Blog: The IP Law Blog

On March 29, 2007, the Ninth Circuit issued its opinion in the case Perfect 10, Inc. v. CCBill LLC, et al. in which it attempted to clarify when immunity is available to internet service providers for copyright infringement under the Digital Millennium Copyright Act (“the DMCA”), 17 U.S.C §512. Perfect 10, the publisher of an adult magazine and a related subscription website, brought a lawsuit claiming that CCBill and CWIE violated copyright laws by providing services to other websites that posted images stolen from Perfect 10’s magazine and website. CWIE provides web hosting and related internet connectivity services to the owners of various websites. CCBill allows customers to use credit cards or checks to pay for subscriptions or memberships to various websites. The U.S. District Court granted summary judgment in favor of CCBill and CWIE as to the copyright claims finding that they qualified for the “safe harbor” provisions from copyright infringement liability under the DMCA.

The Ninth Circuit began by recognizing that the DMCA created specific “safe harbors” to “provide protection from liability for: (1) transitory digital network communications; (2) system caching; (3) information residing on systems or networks at the direction of users; and (4) information location tools.” While the safe harbor provisions limit liability, they “do not affect the question of ultimate liability under the various doctrines of direct, vicarious and contributory liability.” The Ninth Circuit recognized that to be eligible for any of the four safe harbor provisions, a service provider must first meet the threshold requirements set out in section 512(i). Specifically, a service provider such as CCBill or CWIE must have “adopted and reasonably implemented, and informed subscribers and account holders, of . . . a policy that provides for the termination in appropriate circumstances of subscribers and account holders . . . who are repeat infringers.” (17 U.S.C. § 512(i)(1)(A).)

The Ninth Circuit observed that the DMCA does not define “reasonably implemented,” but held that “a service provider ‘implements’ a policy if it has a working notification system, a procedure for dealing with DMCA – compliant notifications, and if it does not actively prevent copyright owners from collecting information needed to issue such notifications.” While the DMCA allows a service provider to implement a variety of procedures, a policy implementation is reasonable if under “appropriate circumstances” the service provider “terminates users who repeatedly or blatantly infringe copyright.”

In turning its attention to these factors, the Ninth Circuit addressed Perfect 10’s claim that CCBill and CWIE prevented the implementation of their policies by failing to track webmasters who repeatedly infringed. The Ninth Circuit disagreed and found that CCBill/CWIE had implemented a policy of tracking repeated infringers. The Court recognized that CCBill and CWIE posted a “DMCA Log” which attempted to identify those webmasters who were repeat infringers. The DMCA Log, although having some gaps, indicated the email address and/or name of those webmasters who routinely infringed. Therefore, there was no triable issue of fact that CCBill and CWIE implemented a repeat infringer policy.

As to the issue of reasonableness, the Ninth Circuit recognized that “[a] service provider reasonably implements its repeat infringer policy if it terminates users when ‘appropriate’.” The Ninth Circuit again recognized that the DMCA does not define when it is “appropriate” for service providers to act. The Court emphasized, however, that service providers do not need to “affirmatively police its users for evidence of repeat infringement.” This is premised on the fact that the DMCA provides that a service provider is not liable for monetary relief “if it does not know of infringement.” The Court also observed that the DMCA provides that a service provider is not liable “if it acts ‘expeditiously to remove, or disable access to, the material’ when it (1) has actual knowledge, (2) is aware of facts or circumstances from which infringing activity is apparent, or (3) has received notification of claimed infringement meeting the requirements of § 512(c)(3).”

The Ninth Circuit found that Perfect 10’s claimed notice of infringement did not give rise to a triable issue of fact since it did not substantially comply with the notice requirements of section 512(c)(3). The Ninth Circuit ruled that compliance is not “substantial” if the notice complies with only some of the requirements of § 512(c)(3)(A). The Court held that the DMCA requires “substantial compliance with all of section 512(c)(3)’s clauses, not just some of them.” The Court rejected Perfect 10’s claims that it had substantially complied with 512(c)(3) since it claimed that its notices were provided in a “combination of three sets of documents.” The Ninth Circuit recognized that each of these communications contained more than mere technical errors, rather, one or more of the required elements were entirely absent from the notices. The Ninth Circuit recognized that substantial compliance with section 512(c)(3) is necessary because of the drastic consequences of accusations of alleged infringement: i.e., a user could have content removed or may have his access terminated entirely. Since Perfect 10 did not provide effective notice, the Ninth Circuit held that actual knowledge of infringement could not be imputed to CCBill/CWIE based on Perfect 10’s communications.

In granting summary judgment, the District Court had held that notices of infringement sent to CCBill and CWIE by other, non-party copyright holders were not relevant to the issue of Perfect 10’s claims of copyright infringement. However, the Ninth Circuit disagreed and ruled that CCBill/CWIE’s actions toward copyright holders who were not parties to the litigation was “relevant in determining whether they reasonably implemented their repeat infringer policy.” The Ninth Circuit recognized that a “policy is unreasonable only if the service provider fails to respond when it had knowledge of an infringement.” Thus, the Ninth Circuit held that the District Court on remand must consider whether CCBill and/or CWIE “implemented its repeat infringer policy in an unreasonable manner with respect to any copyright holder other than Perfect 10.”

Finally, the Ninth Circuit held that a service provider “may lose immunity if it fails to take action with regard to infringing material when it is ‘aware of facts or circumstances [“red flags”] from which infringing activity is apparent.’” Perfect 10 argued that CCBill/CWIE were aware of a number of “red flags” since it provided service to various websites such as illegal.net and stolencelebritypics.com. The Ninth Circuit rejected this argument, however, ruling that there was nothing in these titles to put CCBill/CWIE on notice of apparent infringing activity since these “titillating” titles “may be an attempt to increase their salacious appeal rather than an admission that the photographs are actually illegal or stolen.”

Perfect 10 also argued that CCBill was not entitled to immunity because it interfered with “standard technical measures” by blocking Perfect 10’s access to CCBill-affiliated websites in order to prevent Perfect 10 from discovering whether those websites infringed on Perfect 10’s copyrights. The Ninth Circuit remanded to the District Court to determine “whether access to a website is a ‘standard technical measure’ and if so whether CCBill interfered with [Perfect 10’s] access.”

CCBill argued that, because it provides a hyperlink so that a user may access a client website after it processes that user’s credit card, it fell under the “information location tools” safe harbor of section 512(d). The Ninth Circuit found that even if the hyperlink provided by CCBill could be viewed as “information location tool,” the majority of CCBill’s activities fall outside of the safe harbor. The Ninth Circuit recognized that section 512(b) provided immunity only for the infringement “by reason of the provider referring or linking users to an online location containing infringing material or infringing activity.”

The Ninth Circuit’s opinion in Perfect 10 requires copyright holders to remain vigilant and observe strict compliance with the notice of infringement requirements in the DMCA. Otherwise, a service provider can claim that it did not have actual knowledge of the infringing activity because of the defective notice. A copyright holder then risk being thrown out of court for failing to comply with these notice requirements if a service provider can establish immunity under the “safe harbor” provisions of the DMCA.

By now, everyone has heard about the One Billion dollar copyright infringement lawsuit Viacom filed against YouTube and its owner, Google. The lawsuit stems from the fact that clips from a number of Viacom’s programs are regularly appearing on the YouTube website.

YouTube allows its users to post video clips onto the YouTube website, and categorize the clip by providing terms which enable the clip to be displayed when a viewer conducts a search. While some users post videos clips they themselves create, other users are posting clips from television programs and motion pictures, including programs owned by Viacom such as Sponge Bob Square Pants, The Daily Show with Jon Stewart, The Colbert Report, South Park, and MTV Unplugged.

One of Viacom’s chief complaints is that YouTube has not instituted filtering technologies to prevent the uploading of clips from Viacom’s programs despite promises from its executives. Viacom also complains that because YouTube users are able to re-post removed clips almost as soon as they come down. This and other factors cause Viacom to lament that “no matter how much a copyright owner expends to protect their rights, there will always be a vast collection of infringing videos available on YouTube to draw users to its site.”

As an attorney who regularly represents content owners, I understand Viacom’s concerns. Viacom believes that if clips from one or more of its programs are available to users for free on YouTube, this may lessen the demand for those programs on either Apple’s iTunes or on one of Viacom’s own sites. Is YouTube taking advantage of some loopholes in the now 9 year old Digital Millennium Copyright Act (“DMCA”), or is the DMCA doing what its supposed to do and content owners are trying to run rough shot over what may be fair use.

Under the DMCA, a “Service Provider” may be entitled to immunity from claims of copyright infringement in four areas: 1) transitory communications; 2) system caching; 3) storage of information on systems or networks at direction of users; and 4) information location tools. While each area would appear to have some application to YouTube’s business, the information storage category is likely to be of primary focus if Viacom’s suit progresses.

Under the information storage safe harbor, the Service Provider:

1. Must not have actual knowledge that the material is infringing;
2. Must not aware of facts or circumstances in which they would be aware of that the material is an infringement;
3. Upon becoming aware of the existence of such infringement material, acts promptly to remove or disable access to the infringing material.

In addition, in order to be entitled to copyright infringement immunity under this provision, the Service Provider must not receive a financial benefit directly attributable to the infringing material where it has the right and ability to control it. Additionally, the Service Provider must, upon notification of a claim of infringement, quickly removes or disables access to the infringing material.

The areas that will receive the most attention in determining whether or not YouTube should be entitled to the protections of this safe harbor is whether YouTube receives a financial benefit directly attributable to the infringing material, and YouTube’s knowledge that the material is, in fact, infringing.

YouTube sells advertising on its site, and reaps a financial benefit from high user traffic. However, as far as this writer is aware, YouTube does not include advertisements either before, after or within the video clips themselves. Rather, YouTube runs banner ads where YouTube gets paid based on the number of times any particular ad is viewed. Under Ninth Circuit case law this may be enough to establish a “financial interest.” (See, A&M Records, Inc. v. Napster, Inc; Fonovisa, Inc. v. Cherry Auctions, Inc. See also Perfect 10 v. Google, Inc.)

Does YouTube know that material on its system is infringing. Viacom claims that YouTube does. In an Op-ed piece in the Washington Post, Viacom’s general counsel claims that YouTube users use the site to view infringing material and “[i]f the public knows what’s there, then YouTube’s management surely does.” Other critics claim that YouTube must be aware that infringing material is on its system and this generally knowledge should strip it of safe harbor protection. While it would be safe to presume that YouTube knows that there is some content on its system which infringes the copyright held by a third party. However, its almost certain that YouTube does not know which of each piece of content stored on its system is infringing and which is not.

Viacom and others insist that YouTube could install filtering software that would flag files which contain certain keywords tending to be associated with clips from television shows such as “The Daily Show” or “The Colbert Report.” However, if YouTube did install such filters, it would then have to manually review each file to determine whether or not fair use or some other applicable exemption would be applicable. Not to mention the resources YouTube would have to devote to this, what if YouTube’s definition of fair use deviated from that of its users. Why should the fight about fair use be between the user and YouTube.

As a result of YouTube and other similar companies, content owners are required to be extra vigilant in policing their rights. That vigilance comes with a price tag. However, at the end of the day, content owners can have infringing content removed from YouTube very quickly. (Based on personally experience, YouTube is by far the quickest to respond to a take down notice.)

The DMCA is performing as its supposed to do. Content owners have the ability to initiate the removal of allegedly infringing content, the posting party has the ability prevent its removal by claiming fair use or some other exception, and if the content owner still feels strongly about removing the content, the DMCA allows the content owner to take the poster to court. It may be somewhat expensive for a content owner to patrol sites like YouTube and send out take down notices, but if the burden were on YouTube, posts like the pro Barack Obama clip incorporating Apple’s 1984 Super Bowl television ad might not have made it up. (Oor the various clips responding in kind)

Protecting the public’s right to use a third party’s material for criticism or comment are the hallmarks of fair use, and must be protected. The question the Viacom litigation poses is who will bear the price associated with protecting this right.

And the Oscar goes too …. This phrase means only one thing to most people: the annual award given to those celebrated actors and actresses at the Academy Awards each February. The eight and a half pound gold plated statue standing thirteen and a half inches tall is as well known as any celebrity, and its name has become synonymous with the show itself. Although the origin of the name is in dispute, the statute has been called Oscar since the 1930’s.

The Oscar name is a registered trademark of the Academy of Motion Picture Arts and Sciences, and they have vigorously protected the use of their famous mark. Recently, the Academy filed suit against an Italian broadcaster who used the word Oscar in the title of several of their award programs. These shows were broadcast in Italian to subscribers living in the United States. The Academy filed a motion for summary judgment based on the broadcaster’s trademark infringement. This motion was denied by the United States District Court, Central District of California. The judge held that the mark Oscar may be generic in Italian and may not be entitled to trademark protection.

Under trademark law, the quality of a mark’s distinctiveness determines the scope of its protection. Courts have developed four categories to determine a mark’s distinctiveness and, consequently, its strength as a trademark. These categories are (i) coined or arbitrary, (ii) suggestive, (iii) descriptive, and (iv) generic marks. Trademarks that are coined or arbitrary receive the highest protection. Marks such as Kodak or Exxon are examples of coined trademarks. Marks such as Apple for computers or Grey Goose for vodka are examples of arbitrary marks. These marks receive the highest protection since they are inherently distinctive.

One step below coined or arbitrary marks are suggestive marks. Suggestive marks are also inherently distinctive. They are considered weaker than coined or arbitrary marks because the marks suggest some characteristic or quality of the goods or services. With suggestive marks, an individual must use imagination to understand the significance of the marks. Examples of suggestive marks are Greyhound for buses or Mustang for cars. Unlike arbitrary marks, these marks suggest a quality of the goods and services. The suggestion of these two marks denotes speed and quickness.

Falling below suggestive marks are descriptive marks. These are marks that merely describe the good or services. Examples of descriptive marks are Computer Land for a computer store or Park N Fly for airport parking services. These marks are considered weak marks and are only entitled to trademark protection if they have acquired a secondary meaning in the marketplace. An example of a descriptive mark that has acquired secondary meaning is International Business Machines (IBM). IBM is clearly descriptive of its goods and services, but the trademark has acquired secondary meaning through its branding and long history in the marketplace allowing for trademark protection.

The weakest marks and those that are entitled to no protection under trademark law are generic marks. Generic marks describe the general class of goods or services. Simply, the everyday common words for goods and services, such as car or food, are not entitled to trademark protection.

In this case, the judge recognized that Oscar was a strong mark in the United States and should be protected. The judge, however, refused to grant the summary judgment because evidence was presented to show that Oscar in Italian may be a generic term for an award. Since the broadcast was in Italian, the judge found it difficult to prevent an Italian broadcast from using a term that was generic in their own language even if the broadcast was aimed for viewers in the United States. The judge stated, “If the viewers of [the broadcast] perceive the word ‘oscar’ as being a generic term for an award when used in the Italian language, then the Italian award programs using the word ‘oscar’ may not even bring about a mental association with the Plaintiff’s Oscar mark.”

Despite Oscar being a strong mark in the English language, this ruling states that the mark may not be protected against uses in other languages where the mark is a generic term in that language. Since the use of the term Oscar in Italian would evoke the generic sense of the term, it does not infringe on the Academy’s trademark rights.

Last year’s Ninth Circuit’s decision in Funky Films, Inc. v. Time Warner Entertainment is a reminder just how complex and complicated it can be proving copyright infringement. Funky Films involved a claim that the award winning Home Box Office mini-series “Six Feet Under” infringed Funky Films’ screenplay “The Funk Parlor.” At issue on appeal was the district’s court conclusion that “The Funk Parlor” and “Six Feet Under” were not substantially similar.

In order to bring a claim for copyright infringement, a plaintiff must establish (1) ownership of a valid copyright, and (2) copying of protected elements of the plaintiff’s work. Ordinarily, ownership is established by way of a copyright registration certificate and tends not to be the subject of much debate. Courts spend most of their time and effort analyzing the elements of the infringement prong. Absent evidence of direct copying, “proof of infringement” involves fact-based showings that the defendant had “access” to the plaintiff’s work and that the two works are “substantially similar.”

In Funky Films, the district court assumed that the defendant had access to the plaintiff’s work. Ordinarily, in order to establish “access” a plaintiff must show that the defendant had an opportunity to view or copy the plaintiff’s work. This opportunity must be a “reasonable opportunity” and not a “bare possibility” in the sense that anything is possible.

Access can be established by way of circumstantial evidence. A court will consider either (1) a particular chain of events which establishes a link between plaintiff’s work and the defendant’s access (e.g., dealings with a movie studio or record label), or (2) that the plaintiff’s work has been widely disseminated.

After establishing access, a court will turn to whether the two works are substantially similar. In the Ninth Circuit, substantial similarity is inextricably linked to the issue of access. This is known as the “inverse ratio rule” and requires lower standard of proof of substantial similarity when a high degree of access is shown.

Proof of substantial similarity is satisfied by a two part test of extrinsic similarity and intrinsic similarity. The extrinsic test is objective in nature and requires the plaintiff to identify specific criteria which it alleges have been copied. The intrinsic test is an examination of an ordinary person’s subjective impression of the similarities between the two works, and is the exclusive province of the jury. Since Funky Films addressed the district court’s grant of summary judgment, the court’s focus was the extrinsic test.

Applying the extrinsic test the Ninth Circuit found that at a very high level of generality, both works shared certain plot similarities. However, this would not be enough to support plaintiff’s burden as general plot ideas are not protected by copyright law. After substantial review of the plot, characters, themes, setting, mood, pace, dialogue, and sequence of events of the two works, the court found no similarities and upheld the district court’s grant of summary judgment.

The Ninth Circuit’s decision in Funky Films is a reminder that satisfying the extrinsic test can be difficult and require substantial proof. The extrinsic test often requires analytical dissection of a work and expert testimony. In cases such as Funky Films the focus is not on basic plot ideas for the stories, but articulable similarities between protectable elements (e.g., not scenes a faire) of the two works.

Last week Keith Urban, the Grammy nominated country singer from Australia, sued Keith Urban, a New Jersey painter, for use of the website www.keithurban.com. The suit filed in federal court alleges that Keith Urban, the painter, is infringing on the singer’s trademark rights by misleading internet users into believing that the website is owned by the singer. The website, which has been owned and registered by the painter since 1999, sells oil paintings through the website. Upon entering the site users see the following: “You have reached the site of Keith Urban. To those who don’t know, oil painting is one of my hobbies.” Users are then directed to a link which displays several paintings. The singer claims this use infringes on the Keith Urban trademark by violating the Anticybersquatting Consumer Protection Act, the Federal Trademark Dilution Act, and federal unfair competition laws. This article will examine the claims against the painter under the Anticybersquatting Consumer Protection Act.

The Anticybersquatting Consumer Protection Act (ACPA), established in 1999, provides trademark holders protection from cybersquatters. Cybersquatting is registering and using a domain name in bad faith with the intent of profiting from the goodwill created by another’s trademark. Cybersquatters often seek to sell the domain name to the trademark holder at an inflated price. In the early days of the internet, who ever registered a domain first had rights to that domain name. Many individuals bought names hoping to later sell them for exorbitant sums of money. For example, the generic domain name business.com sold for 7.5 million dollars in 1999. Concerned about this environment as it relates to federally registered trademarks, Congress passed the ACPA. The ACPA gives trademark owners legal remedies against defendants who cybersquat.

In this case, Keith Urban, the singer, alleges that the Keith Urban, the painter, is cybersquatting on the domain name www.keithurban.com. In order to receive relief, the singer must show that the painter:

1) has a bad faith intent to profit from the registered trademark (Keith Urban); and

2) registers, traffics in, or uses a domain name that is identical, confusingly similar, or, in cases of famous marks, dilutive of a mark that is distinctive or famous at the time the domain name was registered.

The Act defines many non-exclusive factors that show bad faith. These include offering to sell or transfer the domain name for financial gain; acquiring similar domain names relating to the same mark; diverting consumers from the owner’s online location to a site accessible under the domain name that harms the goodwill of the mark; supplying false information when registering the domain name; and not using the site for a bona fide noncommercial or fair use purpose.

The court will consider these factors to determine if the painter acted in bad faith in obtaining the domain name. Examining the website, it appears that the painter uses his domain name for commercial purposes, specifically to sell paintings as well as advertisements. Also, the web site does not state that the painter is not the famous singer. In fact, the web page subtly implies that the painter and the famous singer are the same. The message that states, “To those who don’t know, oil painting is one of my hobbies” implies that the owner is someone well known. This creates the appearance that the singer is the owner of the site and also paints as a hobby. The web page also stresses that the paintings are available for sale in a “very limited edition.” This language may cause unwitting fans to purchase limited art work of their favorite singer. These factors show bad faith.

On the other hand, no evidence suggests that the painter is seeking to sell the domain name for a profit. The painter is selling his art but on a very limited basis. The painter does not disclaim that he is not the singer, but he also does not proclaim this fact. A more significant factor favoring the painter is that he registered the domain name in 1999, and the domain name he registered was his actual name. Based on these facts, the court will determine if the painter acted in bad faith.

In addition, the singer must prove that his trademark was famous or distinctive when the painter registered the domain name. The painter registered the domain name in May, 1999. Although the singer was well known in Australia at this time, he was not well known in the United States. In October 1999, he released a self-titled album which produced three top ten country singles over the next two years. In 2001, he won awards for top male country vocalist cementing his status as a star in the music industry. The singer, however, must prove that his trademark Keith Urban was famous at the time the painter registered the domain name in May, 1999. This will be difficult for the singer to establish considering the above facts. If the singer is unable to prove this he was in fact famous at the time of registration, he will not be eligible for relief under the ACPA even if the painter acted in bad faith.

This is not the only recourse for the singer. The singer has also sued the painter on other federal trademark grounds as well as for unfair competition. Although the singer might prevail on these claims, the painter’s registration and use of the domain name before the singer’s mark became famous will be difficult to overcome.

The Motion Picture Association Says “Yes!”

Last month, in a lawsuit filed in the U.S. District Court for the Southern District of New York, the Motion Picture Association of America (MPAA) companies sued Load ‘N Go Video, a small company that loads customer purchased DVDs onto their personal iPods, for copyright infringement and violating the Digital Millennium Copyright Act (DMCA).

Based out of Boston, Load ‘N Go was founded in 2005 to help consumers get video content on to their portable media players, such as iPods. Load ‘N Go sells iPods and DVDs to their customers, who pay the company an additional charge to load purchased DVDs onto their iPod or other portable video player. Load ‘N Go then sends both the customized iPod and original purchased DVDs back to the customer.

Paramount Pictures, Twentieth Century Fox, Universal Studios, Warner Bros Entertainment, Disney Enterprises, Columbia TriStar Television and Columbia Pictures

The MPAAs describe in its complaint that before releasing their copyrighted works in DVD format, they employ a Content Scramble System (CSS), which is an encryption-based DVD access control and copy prevention system that provides for protection of copyrighted content. According to the MPAA, the service provided by Load ‘N Go circumvents the CSS, thus violating the DMCA. The MPAA further highlights that Load ‘N Go has not been granted a license to copy, distribute or exploit their copyrighted works or to circumvent the CSS.

Technically and legally speaking, the MPAA makes valid points, as the DMCA prohibits the circumvention of copy protection. However, taken to its logical extreme, a buyer could be subject to legal liability for ripping purchased DVDs at home without first seeking permission or purchasing the content again, through a service provider such as iTunes, for specific portable media player use. Critics note that the studios are effectively attempting to force consumers to buy the same content twice—once on DVD and another time in a format suitable for the iPod or other portable media device.

Load ‘N Go asserts that the process it uses does not involve decryption and further, that it is engaging in “fair use” for copyright purposes and that such fair use trumps the MPAA’s claims under the Copyright Act and the DMCA. Fair use is a doctrine that allows limited use of copyrighted material without requiring permission from the rights holders. Section 107 of the Copyright Act of 1976 contains a list of various purposes for which the reproduction of a particular work may be considered “fair” and lays out four factors to be considered in determining whether or not a particular use is fair:

1. the purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes;

2. the nature of the copyrighted work;

3. 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.

(17 U.S.C.§ 107.)

Although there is historical precedent of the fair use doctrine with copying and backing up CDs and software, the MPAA distinguishes DVDs because of their encryption copy protection. This area of law is still highly controversial and hotly contested. To date, the motion picture studios have been successful in protecting its copyrighted works. However, with the rapid growth and expansion of the Internet and portable media devices, the stage is set for new interpretations and/or exceptions to be carved out of the DMCA.

Stay tuned…

By Andrea Anapolksy

In the wake of jury selection for the Coco-Cola Co. theft trade secrets trial and Apple Computer’s two-year quest to discover who leaked trade secret information about an unreleased Apple product to several online blog sites, misappropriation of a company’s trade secrets may have become increasingly more difficult to prevent. This article will be the first of a two-part series which examines the trade secrets doctrine and recent developments related to it. This article in particular will assess the doctrine of trade secrets under California law and will offer available remedies on avoiding misappropriation.

Treatment of Trade secrets under California law.

Under California law, the trade secrets doctrine is found primarily in two statutes: the California Uniform Trade Secrets Act, Civil Code §§ 3426 et. seq., (the “UTSA”) and Penal Code §499c.

The penal code provides that anyone who intends to “deprive or withhold the control of a trade secret from its owner” or has the “intent to appropriate a trade secret to his or her own use” or to the use of someone else, may be guilty of theft. (Penal Code § 499c)

The Civil Code, provides the definitions to “misappropriation” and “trade secrets”. The term “misappropriation” has a specific legal meaning and is divided into two distinct types of misuse: acquisition by improper means, and the use or disclosure without express or implied consent. (Civil Code § 3426.1) Under the first type of misuse, “improper means” may include: “theft, bribery, misinterpretation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.” (Civil Code § 3426.1(a)) Under the second type of misuse, courts have extended the definition to capture situations in which a former employee’s use or disclosure of confidential customer information to solicit new customers or accounts for a new employer constitutes the “misappropriation” of a trade secret.” (Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Garcia, 127 F.Supp.2d 1305, 1306 (C.D. Cal. 2000))

In an effort to reflect California’s commitment to protect proprietary business information, California courts constructed a broad definition of “trade secrets” that often captures information commonly and frequently accumulated in the normal course of running a business. Under California law, a trade secret may include a pattern, formula, program, device, method, technique, or process. While these examples may not appear to rise to the level of a protection deserving of source code, for example, such information may be eligible for protection as a trade secret if such information has two salient characteristics: (1) it gains independent (actual or potential) economic value from not being generally known to the public or to other parties (competitors, associates) which could obtain economic value from its disclosure or use; and (2) it is subject to efforts that are reasonable under the circumstances to maintain its secrecy. (Civil Code § 3426.1(d)) Therefore, as long as a company takes reasonable measure(s) to protect what it considers proprietary business information, and if the value of the information is actually or potentially based on the fact that it is a secret, then California courts will consider extending the trade secrets doctrine to protect customer lists, plans, spreadsheets, corporate records, offers and so on.

Not only is it pertinent to understand what types of proprietary information may benefit from protection under the trade secrets doctrine, it is also worth mentioning that even if employers do not actually know of an employee’s misappropriation of a former employer’s trade secret, the current employer may be held liable. Under the UTSA, liability is based on constructive knowledge, not actual knowledge. (Civil Code § 3426.1(b)(2)(B)(ii)(iii)) This standard may implicate an employer in situations where an employer should have known of the misappropriation, as shown in one case where an employer repeatedly used proprietary information which had been previously protected as a trade secret by an employee’s former employer. (Cadence Design Systems, Inc. v. Avant! Corp., 29 Cal. 4th 215 (2002)) While the current employer did not actually know of the misappropriation, the Court stated that the employer’s repeated use of such proprietary information was one factor which it relied on to impute constructive knowledge of the misappropriation to the current employer. (Id., at 226) Of course, the standard of constructive knowledge is fact-specific, but it is something to keep in mind.

Remedies to Mitigate Misappropriation.

The most important step toward protecting a company’s trade secrets is for the hiring party to always reduce its intentions to writing. As will be discussed in a subsequent article, California Courts generally do not uphold non-competition agreements. An alternative is to prepare nondisclosure agreements. While nondisclosure agreements vary—depending on the nature and scope of the disclosure, the parties involved, and the value of the trade secret—most, if not all nondisclosure agreements should include a clear description of the trade secret, permissible uses of the trade secret, a duty of confidentiality, a remedy for non-compliance with the duty of confidentiality (such as injunctive relief), a duty to disclose prior agreements which could prevent the employee from using proprietary information acquired from a prior employer and the term of the agreement (which may last indefinitely or until a certain event, such as when the information is released to the public through a channel other than misappropriation). While it is highly improbable that any company can prevent the misappropriation of its trade secrets, creating a nondisclosure agreement, among several steps it should take to help mitigate potential misappropriation and liability.

In 2006, Federal District Courts throughout the country were asked to decide if purchasing and using trademark-protected keywords to trigger internet advertising constitute trademark violations as contemplated by the Lanham Act. Unfortunately for advertisers, these rulings were inconsistent. In 2007, this trend continues with the Eastern District of Pennsylvania ruling in J.G. Wentworth v. Settlement Funding, LLC, No. 06-0597 (E.D. Pa. Jan. 4, 2007). In J.G. Wentworth, the court siding with advertisers, ruled that using trademark-protected words to trigger internet advertising does not violate trademark law.

J.G. Wentworth (“Wentworth”) and Settlement Funding (“Settlement”) are finance companies that specialize in providing immediate cash payments in exchange for the rights to future payments from structured settlements, annuities, and other assets. Plaintiff, Wentworth, is the market leader for these types of products and holds trademarks that are heavily promoted through television and internet advertising. Wentworth sued Settlement for using Wentworth’s trademarks to draw internet traffic to Settlement’s website.

Settlement used Wentworth’s trademarks in two ways. The first manner in which Settlement used the trademarks was through Google’s AdWords program. Using Google’s internet search engine, internet users search Google’s database of websites by entering keywords. Based on these keywords, Google presents an ordered list according to relevancy to the user. The user then is able to click on any website link they desire. With Google’s AdWords program, advertisers can place bids on certain keywords. When the advertiser’s keyword is entered into the search engine, the advertiser’s link to their website is displayed in the “Sponsored Links” section of the web page. Each time a user clicks on this link, the advertiser pays Google a fee. Settlement used keywords “J.G. Wentworth” and “Wentworth” to increase traffic to their website. Whenever a user typed in the keyword “J.G. Wentworth,” a sponsored link advertising Settlement’s website would appear alongside the other search results. Wentworth maintained that Settlement’s use of the J.G. Wentworth trademark in this manner infringed upon plaintiff’s trademark rights.

The second manner in which Settlement used Wentworth’s trademarks was in the keyword portion of Settlement’s meta tags of its website. Meta tags are hidden code imbedded in websites to help search engines determine the relevancy of web pages to particular search terms. Wentworth asserted that Settlement used plaintiff’s trademarks in their meta tags to increase traffic to their website whenever the term “J.G. Wentworth” was searched. Whenever a user typed in “J.G. Wentworth” into a search engine, links to Settlement would appear in the search results. Wentworth also claimed that this use of Wentworth’s marks infringe upon their trademark rights.

Based on these uses, Wentworth sued Settlement for intentionally confusing customers as well as diverting potential customers from their website to Settlement’s site. Wentworth claimed that not only was defendant stealing customers, Settlement was eroding the distinctiveness of Wentworth’s mark causing loss profits for Wentworth.

To determine if the there was a trademark violation, Wentworth needed to establish that (1) the mark is legally protectable; (2) the mark is owned by Wentworth; and (3) Settlement’s use of the mark is likely to create confusion concerning the source of the goods and services. The issue in this case centered on the third prong, specifically, did Settlement use the mark in commerce and did that use create consumer confusion.

The court first addressed whether or not the purchase and use of a trademark-protected keyword to trigger internet advertising constitutes a use in commerce as contemplated by the Lanham Act. Courts have been divided on this issue. Some courts have taken the position that there can be no liability unless a trademark is used in a way that identifies the products and services. (Wells Fargo & Co. v. WhenU.com, Inc., 293 F. Supp. 2d 734, 757 (E.D. Mich. 2003)). Since the meta tags and the Google AdWords program are invisible to the public and do not identify the source of the goods, there can be no “use” of the trademark.

Other courts have taken the opposite approach on this issue. In examining a similar issue concerning Google’s AdWords program, a New Jersey District Court held that using this technology did satisfy the “use” requirement. (Buying for the Home, LLC v. Humble Abode, LLC, 2006 WL 3000459 (D.N.J. Oct. 20, 2006)). The court reasoned that purchasing another’s trademark to trigger advertising was a “use” because it entailed a purchase in commerce based on the value of another’s trademark while being used to trigger advertising for goods and services. Siding with the New Jersey court, the present court found that Settlement’s uses of Wentworth’s trademarks constituted “use” under the Lanham Act.

Finding that there was a use of the mark, the court had to determine if that use created a likelihood of confusion. Likelihood of confusion exists where “consumers viewing the mark would probably assume that the product or service it represents is associated with the source of a different product or service identified by a similar mark.” (Checkpoint Sys., Inc. v. Check Point Software Techs., Inc., 269 F.3d 270, 280 (3d Cir. 2001)). Courts have reasoned that initial interest confusion is actionable under the Lanham Act. Initial interest confusion occurs when a competitor misleads a potential purchaser into an initial interest in the competitor’s goods by using another’s trademark. This confusion is actionable even if confusion as to the source of the goods would be dispelled by the time the goods are sold.

The court in this case acknowledged a Third Circuit opinion that did not apply initial interest confusion to meta tags and rejected a Ninth Circuit argument that found confusion does occur because the web-user is “directed” to certain websites. The court here held that as a matter of law, using Google AdWords and meta tags did not result in any actionable likelihood of confusion. The court based this decision on the belief that users choose among the search results presented to them. Users are not forced or “directed” to particular sites, and therefore, no initial interest confusion exists.

Since the court was unable to find a likelihood of consumer confusion from Settlement’s use of Wentworth’s trademarks, the court found for Settlement. Even though courts have gone back and forth on these issues, the Eastern District of Pennsylvania was the first court to rule as a matter of law that even if plaintiff’s trademarks are used to trigger ads or search results, plaintiff will lose if the trademarks are not displayed. Despite this ruling, courts are still widely split on this issue and will remain so until the Supreme Court rules.