical, this factor is neutral.

Conclusion

Based on the “highly transformative” nature of Equals Three episodes and the fact that Equals Three used only what was reasonably necessary to achieve their transformative purpose, the court found Equals Three’s use of Jukins’ clips (with the exception of one clip) to be fair use.

Over the last half century there has been an explosion in the popularity of yoga in the United States, much of it attributable to Bikram Choudhury, the self-proclaimed “Yogi to the Stars.” In 1979, he published a book titled Bikram’s Beginning Yoga Class, which centered on a sequence of 26 yoga poses and two breathing exercises. Two former students of his started a new type of yoga (hot yoga) which resulted in Choudhury suing them for copyright infringement. On October 8, 2015, the Ninth Circuit issued its opinion affirming the trial court’s summary adjudication as to the copyright claim and finding that the Bikram yoga “sequence” was not subject to Copyright protection.

In 1971, Choudhury came to the U.S. and settled in Beverly Hills, California. With his arrival, he helped popularize yoga in the United States and developed a “sequence” of 26 asanas and two breathing exercises; Choudhury opened a yoga studio where he taught the “Sequence” and eventually published his book, Bikram’s Beginning Yoga Class. In 1979, he registered the book with the U.S. Copyright Office. (In 2002, he registered a compilation of exercises contained in the book using a supplementary registration form that referenced the 1979 book.)

In 1994, Choudhury introduced the “Bikram Yoga Teacher Training Course,” which was attended in the early 2000s by Mark Drost and Zefea Samson. Following their completion of the course, Drost and Samson founded Evolation Yoga, LLC, which offered several types of yoga, including “hot yoga” which was similar to Bikram’s basic yoga system. Evolation acknowledged that hot yoga includes 26 poses and two breathing exercises (like Bikram yoga) and is done for 90 minutes in a room heated to approximately 105 degrees Fahrenheit.

In July of 2011, Choudhury and his Bikram’s Yoga College filed suit claiming, among other things, that the hot yoga system of Evolation violated its copyright. Evolation moved for partial summary judgment as to the copyright infringement claim and the court granted the motion, ruling that the “Sequence is a collection of facts and ideas” which were not entitled to copyright protection. The plaintiffs appealed that decision to the Ninth Circuit.

In affirming the trial court’s decision, the Ninth Circuit found that at its most basic essence, “the Sequence is an idea, process or system designed to improve health.” Because copyright law is intended only to protect the expression of an idea, i.e., “the words and pictures used to describe the Sequence,” and not the idea of the Sequence itself, the Sequence was not subject to copyright protection.

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As I frequently mention in my articles, trademark law is a much more prevalent part of the average person’s life than they realize. We are surrounded by the trademarks of numerous companies every time that we step outside, or even when we look around our own homes. However, we would not generally expect for trademark law to be inserted into a presidential campaign. At least, not until Donald Trump threw his hat in the ring.

Since Donald Trump has coined the campaign slogan “Make America Great Again,” he has been quite diligent about protecting his brand. Trump’s army of trademark attorneys have been aggressively threatening companies such as Café Press and an anti-Trump interest group with cease and desist letters ordering that they cease using the mark “Make America Great Again.” Although this is a shock to many of us who are not accustomed to seeing trademark law inserted into the political sphere, it should not come as too much of a surprise given Mr. Trump’s involvement. Donald Trump‘s acute understanding of the power of branding has significantly contributed to his net worth that allegedly exceeds $8.7 billion dollars. So his diligent brand protection is hardly out of character.

Trademark claims have been regularly made at the lower levels of politics, such as in campaigns for local offices, but they are rarely seen at the presidential level. Despite Mitt Romney’s use of numerous creative campaign logos and designs in the 2012 election, none of them were trademarked. To the contrary, Team Obama did not hesitate to trademark its campaign logo utilizing the Obama “O” which symbolized “a rising sun and a new day.” According to the creator of the mark, brand development and design company Sender LLC, “The Sun Rising over the horizon evoked a new sense of hope.” The Obama Campaign felt so strongly about this meaning that the logo was registered with the United States Patent and Trademark office as a trademark. Still this was another exceptional case.

Trump, however, is the first candidate to register a mark utilizing “America.” According to numerous trademark experts, Trump can establish that he has a right to the trademark “Make America Great Again” because the public now associates the mark with him. I tend to agree. What this is really saying is that “Make America Great Again” has acquired secondary meaning in the marketplace as a result of advertising or continued usage. Under United States trademark law, many common phrases cannot be trademarked unless they have acquired such secondary meaning. That certainly seems to be the case here given Trump’s repeated appearances in the red baseball hat bearing the mark. He has also repeatedly utilized the mark during his campaign speeches. The mark has become so commonly associated with Trump that when Tom Brady was seen wearing the hat in the locker room, rumors spread that he was a Trump supporter.

Certain trademark experts have compared Trump’s right to “Make America Great Again” to that of Coke to “It’s the real thing” or Nike to “Just do it.” Logically, allowing such protection makes sense because when the mark becomes so closely associated with a company or an individual there is a “likelihood of consumer confusion” if others are permitted to sell goods bearing the mark. As such, other companies could wrongfully benefit from the goodwill of the individual or company who owns the mark.

Based on this brief analysis, it seems that while Trump’s trademarking of the phrase “Make America Great Again” may be uncommon in the sphere of presidential politics, it is likely permitted under United States trademark law. It remains to be seen whether this business-like mentality will have any effect on Trump’s campaign, but it certainly did not seem to affect the 2008 or the 2012 Obama campaigns. Irrespective of how you feel about Mr. Trump’s political views, you have to admit, the man knows how to protect his brand.

Laches, a judicially created defense based on the plaintiff’s delay and prejudice to the defendant, is a proper defense to the recovery of damages in a patent infringement suit, even though the Supreme Court ruled in 2014 that laches does not apply in copyright infringement cases.

A divided en banc Federal Circuit Court of Appeals held in SCA Hygiene Products v. First Quality Baby Products (September 18, 2015) 2015 U.S. App. LEXIS 16621 that Congress specifically provided for a laches defense in the Patent Act, unlike the Copyright Act.

SCA owned a patent for adult incontinence devices; First Quality was a competitor. In 2003, SCA sent First Quality a letter stating that it believed First Quality’s products infringed SCA’s patent. First Quality replied that SCA’s patent was invalid based on a prior art patent. In 2004, SCA filed a petition for reexamination of its patent in the Patent and Trademark Office, citing the prior art patent. In 2007, the PTO upheld SCA’s patent. SCA had not informed First Quality of the reexamination because the reexamination proceedings were public, but First Quality believed that SCA had dropped its accusation in response to First Quality’s letter. During this time, First Quality had made significant investments in its business. SCA knew First Quality was expanding its business, but did not inform First Quality of the reexamination decision. In 2010, seven years after its last communication with First Quality, SCA sued First Quality for patent infringement.

The trial court granted First Quality’s motion for summary judgment on laches and equitable estoppel. SCA appealed. A panel of the Federal Circuit affirmed the trial court’s decision on the laches defense and reversed it on the equitable estoppel defense.

On rehearing before the en banc Federal Circuit, SCA contended that the Supreme Court’s decision in Petrella v. Metro-Goldwyn-Mayer, Inc., 134 S.Ct. 1962 (2014) eliminated laches as a defense. In Petrella, the Supreme Court held that laches is not a defense to a claim of copyright infringement brought within the Copyright Act’s statute of limitations. SCA argued that laches should not apply as a defense in patent infringement cases within the Patent Act’s six-year period for obtaining damages.

The Federal Circuit held that the Patent Act was not like the Copyright Act because the patent statutes expressly provided for both a six-year time limit on the recovery of monetary damages and a defense of laches.

The court explained that laches was codified in 35 U.S.C. §282(b)(1), which sets forth, in general terms, that defenses of “absence of liability” are permitted. The court relied on the commentary of the drafters of the Patent Act, which specifically stated that laches was a proper defense. The court noted that its holding is not new, as courts have interpreted §282 to permit laches as a proper defense to patent infringement claims for decades.

The court next addressed whether laches is a defense only to equitable relief (injunctions) or whether it is also a defense to legal relief (monetary damages). Although the patent statutes do not provide the answer to this question, the court concluded that laches is a defense to all forms of relief, based on this state of the case law in 1952 when the patent statutes were enacted. At that time, courts applied laches to bar both equitable and legal relief, and Congress intended to codify existing law in enacting the Patent Act. In analyzing Patrella, the court explained that the Supreme Court had:

“eliminate[d] copyright’s judicially-created laches defense because Congress, through a statute of limitations, has already spoken on the timeliness of the copyright infringement claims, so there is no room for a judicially-created timeliness doctrine.”

This is in contrast to the Patent Act, which the court explained as follows:

“The statutory scheme in patent law, however, is different. While Congress has spoken on the timeliness of patent damages claims, Congress also codified laches defense in §282. Thus, because §286 provides for a time limitation on the recovery of legal remedies, and §282 provides for laches as a defense to legal relief, the separation of powers concern is not present. . . . Laches therefore remains a viable defense to legal relief in patent law.”

Lastly, the court clarified that laches is a proper defense to a permanent injunction, but not to an ongoing royalty for a defendant’s continuing infringement. The factors considered in laches (the plaintiff’s delay and prejudice to the defendant) are relevant in deciding whether an injunction is appropriate, but the plaintiff’s delay should not bar it from recovering ongoing royalties for the defendant’s current infringement.

The court also distinguished the defense of equitable estoppel from laches. Equitable estoppel is a bar to the entire claim of patent infringement, precluding any relief. This is because equitable estoppel is premised on conduct by the patent owner that demonstrates acquiescence in the defendant’s infringing acts, essentially granting the defendant a license under the patent for the patent’s term.

In concluding, the court said that Congress can certainly change the law if it so chooses, but for now, laches survives. In that case, patent owners should be vigilant in protecting their rights.

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.

Patents covering software for use in the financial industry are increasingly being invalidated by the courts. Because of the Supreme Court’s decision in Alice Corp. v. CLS Bank International, 134 S. Ct. 2347 (2014), district courts are holding these patents invalid on the grounds that they are unpatentable abstract ideas, and the Federal Circuit Court of Appeals is affirming the district courts’ decisions.

Patents may cover one of four statutory categories of inventions: (1) machines; (2) articles of manufacture; (3) processes; and (4) compositions of matter. 35.U.S.C. §101. These types of inventions are called “patent-eligible subject matter.” The longstanding exceptions to these four categories are: natural phenomena, laws of nature, and abstract ideas. These types of inventions are called “patent-ineligible subject matter.”

In Alice Corp., the Supreme Court established a two-part test to determine the patentability of claims directed to patent-ineligible subject matter. The first step is to decide whether the claims in the patent are directed to patent ineligible subject matter, such as an abstract idea. If so, the second step is to determine whether the elements of the claim transform the abstract idea into a patent-eligible application.

Two recent cases illustrate the trend. In both cases, the claims covered software for use in the financial industry, as was true of the claims invalidated in Alice Corp.

In OIP Technologies, Inc. v. Amazon.com, Inc., 788 F.3d 1359 (Fed. Cir. 2015), the district court for the Northern District of California granted Amazon’s motion to dismiss OIP’s complaint on the grounds that OIP’s patent was directed to a patent-ineligible abstract idea. OIP’s patent covered a method for pricing a product for sale, using “offer-based price optimization.” In affirming the district court’s decision, the Federal Circuit held that the patent was invalid under the Alice Corp. test. The first step of the test was met because the claims were directed to a patent-ineligible abstract idea (offer-based price optimization). The second step of the test was met because the elements of the claims did not transform the claims into a patent-eligible application. The court stated that the claims “merely recite ‘well-understood, routine conventional activities,’ either by requiring conventional computer activities or routine data-gathering.” The court emphasized at 1093, that:

“At best, the claims describe the automation of the fundamental economic concept of offer-based price optimization through the use of generic-computer functions.

But relying on a computer to perform routine tasks more quickly or more accurately is insufficient to render a claim patent eligible.

These processes are well-understood, routine, conventional data-gathering activities that do not make the claims patent eligible.“

In Intellectual Ventures I LLC v. Capital One Bank, 2015 U.S. App. LEXIS 11537, the district court for the Eastern District of Virginia granted the defendant’s motion for summary judgment of invalidity of two patents. One patent covered methods of budgeting, including tracking and comparing a user’s purchase information to their budget. The other patent covered a method in which web page content was customized for the user based on the user’s prior Internet usage. The Federal Circuit affirmed the district court’s grant of summary judgment. As to the budgeting method patent, the court held that budgeting is clearly an abstract idea and that the other elements of the claim were generic computer elements which did not make the claims patentable. The court explained, at *11:

“[T]he budgeting calculations at issue here are unpatentable because they ‘could still be made using a pencil and paper’ with a simple notification device.”

As to the web page patent, the court found that the concept of tailoring information to the user is an “abstract, overly-broad concept, long practiced in our society” and that “merely adding computer functionality to increase the speed or efficiency of the process does confirm patent eligibility . . .”

These two cases are not unusual. In fact, they are becoming routine. Financial industry patents face serious problems. Because of Alice Corp., they are more difficult to obtain than patents for other types of inventions and they are much less likely to survive challenge.