Blog: The IP Law Blog

By: Intellectual Property Group

Michael Jordan is considered by many to be the greatest basketball player of all time. Beyond his five MVP trophies and six NBA championship rings, however Jordan also was the one of the most widely marketed athletic personalities in history. His name and image ultimately became iconic when Nike developed a new type of basketball shoe named “Air Jordan,” marked with the “Jumpman” logo – a silhouetted image of Jordan in mid-flight on his way to delivering a one-handed slam dunk.

Jordan’s fame knows almost no boundaries. He and former Houston Rockets star Yao Ming are the most popular international basketball stars in China, where Jordan is known as “Qiaodan.” Not surprisingly, and in the marked absence of any “Air Ming” footwear, Air Qiaodan sneakers have become popular in China. “Air Qiaodan” products are not endorsed or backed by Michael Jordan, rather they are manufactured and distributed by Qiaodan Sports Co. Beyond merely using Jordan’s Chinese name, Qiaodan’s products carry a logo closely resembling the “Jumpman” used on Nike’s “Air Jordan” products.

Believing that Qiaodan’s actions were causing confusion among Chinese consumers by misleading them into believing that Qiaodan Sports Co. was affiliated with His Airness, Jordan sought to cancel Qiaodan’s trademark. The Chinese lower courts refused to cancel Qiaodan’s trademarks, and the case was appealed to the Beijing Higher People’s Court. The Beijing Higher People’s Court has now ruled against Jordan.

The court noted that “’Jordan’ is not the only possible reference for ‘Qiaodan’ in the trademark under dispute.” The court also commented that “’Jordan’ is a common surname used by Americans.” Explaining its decision regarding Qiaodan’s use of the Jumpman logo, the court reasoned that the logo is in the shape of a person with no facial features, so therefore it is difficult for consumers to identify the Jumpman as Michael Jordan. The court therefore concluded that there was insufficient evidence to prove the Qiaodan trademark referred to Michael Jordan or otherwise caused confusion among consumers.

While the Higher People’s Court’s ruling seems to be the outcome of a decision in search of an analysis, it should come as no surprise. China frequently reinforces its reputation of being a sanctuary for producers of counterfeit goods by failing to enforce international intellectual property rights.

Pending before the 9th Circuit is a case which may change the landscape for online copyright protection. The case, Lenz v. Universal, may make it more difficult for copyright owners to protect against infringement in today’s environment of hyper infringement. Defenders of Lenz argue that this case represents the quest for a legitimate balance between overzealous copyright enforcement and legitimate, non-infringing use.

The facts of Lenz are fairly simple. Lenz posted to YouTube a very short video of her young child dancing to a Prince song playing in the background. At the time, Universal Music Publishing was managing Prince’s music publishing. An attorney at Universal manually reviewed the posting but acknowledged that he did not consider whether the Lenz video was fair use. Universal sent a DMCA takedown notice to YouTube and YouTube removed access to the video. Most normal takedown situations end there; however, Lenz was upset and, after trying and failing to remedy the situation herself, sought the aid of attorneys at the Electronic Frontier Foundation.

The DMCA was enacted in 1999 as an attempt by Congress to stem the tide of rampant online copyright infringement. The DMCA offered copyright owners a streamlined process for taking down from the Internet allegedly infringing material and online service providers had great incentive to follow the process laid out in the DMCA; to not do so opened one up to potential secondary liability for their users’ activities. Congress included a requirement that the allegation of infringement in a takedown notice include a statement that the sender had a good faith belief that the posting of the allegedly infringing content was not authorized by law. Specifically, Section 512(c)(3)(A)(v) requires a takedown notice to include “[a] statement that the complaining party has a good faith belief that use of the material in the manner complained of is not authorized by the copyright owner, its agent, or the law.”

Congress also included in the statute a prohibition against making a misrepresentation in a takedown notice. Section 512(f) provides:

(f) Misrepresentations — Any person who knowingly materially misrepresents under this section—

(1) that material or activity is infringing, or

(2) that material or activity was removed or disabled by mistake or misidentification, shall be liable for any damages, including costs and attorneys’ fees, incurred by the alleged infringer, by any copyright owner or copyright owner’s authorized licensee, or by a service provider, who is injured by such misrepresentation, as the result of the service provider relying upon such misrepresentation in removing or disabling access to the material or activity claimed to be infringing, or in replacing the removed material or ceasing to disable access to it.

Lenz contends that Universal violated Section 512(f) when it failed to consider fair use prior to sending the takedown notice. The court made clear earlier in the case that fair use is a use authorized by law and a copyright owner must consider fair use before proceeding with a takedown notice under the DMCA. Universal acknowledged that while it considered other factors that are relevant to a fair use analysis, it did not engage in a fair use analysis per se. Is this sufficient to impose Section 512(f) liability on Universal? Lenz argues that it is. Lenz argues that her post was clearly fair use and that Universal’s failure to consider fair use was willful blindness. Universal argues that it is not. Universal argues that its failure to engage in a fair use analysis when it was unaware that such analysis was required is not a “knowing” misrepresentation and points to 9th Circuit precedent which holds that the good faith requirement in § 512(c)(3)(A)(v) is to be evaluated according to a subjective standard.

Whether or not Universal’s lack of actual knowledge that it should perform an initial fair use assessment before sending a takedown notice allows it to escape liability under Section 512(f) is just one issue at the center of the appeal. Another issue being pressed by Universal is whether, and to what degree, a copyright owner must engage in a fair use analysis before sending a takedown notice. The determination of this issue will have ramifications on the ability of all content owners to police online infringement.

At oral argument before the 9th Circuit on July 7, 2015, Universal argued that the DMCA takedown system “simply can’t function” if owners need to engage in a fact intensive fair use analysis prior to sending a takedown notice. “Is that an argument you should be making to Congress?” U.S. Circuit Judge Mary H. Murguia asked. “The plain text, a reading of it, says that fair use should, or could be, and likely needs to be, considered.”

The court acknowledged that such a requirement would impose a greater challenge on a copyright owner’s ability to police online infringement. In questioning Lenz’s attorney, the court asked “Doesn’t [the fact that millions of DMCA takedown notices are filed each year, and only a fraction of a percent of them are later disputed by the targeted users] suggest that copyright infringement is rampant all over the Internet and that what you’re asking for here is a clarification or an interpretation of the law that will make it more onerous on the copyright owners to get these takedowns accomplished against people who are truly infringing their copyright?”

In general, any appeal from a civil action involving claims of patent infringement must be made to the Federal Circuit in Washington, D.C. A recent case from the Ninth Circuit, Amity Rubberized Pen Company v. Market Quest Group, illustrates this principle as well as demonstrating the practical measures an appellate court will take to help an appeal survive.

In Amity Rubberized Pen Co., Amity held a patent for a device that dispensed both toothpicks and tablets such as breath mints. In 2006, Amity sued Market Quest Group alleging infringement of its patent and brought various other federal and state law claims. Counsel for Amity withdrew from the case during trial and the court declared a mistrial and ordered that Amity substitute in new counsel. It also awarded Market Quest its attorney’s fees and costs for the mistrial and warned Amity that it would dismiss the case if it failed to pay. Amity did not pay the fees and in 2010, the Court dismissed the case with prejudice.

Approximately three years later, in 2013, Amity filed a new lawsuit against Market Quest alleging similar claims as the previous action, including claims for patent infringement. Market Quest filed a motion to dismiss the lawsuit on the grounds of res judicata, arguing that the present actin was barred by the dismissal with prejudice of similar claims three years earlier. The District Court agreed and dismissed the 2013 lawsuit. Amity appealed this dismissal to the Ninth Circuit Court of Appeals instead of to the Federal Circuit.

The Ninth Circuit concluded that it lacked jurisdiction to hear Amity’s appeal. The Court recognized that generally it had appellate jurisdiction over appeals emanating “from the United States District Courts within the geographical boundaries of the Circuit.” The Court recognized, however, that this jurisdiction was not absolute in that Congress had granted the Federal Circuit “exclusive jurisdiction … of an appeal from a final decision of a district court of the United States … in any civil action arising under … any act of Congress relating to patents.” Although the dismissal was premised on the common law doctrine of res judicata, the Ninth Circuit recognized that “a case arises under the patent laws where `a well pleaded complaint establishes … that federal patent law creates the cause of action.’” Here, Amity had asserted a claim for patent infringement in the 2013 lawsuit against Market Quest thereby triggering the Federal Circuit’s appellate jurisdiction. Given this, the Ninth Circuit lacked the jurisdiction to determine the merits of Amity’s appeal.

However, rather than dismiss the appeal which, depending on certain timing issues would likely have barred Amity from refiling the appeal in the Federal Circuit, the Ninth Circuit decided to order that the appeal be transferred to the Federal Circuit. In reliance on 28 U.S.C. section 1631, the Ninth Circuit concluded that it had the authority to transfer the appeal to a federal court of competent jurisdiction provided: “(1) the Court to which the appeal is to be transferred would have had jurisdiction at the time the appeal was filed; and (2) transfer is `in the interest of justice’.” The Ninth Circuit also recognized that it could order the transfer of the appeal on its own without Amity filing a motion for such transfer.

In applying the two prong test, the Ninth Circuit concluded that the Federal Circuit had original jurisdiction over the appeal at the time it was mistakenly filed in the Ninth Circuit. This was because 28 U.S.C. section 1295 gives the Federal Circuit exclusive appellate jurisdiction over patent infringement claims. The Ninth Circuit then turned to whether a transfer of the appeal would be “in the interest of justice” finding this a more complex issue.

The Ninth Circuit recognized that it had taken a broad view of when a transfer would be appropriate, having previously held a “transfer will be in the interest of justice because normally dismissal of an action that could be brought elsewhere is ‘time consuming and just as defeating’.” The Ninth Circuit had also recognized that transfer is often times a suitable remedy so as not to penalize a party for “an honest procedural mistake.” The Court continued that a transfer should be ordered “where … the plaintiffs appear to have been `unaware of or confused about the proper forum in which to file [their] action’ as well as having held that it was in the interest of justice to transfer a case `when the time period has elapsed to file in the appropriate court’.” Finally, the Ninth Circuit recognized that it had rarely held that it would not be in the interest of justice to order the transfer of a case to another court. Thus, unless the matter to be transferred “is frivolous or was filed in bad faith,” the Ninth Circuit concluded that it would be in the interest of justice to transfer the case to the Federal Circuit rather than dismissing the appeal.

The Amity decision is a reminder to counsel in litigating patent infringement claims that any appeal from an unfavorable ruling must be made to the Federal Circuit. However, at least in the Ninth Circuit, there does not appear to be the likelihood of the severe penalty of dismissal should counsel mistakenly appeal to the wrong court.

Unless you have been living under a rock for the last week, you know who Carli Lloyd is. If, however, you do not, she is the reigning World Cup MVP for Team USA. On Sunday, in perhaps the most astonishing World Cup performance of all time, Lloyd scored a hat trick in just the 16^th minute of the game, and propelled Team USA to its third Women’s World Cup championship. You may be wondering, how is this related to intellectual property, and I promise you, I am getting there.

After Lloyd scored her second goal in the first five minutes of Sunday’s World Cup final, her official website’s server crashed because it was getting so much traffic. Just eleven minutes later, Lloyd scored her third goal and transitioned into a household name. During the game alone, Lloyd gained 50,000 Twitter followers. By now, the connection between this article and intellectual property may be evident: Lloyd’s spike in popularity also caused a spike in the value of her likeness.

Merriam-Webster’s Dictionary defines likeness as (1) a picture of a person; or (2) the quality or state of being alike or similar especially in appearance. California law provides that the appropriation of a person’s name, voice, signature, photograph, or likeness for a commercial use is actionable. Thus, a celebrity is entitled to control the use of their likeness in the commercial context to their financial gain if they so desire. Simply put, Lloyd’s hat trick may have not just cemented her spot in World Cup history, but also greatly increased her wealth.

According to ESPN.com, an autographed card of Lloyd closed out during the game for $177.50, and another card closed out after the game for $218. Prior to the World Cup, Lloyd’s autographed cards sold for $15 to $20. Further, ESPN confirmed that personal appearances by Lloyd would now cost approximately $30,000 for two hours, which was up from $10,000 since the first round of the World Cup, and $15,000 since the U.S. beat Germany in the semifinals.

Prior to this year’s World Cup, Lloyd did not have many endorsement deals aside from Nike and Usana Health Sciences. However, as of last week, she closed a deal to represent Visa through the 2016 Olympics. As you may expect, there will be no shortage of endorsement deals for the superstar now. According to her agent, Josh Weil of William Morris Endeavor, Lloyd is in negotiations with an automobile company and a watch company. Weil said he would like to obtain a deal for Lloyd with a company like AT&T or McDonalds. However, his client has insisted that he put an emphasis on obtaining a deal in the nutrition and training industry. According to Weil, “food, wealth and wellness, is what she is always focused on.” My general inclination is that Lloyd will have no problem obtaining such a deal.

Of course the take away here is simple: score a hat trick in the World Cup Finals, and you too, can get mega endorsement deals. Okay, maybe that isn’t realistic, but what we can all take away from this example is that intellectual property rights can be highly lucrative. As such, corners should not be cut inadequately protecting them through all avenues provided by the law.

By: Intellectual Property Group

Many who enjoy champagne have noticed that their favorite cuvée has quietly changed its label. Many of the world’s bottles of bubbly now indicate that they contain “sparkling wine” when they used to be “champagne.” Those who enjoy Basmati rice or Camembert cheese also have noticed changes to the names of their favorite products. What happened? Why we are now drinking sparkling wine when we used to enjoy champagne, or why we must settle for brie when we previously enjoyed Roquefort?

Although the names have changed, the products probably have not. Rather, many countries have created a system which recognizes and protects the value of the intellectual property associated with the geographic origin of certain products. Functioning like a trademark, a geographical indication can represent valuable intellectual property by identifying a particular region as the source of a certain product. Although not traditionally protected by trademark laws, geographical indications and designations of geographic origin have traditionally been afforded protection by various countries. Long known for its famous varieties of cheese, wine, and, of course, champagne, France introduced one of the first systems designed to protect geographical indications, known as appellation d’origine contrôlée, or the “AOC.” Sacre bleu! The AOC makes it unlawful to manufacture and sell a product under a geographical indication identified by the AOC unless that product complies with a set of strict criteria, including production of AOC-protected products in particular regions.

International agreements recognize designations of geographic origin and geographical indications as valuable intellectual property subject to protection. The World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (commonly known as “TRIPS”) provides protection for geographical indications where goods in a region or locality have developed a reputation or other characteristic essentially attributable to its geographic origin. For example, under TRIPS, onions can only be sold as “Maui onions” if they are grown on the Hawaiian island bearing the same name. Likewise, under TRIPS, your favorite sparkling wine can only be called champagne if it originates from that particular region of France.

Acquiring protection of geographical indications is not automatic. Each country that has agreed to the terms of the TRIPS agreement first must permit registration of geographical indications within their borders. Further, all member governments must provide opportunities under their domestic intellectual property laws which permit the owner of a registered geographical indication to prevent the use of trademarks which tend to mislead the public as to the geographical origin of the particular good in question. These governments may refuse to register a trademark, or invalidate an existing trademark, where that mark has a tendency to mislead the public as to the actual origin of the product underlying that mark. Obviously reflecting a strong lobby from the French, Article 23 of the TRIPS agreement provides that all nations covered by the TRIPS agreement must provide the owner of a geographical indication the ability to prevent the use of such indications on wines and spirits which originated outside of the proper geographical region. The grapes of wrath are ripe on the vine – misleading geographical indications relating to wines and spirits must be discontinued, even where there is no evidence of actual confusion among the buyers of these products.

While consuming the contents of the champagne bottles might have been sufficient to avoid the onset of international conflict regarding the fizzy libation, it is the change to the bottles’ labels which has permitted makers of the bubbly to avert international conflict. So, next time you reach for a bottle of Ballatore or Chandon, you can be confident that it’s still the product you’ve become accustomed to, even though it’s not Champagne.

On Monday, the United States Supreme Court upheld the longstanding case law that prohibits a patent owner from receiving royalties after a patent has expired. In Kimble v. Marvel Entertainment, LLC (June 22, 2015) 2015 U.S. LEXIS 4067, the Court ruled in favor of Marvel, the licensee of a patent for a Spiderman web-shooting toy.

The plaintiff, Stephen Kimble, had patented the web-shooting toy. Kimble had talked to Marvel about licensing his patent, but Marvel declined to take a license. Shortly thereafter, Marvel began selling a suspiciously similar web-shooting toy.

Kimble sued Marvel for patent infringement. The parties settled. Pursuant to the settlement, Marvel bought the patent from Kimble for a lump sum and a three-percent royalty on future sells of the toys.

Marvel later filed a declaratory judgement action in the district court, seeking a judgment that Marvel could stop paying Kimble royalties when the patent expired in 2010. Marvel relied on Brulotte v. Thys Co., 379 U.S. 29 (1964), in which the Supreme Court had held that a patent owner could not receive royalty payments after the patent had expired, and that agreements that provided for post-term patent royalties were per se unlawful.

The district court ruled in favor of Marvel, agreeing with Marvel that Brulotte prohibited post-term patent royalties. The Ninth Circuit Court of Appeals affirmed the district court. On appeal to the Supreme Court, Kimble argued that the Court should overrule Brulotte. The Court refused to do so.

First, the Court explained that courts have carefully protected the rights of the public to make and sell inventions that were covered by patents that have expired. Just like unpatentable inventions, inventions whose patents have expired are in the public domain, and the public is free to use them. As set forth in 35 U.S.C. §154, a patent expires twenty years from its filing date. At that time, the patent owner’s rights to exclude others from practicing the invention end. The Court reiterated the Brulotte Court’s conclusion that this rule is consistent with the policy of the patent laws to limit a patent owner’s monopoly to the term of the patent.

Next, the Court acknowledged that Brulotte’s per se rule hinders certain kinds of deals in which parties want to extend royalty payments over a longer period of time to cover the life of the product. As the Court explained, however, there are alternative arrangements that achieve the same result. For example, parties may agree that the licensee will pay a ten percent royalty over the twenty-year life of the patent, but that the payments will be amortized over forty years. Parties may also agree to license other, non-patent rights, such as trade secrets, that do not expire. Parties may enter into joint ventures or other business transactions to share the risks and profits of commercializing a patented product.

Kimble argued that the Court should replace the Brulotte per se rule with a flexible, case-by-case antitrust-type of “rule of reason.” According to Kimble, the analysis should focus on the relevant product market and whether the patent owner has the power to limit competition.

The Court emphasized that the doctrine of stare decisis requires “sticking to some wrong decisions” because it is “more important that the applicable rule of law be settled than that it be settled right,” (quoting a 1932 Supreme Court case). Id. at *15. According to the Court, stare decisis is only relevant when it is used to maintain incorrect decisions, as a correct decision will be affirmed on its merits. Thus, in order to overcome stare decisis, there must be some “special justification” in addition to a previous wrongful decision. Id. The Court noted that stare decisis is even more important when the prior case interprets a statute (as was true with Brulotte, which interpreted the patent term statute, 35 U.S.C. §154), and pointed out that Congress has had many chances to change the law and overrule Brulotte. In fact, Congress has considered legislation that would change the Brulotte rule into a flexible rule similar to the rule of reason that Kimble proposed.

The Court agreed with Marvel that parties may have been relying on Brulotte in entering into licenses. “Overturning Brulotte would thus upset expectations, most so when long-dormant licenses for long-expired patents spring back to life.” Id. at *18. Brulotte’s rule is clean, easy to apply, and provides certainty to parties in licensing. Kimble’s suggested rule of reason would be difficult to apply, be subjective, provide no certainty, and significantly increase the amount and cost of litigation.

Kimble raised two additional arguments in an attempt to convince the Court that there was special justification to overrule Brulotte. First, he argued that Brulotte was based on the incorrect view that post-term patent royalties are anticompetitive. Second, he argued that Brulotte inhibits innovation.

The Court dispensed with both arguments quickly. The Court found that Brulotte was not based on a concern about the anticompetitive effects of post-term patent royalties. The Brulotte Court did not focus on anticompetitive aspects because the goal of the patent law is not to foster competition. As to Kimble’s innovation argument, the Court found that Kimble had not produced any evidence that post-term patent royalties stifled innovation. Brulotte does not preclude inventors from commercializing their inventions; there are several alternatives to post-term royalties that are sufficient incentives to innovate.

The Court’s message was loud and clear: if the law needs to be changed, Congress can do it.

The take-away message? Be careful in drafting patent licenses so that royalties are not being paid after the patent’s expiration unless those payments are specifically tied to something other than the patented invention. The old rule still applies.

After four years, the quest to obtain federal trademark protection for the mark MATTRESS.COM by owner 1800Mattress.com IP, LLC, formerly Dial-A-Mattress Operating Corp, has been put to bed. The United States Court of Appeals for the Federal Circuit has finally held that the mark is generic and not entitled to registration.

On December 9, 2005, Dial-A-Mattress filed U.S. Trademark Application Serial No. 78/976,682, seeking to register the mark MATTRESS.COM for an “online retail store services in the field of mattresses, beds, and bedding.” On February 14, 2008, the trademark examiner assigned to the application finally refused registration of the mark on the basis that it is generic. Dial-A-Mattress appealed the refusal to the United States Trademark Trial and Appeal Board, which affirmed the examiner’s refusal to register the mark. Dial-A-Mattress timely appealed to the Federal Circuit.

This case reflects the fine and often illusive line between marks that are merely descriptive and those that are generic. The distinction can make a very big difference to the mark owner. Descriptive marks are registrable on the Supplemental Register and are capable of elevation to the Principal Register after obtaining secondary meaning, while generic marks are never capable of registration.

15 U.S.C. §1052 provides that 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 …. (e) Consists of a mark which, (1) when used on or in connection with the goods of the applicant is merely descriptive or deceptively misdescriptive of them. A mark is considered merely descriptive if it describes an ingredient, quality, characteristic, function, feature, purpose, or use of the specified goods or services. For example, the mark APPLE PIE has been held merely descriptive of potpourri and the mark BED & BREAKFAST REGISTRY held merely descriptive of lodging reservations services. The determination of whether a mark is merely descriptive requires consideration of the context in which the mark is used or intended to be used in connection with those goods/services, and the possible significance that the mark would have to the average purchaser of the goods or services in the marketplace. The mark need not describe all the goods and services identified, as long as it merely describes one of them.

By contrast, generic terms are terms that the relevant purchasing public understands primarily as the common or class name for the goods or services. Put in common parlance, if the general public primarily understands the word to designate the product rather than the producer, the word is generic. Generic terms are incapable of functioning as registrable trademarks denoting source, and are not registrable on the Supplemental Register or on the Principal Register after having acquired secondary meaning. Generic terms are terms that the relevant purchasing public understands primarily as the common or class name for the goods or services. For example, in Yellow Cab Co. of Sacramento v. Yellow Cab Co. of Elk Grove, 266 F. Supp. 2d 1199 (E.D. Cal. 2003) the court determined that the mark YELLOW CAB was determined generic for taxi service, and in Retail Servs., Inc. v. Freebies Publishing, 364 F.3d 535 (4th Cir. 2004) the court determined that the mark FREEBIE is generic for free products or services

There is a two-part test used to determine whether a designation is generic: (1) What is the class of goods or services at issue? and (2) Does the relevant public understand the designation primarily to refer to that class of goods or services? The test turns upon the primary significance that the term would have to the relevant public.

On appeal, Dial-A-Mattress argued that in upholding the refusal to register the TTAB did not show by clear evidence that the relevant public refers to the class of on line stores selling mattresses by the mark MATTRESS.COM. The Federal Circuit disagreed with Dial-A-Mattress, concluding that substantial evidence supported the TTAB’s conclusion that the mark is generic. The Federal Circuit noted that the TTAB considered each part of the mark, “mattress” and “.com” and determined that both were generic. Considered in its entirety, the term “mattress.com” added no new meaning. In coming to this conclusion the TTAB noted the prevalence of this term in the website addresses of several online mattress retailers that provide the same services as Dial-A-Mattress. The Federal Circuit noted that such reliance is permissible to that the relevant public would understand and believe that a website operating under the term “mattress.com” provides online mattress store services.

Determining the line between marks that are merely descriptive and generic is often extremely difficult. It is easy to understand the basis for a generic based refusal for the marks E-TICKET for a computerized reservation and ticketing of transportation services, IM for instant messaging or ICE PAK for a reusable ice substitute for use in food and beverage coolers. However given the challenge of determining where the line between a mark being descriptive and being generic cases like Dial-A-Mattress are always challenging for trademark attorneys and mark owners. One solution – avoid choosing marks that push the envelope of descriptiveness.

Earlier this year, the Tenth Circuit court upheld a preliminary injunction granted in favor of an electronics equipment manufacturer against a reseller of its goods in a trademark infringement action. In Beltronics v. Midwest Inventory Distribution, the reseller (Midwest) argued that it was able to resell the manufacturer’s goods based on the first sale doctrine. The court, however, disagreed with this assessment and ruled that the resellers violated the manufacturer’s trademark rights because Midwest’s sales caused consumer confusion.

Beltronics, a manufacturer of electronics equipment, sells its equipment under its trademark. Beltronics has used authorized distributors to sell its products at a specified minimum price. At one point in time, these distributors violated their agreements by selling radar detectors to a reseller. The reseller, Midwest, then resold the radar detectors on eBay. Prior to reselling the goods on eBay, Midwest removed the serial number label from the radar detector to prevent Beltronics from discovering that Midwest resold their goods. Beltronics learned of the sales when it was contacted by several customers seeking warranties on the products purchased on eBay. Beltronics’ warranty policy, however, only covers products that were purchased with a valid serial number on the product. Because Beltronics would not warranty products purchased on eBay, these consumers became upset with Beltronics. These customers expressed their belief that Beltronics had deceived them. Obviously, these complaints harmed Beltronics’ reputation and goodwill.

Learning of the possible damages to its goodwill, Beltronics filed a suit against Midwest for trademark infringement and sought preliminary injunction to stop further sales. The district court granted the injunction and Midwest filed an appeal. The issue that the court examined on appeal was whether or not Midwest violated Beltronics trademark rights.

The guiding principle in trademark law is that trademarks are granted in order to protect consumers. Trademarks protect consumers by identifying the source of goods. If a product sold in the marketplace causes confusion to the source of goods, then the sale may constitute trademark infringement. The more likely the confusion, the more likely infringement has occurred.

Beltronics argued that the manner in which Midwest sold radar detectors caused confusion in the minds of consumers. Midwest, however, relied on a specific defense to trademark infringement known as the first sale doctrine. The first sale doctrine states that those who resell genuine trademarked products are generally not liable for trademark infringement. The rationale behind this defense is as stated above. Trademark law is designed to prevent sellers from confusing consumers about the source of products. If a genuine article is being resold, this confusion does not exist. If a purchaser of a product does no more than “stock, display and resell a producer’s product under the producer’s trademark” no trademark violation has occurred.

The first sale doctrine, however, does not apply when the reseller sells trademarked goods that are materially different than those sold by the trademark owner. Since a materially different product is not genuine, consumers may be confused as to the source of the products. In order to determine if Midwest could rely on the first sale doctrine, the court determined whether the changes that Midwest made to the product as sold on eBay constituted a materially different product. Midwest argued that its changes were not materially different because the changes revolved solely around the product’s warranty. Midwest claimed that it removed the serial number, so consumers would know that the purchaser would not be covered under Beltronics’ warranty. In addition, on its eBay sales page, Midwest disclosed to potential purchasers that the product was covered by Midwest’s own warranty and not any other. Based on these facts, Midwest argued that the changes to the product were immaterial and that it was protected from any liability under the first sale doctrine.

The court, however, was not persuaded by these arguments. The court held that even though there may have been no physical change in the products, there was a material difference in the nonphysical characteristics associated with the product. Since Midwest did not offer the same warranty as Beltronics did, the court held that this constituted a material difference. The court stated that such characteristics as warranties and customer service must be considered when examining the product as a whole. Since the resale of a trademarked product that is materially different constitutes trademark infringement, the court upheld the preliminary injunction.

On the other hand, the court may have ruled differently if Midwest’s disclosures were more effective. Because several consumers who purchased the radar detectors through eBay eventually came to Beltronics seeking warranty coverage shows that consumer confusion actually did exist. Consumers thought they were purchasing a radar detector that was covered by Beltronics’ warranty and service commitments. What they actually were purchasing was the same physical product but without the nonphysical services associated with the trademark. This led the court to conclude that Midwest infringed on Beltronics’ trademark rights. If Midwest disclosures were effective and consumers were not actually confused, the court may have ruled in favor of Midwest.

Several weeks ago, on November 9, 2009, the United States Supreme Court heard oral argument in a key patent case. The case is Bilski v. Kappos (the USPTO). The issue before the Court was whether the Court should reverse the Federal Circuit’s “machine-or-transformation” test for the patentability of process inventions. The Supreme Court’s decision will determine the extent to which processes (or methods), particularly business methods, are patentable.

Bilski filed a patent application for a method of hedging the risks in commodities trading. The Patent and Trademark Office rejected the claims as unpatentable on the grounds that the invention was an abstract idea. The Board of Patent Appeals and Interferences affirmed the rejection. The Federal Circuit Court of Appeals, in an en banc decision in 2008, affirmed the rejection. The court established a new test for the patentability of process inventions called the “machine-or-transformation” test. Pursuant to the new test, in order to be patentable, a process must either: (1) transform an article from one state into another state; or (2) be tied to a specific machine.

Bilski appealed to the Supreme Court. Over 60 amicus curiae briefs were filed.

At oral argument Bilski’s attorney, J. Michael Jakes, argued that the Supreme Court should reverse the machine-or-transformation test as being too rigid and not based on the statutes that define patentable subject matter (35 USC § 101). He argued that § 101 was intended to be read broadly to allow for inventions in new areas of technology. He emphasized that the machine-or-transformation test, which applies only to processes and not to other types of patentable subject matter, is not based on Supreme Court precedent or on the patent statutes.

Several Justices appeared skeptical that all processes should be patentable. They suggested that Bilski’s approach would result in every successful businessman having a patentable invention. The Justices asked what the limits on patentability should be.

Mr. Jakes argued that there are limits as to what is patentable. He said that, for example, the fine arts are not patentable. The Justices then asked whether human activities should be patentable. Mr. Jakes answered that they are patentable, and as an example, cited surgical methods performed by doctors. When pressed by Justices Breyer and Stevens as to what should be patentable, Mr. Jakes stated that the rule was set forth in Diamond v. Diehr. In that case, the Court specifically identified what is not patentable, such as abstract ideas. Justice Ginsburg asked Mr. Jakes why the Court could not adopt a system similar to that in Europe, in which business methods have been held not patentable. Mr. Jakes responded that the European system is based on a definition of “technology” that excludes business methods and that the U.S. cannot adopt.

The Justices challenged Mr. Jakes to explain the advantages of providing patent protection to inventions. Mr. Jakes explained that there are two advantages: the patent laws encourage people to invent and also force a disclosure of new inventions to the public. In response, Justice Breyer said that there are also two disadvantages to the patent laws: patents result in higher prices for products, which results in less use of those products, and the licensing process is too time-consuming.

The deputy Solicitor General, Malcolm Stewart, represented the PTO. He argued that the machine-or-transformation test is not rigid. He explained that the Court did not need to decide the harder question of what to do if part of a process is tied to a machine and part of a process is not.

Justice Sotomayor asked Mr. Stewart if it wouldn’t be safer to simply exclude all business methods from patent protection. Mr. Stewart replied that that would not be correct because it would eliminate claims to new machines or software that are patentable.

The Justices then questioned Mr. Stewart extensively about the State Street Bank case. Mr. Stewart explained that under the machine-or-transformation test, the result in State Street Bank would be the same. He said that the claims in that case were patentable because they were directed to a machine, not a process.

When pushed by the Justices, Mr. Stewart stated that Bilski was not the right case for the Court to address the “hard questions” concerning the patentability of software or medical diagnostics. He argued that these questions should be left unresolved for another case. Justice Ginsburg stated that the Federal Circuit had indicated that the machine-or-transformation test was sufficient for the invention before it and that other types of inventions could be addressed as the cases arose. She concluded that the Court could decide Bilski without addressing those difficult questions.

Mr. Stewart concluded by stating that the economic history of the United States would have been very different had people believed that process inventions like Bilski’s could be patented and that competitors could be precluded from using such methods.

On rebuttal, Mr. Jakes stated that the difficult questions must be faced now because the Federal Circuit has established the machine-or-transformation test as the proper test for all process inventions. He said that the proper question before the Court was whether Bilski’s invention is an abstract idea. He further argued that the test should not be whether an invention is transformed, but whether it is a practical application of a useful result.

The commentators do not agree on how the Court will decide Bilski. Some believe that the Court will strike down all business methods, while others believe that the Court will further modify the machine-or-transformation test to allow such patents.