Intellectual Property

Section 2(a) of the Lanham act bars the registration of “scandalous, immoral or disparaging trademarks.” The USPTO has used this applied this provision to refuse the registration of marks such as F**K PROJECT, PORNO JESUS, ASSJACKED and NO $#!+.  The USPTO also invoked this provision when it upheld an examiner’s refusal to register the mark THE SLANTS for a musical band on the grounds that it was offensive to Asian-Americans.  The band appealed the refusal to register to the Federal Circuit.

The question on appeal was whether Section 2(a)’s prohibition on scandalous, immoral or disparaging trademarks is constitutional. The government defended the prohibition on the grounds that it disapproves of the messages conveyed by disparaging marks.   The Federal Circuit noted that this prohibition does not further the Lanham Act’s purpose and preventing consumers from being deceived. This reason for denial of registration is for “reasons quite separate from any ability of the mark to serve the consumer and investment interest underlying trademark protection.”

The Federal Circuit found that Section 2(a)’s prohibition on registering disparaging marks is a content-based regulation which is presumptively invalid. Content-based laws – those laws that target speech based on its communicative content – are presumptively unconstitutional and maybe justified only if the government proves that the laws are narrowly tailored to serve a compelling state interest.  The refusal to register a trademark because it is disparaging results from the government making a moral judgment based solely on the mark’s expressive content.   The Federal Circuit found that the government’s desire to prohibit disparaging marks and the messages they convey is not a legitimate and compelling state interest.  Based on this analysis, the Federal Circuit found this provision of Section 2(a) to be unconstitutional.

Subsequent to the Federal Circuit’s opinion, the band pushed the USPTO to immediately register its mark.  In response, the USPTO said that it would suspend the registrations of all disparaging trademarks while it considered appealing the Federal Circuit’s ruling to the United States Supreme Court. Commentators believe that the US PTO will likely appeal the Federal Circuit’s ruling to the Supreme Court.

The Federal Circuit’s opinion may open the door for the registration of marks that may be potentially disparaging and new applications for marks previously refused registration based on Section 2(a).  Further, the Federal Circuit’s opinion may have an impact on the case of Washington Redskins football team which is appealing the 2014 revocation of its REDSKINS trademark on the grounds that it was offensive to Native Americans.

When you hear the name of someone you can’t place or don’t know much about, what do you do?  Chances are, you “Google” them.  Well that is what attorneys are doing to learn more about prospective jurors too!  But they are not stopping there.  They are looking at a number of social media sites, such as Facebook, Twitter, and LinkedIn to learn about the profiles, likes, dislikes, friends, hobbies, biases, religion, and preferences of individuals in the jury pool.  This practice has raised a number of issues related to ethics, privacy, and responsibility.  To date, courts have taken positions ranging from banning these searches to practically requiring them.

Ironically, the use of social media to screen jurors is a key issue in current litigation where Oracle is suing Google in the Northern District of California for allegedly violating the copyright on its Java API code.  Originally, the parties wanted potential jurors to fill out a two-page questionnaire.  Then the parties would spend a day or two evaluating the questionnaires before actually selecting a jury.  But Judge Alsup was suspicious as to why it would take so long to evaluate two-page forms, so he asked the parties if they were planning to use social media to investigate potential jurors based on the information provided.  Bingo!  That is exactly what they were planning to do.  As a result, the questionnaire was scrapped, but that still left open the question of what Internet searches would be permitted during jury selection and the trial.

Judge Alsup addressed these issues in his order last week noting that the “American Bar Association issued an opinion that, within limits, it is ethical for counsel to conduct Internet searches on prospective jurors.”   But the ABA cautioned that judges may limit the scope of searches if necessary under certain circumstances.  California has not issued a rule on the ethical scope of such Internet searches, and the California State Bar has not issued an opinion.

While Judge Alsup stopped short of banning social media searches during jury selection, he expressed misgivings and implored Oracle and Google to voluntarily refrain from scouring the jurors’ social media activity before and during the trial.  Judge Alsup cited three primary arguments against the searches.  “The first reason is anchored in the danger that upon learning of counsel’s own searches directed at them, our jurors would stray from the Court’s admonition to refrain from conducting Internet searches on the lawyers and the case.”  Second, the parties may use information about the jurors to create analogies or make arguments that are targeted at specific jurors.  Judge Alsup noted that “if a search found that a juror’s favorite book is To Kill A Mockingbird, it wouldn’t be hard for counsel to construct a copyright jury argument (or a line of expert questions) based on an analogy to that work and to play upon the recent death of Harper Lee, all in an effort to ingratiate himself or herself into the heartstrings of the juror.  The same could be done with a favorite quote or with any number of other juror attitudes on free trade, innovation, politics, or history.”  Third, Judge Alsup acknowledged the need to protect the privacy of the potential jurors, who “are not celebrities or public figures.”

If Oracle and Google agree to the voluntary ban, then they will be given more time to question the potential jurors during jury selection.  If they do not agree, then each side will have to explain to the potential jurors the “specific extent to which it (including jury consultants, clients, and other agents) will use Internet searches to investigate and to monitor jurors, including specifically searches on Facebook, LinkedIn, Twitter, and so on, including the extent to which they will log onto their own social media accounts to conduct searches and the extent to which they will perform ongoing searches while the trial is underway.”  The potential jurors “will then be given a few minutes to use their mobile devices to adjust their privacy settings, if they wish.”  Then until the trial is over, each side will be permitted to view online only what it told the potential jurors it would review and nothing more.

But, is looking at someone’s public presence on social media really any different than driving by their house on a public street or asking them questions about likes and dislikes during jury selection?  It could be.  For example, do the potential jurors know that their social media posts and profiles are publicly accessible, or do they think that only their “friends” can see them?  Do they even know how to limit access to their social media accounts so that only their friends can see them?  What if their account allows friends of a friend to see their posts?  Who knows, one of the lawyers could fortuitously be a friend of a friend of a potential juror.  Also, will there be a chilling effect that causes large numbers of jurors to avoid jury service for fear that something in their social media accounts will be revealed in court?

On the other hand, failure to perform social media searches raises the risk of seating a juror who lied during voir dire or of failing to identify online juror misconduct during a trial.  For example, in Sluss v. Commonwealth, 381 S.W.3d 215, 226-227 (Ky. 2012), two jurors lied about their relationships to the victim’s mother.  A later review of their Facebook profiles revealed that both jurors were “friends” with her.  As another example, review of online posts during a trial can reveal instances where jurors are improperly talking about or researching the case.

In addition, some court have penalized parties who did not timely use searches to ferret out jury bias.  For example, after the trial in Burden v. CSX Transp., Inc., No. 08-cv-04-DRH, 2011 WL 3793664 (S.D. Ill. Aug. 24, 2011), the defendant’s online searches revealed that certain jurors failed to disclose relevant information on questionnaires and during voir dire.  But the Court said it was too late stating “defendant’s motion for a new trial based on juror dishonesty must be dismissed because the basis of defendant’s objections might have been known or discovered through the exercise of reasonable diligence.”  In another case, Johnson v. McCullough, 306 S.W.3d 551 (Mo. banc 2010), the Missouri Supreme Court suggested that competent representation in light of advances in technologies imposes a duty to conduct certain types of online searches during voir dire. Specifically, the court stated that “[l]itigants should not be allowed to wait until a verdict has been rendered to perform a Case.net search for jurors’ prior litigation history when, in many instances, the search also could have been done in the final stages of jury selection or after the jury was selected but prior to the jury being empanelled.”

Given the variation in rules across jurisdictions and judges, attorneys need to be keenly aware of the applicable rules for investigating potential and actual jurors in their cases and the risks associated with failure to perform the allowable searches.

The Federal Circuit Court of Appeals recently addressed an issue of first impression: what is the “actual notice” required under 35 U.S.C. §154(d) for a patent owner to recover damages for a defendant’s infringing conduct that occurred before the patent issued?

Most people assume that a plaintiff cannot recover damages for patent infringement for infringing actions that took place before the patent issued (pre-issuance damages). However, the American Inventors Protection Act of 1999 does for just that. Section §154(d) provides that a patent owner can recover damages from the defendant infringer for infringement that occurred after the patent application was published if the defendant had actual notice of the published patent application and if the invention claimed in the published patent application is substantially identical to the invention claimed in the issued patent. For patent litigators, the situation rarely exists because the published claims are almost always amended during prosecution, resulting in different claims in the issued patent.

Rosebud LMS, Inc. sued Adobe Systems, Inc. for infringement of three different patents, from 2010 through 2014 in the district court of Delaware. The first and second cases were dismissed. The third case, filed in 2014, alleged that Adobe infringed Rosebud’s U.S. patent no. 8,578,280. The ‘280 patent and was a continuation of the second patent, which was a continuation of the first patent. All three of the patents covered methods for allowing collaborative work on a computer network.

Adobe moved for summary judgment on the grounds that Rosebud had no remedy. Adobe contended that Rosebud was not entitled to damages after the patent had issued because Adobe had ceased using the technology in 2013, ten months before the ‘280 patent issued. Adobe also argued that Rosebud was not entitled to pre-issuance damages under §154(d) because Adobe had not received actual notice of the published ‘280 patent application.

The trial court granted the summary judgment for Adobe, and Rosebud appealed.
The Federal Circuit affirmed the decision, noting that this was a case of first impression.

On appeal, Adobe showed that there was no disputed question of fact as to whether it had actual acknowledge of the ‘280 patent. Adobe also argued that the court should interpret §154(d) to require that a patent applicant actively provide notice of the published patent application to a potential infringer in order to recover pre-issuance damages.

The appellate court agreed with Adobe and held that §154(d) requires actual notice, not constructive notice, as Rosebud had argued. However, the court disagreed with Adobe that §154(d) requires an affirmative act by the patent applicant to notify the potential infringer. The court held that “actual notice” should be interpreted according to its ordinary meaning – knowledge – and is not limited to an affirmative act of notice by the plaintiff. (Id. at *5.)

The court explained, at id., that there are good policy reasons to support Adobe’s proposed interpretation of §154(d), but that Congress must amend the statute:

“Requiring the applicant to affirmatively provide notice to potential infringers is in line with the extraordinary nature of statutory pre-issuance damages. Moreover, a strict rule requiring notification by the applicant is simpler to implement and does not leave the accused infringer in the difficult situation of having to rebut allegations that it knew of the published application. If Congress wishes, it can amend the statute to require an affirmative act by the patentee. We cannot.”

The Federal Circuit quickly disposed of Rosebud’s three arguments that Adobe had actual knowledge of the published ‘280 patent application. First, the court held that Adobe’s knowledge of the grandparent patent to the ‘280 patent is irrelevant, as §154(d) requires that the invention claimed in the published patent application be substantially identical to the invention claimed in the issued patent. Adobe’s knowledge of the grandparent patent did not give it knowledge of the claims of the issued ‘280 patent.

As to Rosebud’s second argument, the appellate court found it “border[ing] on the frivolous” to suggest that a few emails in Adobe’s possession referring to Rosebud more than two years before the ‘280 patent application was published were sufficient evidence to show that Adobe monitored Rosebud’s patent applications and would have found the published ‘280 application.

As to Rosebud’s third argument, the Federal Circuit held that it was not reasonable to expect that Adobe’s counsel would have searched for related patent applications in the second litigation when the second litigation had not even reached claim construction.

Thus, while it is important in any patent infringement case to consider whether pre-issuance damages are possible, they are still a highly unusual remedy and may become even more so in the future. Patent applicants who have published applications that may lead to infringement actions should evaluate the need to notify potential infringers pre-issuance and the consequences of such notification.

On February 16, 2016, Magistrate Judge Sheri Pym in the United States District Court for the Central District of California issued an order compelling Apple, Inc. to provide technical assistance to the F.B.I. so it can access an iPhone 5C that belonged to a shooter in the recent San Bernardino, California attack.

The order, which issued without obtaining Apple’s initial input, requires Apple to write new software and take other measures to disable passcode protection on the attacker’s iPhone. The court issued the order under 28 U.S.C. § 1651, the “All Writs Act,” which authorizes the United States federal courts to “issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” The order also allowed Apple to make a request to the court for relief from compliance with the order if such compliance would be unreasonably burdensome. Apple made this request via a motion to vacate the order on February 25, 2016. In its motion to vacate the order, Apple raises three general arguments.

First, Apple argues that the relief the government seeks is not justified under an extension of the All Writs Act because law enforcement assistance by technology providers is already addressed by existing laws that specifically omit providers like Apple from their scope. Apple argues the Communications Assistance for Law Enforcement Act (“CALEA”), 47 U.S.C. § 1001 et seq., specifies when private companies must assist law enforcement in the decryption of electronic communications obtained during surveillance, and the nature of the assistance such companies must provide. Specifically, under CALEA a company has no obligation to assist law enforcement where the company does not retain a copy of the decryption key, which Apple says it does not have in this case. Thus, Apple asserts that Congress opted not to provide courts with the authority to compel companies like Apple to assist law enforcement in cases such as this one where Apple designed and manufactured the device but did not retain a decryption key. Therefore, Apple says the government’s attempt to use the All Writs Act to expand the obligations imposed by CALEA is improper and violates the separation of powers doctrine.

Second, Apple argues the Supreme Court’s decision in United States v. New York Telephone Co., relied upon by the government, does not apply. In New York Telephone Co., the Supreme Court held that an order under the All Writs Act was proper because it was consistent with Congress’s intent to compel third parties to assist the government in the use of surveillance devices, and it satisfied a three-part test imposed by the Court. Here, however, Apple argues it does not satisfy the three-part test. Apple says nothing connects it to the case such that Apple could be ordered to help the government because Apple is a private company that does not own or possess the phone at issue, Apple has no connection to the data that may or may not exist on the phone, and Apple is not related in any way to the events giving rise to the investigation. Further, Apple argues the order would impose an oppressive burden on Apple and those who use an iPhone because the order would require Apple to develop new software that destroys the security features that Apple has spent years building. In addition, Apple argues the government failed to demonstrate that the requested order was necessary because, without consulting Apple or reviewing its public guidance regarding iOS, the government changed the iCloud password associated with the attacker’s account, thereby preventing the phone from initiating an automatic iCloud back-up.

Third, Apple argues the order would violate both the First Amendment’s right to freedom of speech and the Fifth Amendment’s due process clause. As to the First Amendment, Apple asserts computer code is treated as speech within the meaning of the First Amendment and the order seeks to compel Apple to write new software that advances views contrary to its position on data security and the privacy of citizens. As to the Fifth Amendment, Apple argues that conscripting a private party, with a limited connection to the crime, to do the government’s work violates Apple’s substantive due process right to be free from arbitrary deprivation of its liberty.

In addition to Apple, numerous third-parties have filed amicus briefs on all sides of the debate, raising various issues. These issues range from arguments that back doors would weaken technology companies’ ability to protect their customers’ information, which would put customers at heightened risk of being hacked, to arguments that the use of outdated rules improperly expands government power without Congress’ approval. On the other side, some argue this is an isolated incident involving a single iPhone and access to this particular iPhone is necessary to keep Americans safe from future attacks.

The parties are expected back in court on March 22, 2016, when the court may entertain further oral argument on the issues.

Kylie Jenner has finally decided to step out from behind her older sisters and get to work on her own independent ventures. In furtherance of this desire, Ms. Jenner filed numerous federal trademark applications in April and November 2015. The applications relate to Ms. Jenner’s first name, as well as her full name. As you may know, a trademark provides its user the exclusive right to use the mark in connection with the class of goods in which the mark is registered. For example, the registration of KYLIE for fashion apparel, or handbags, would effectively preclude anyone from utilizing KYLIE in conjunction with that good without first obtaining Ms. Jenner’s permission. You can likely see why this might be a problem.

Ms. Jenner’s attorneys filed the applications in the international classes of goods that cover “All-purpose carrying bags; athletic bags; back packs; cosmetic bags; cosmetic carrying cases; duffle bags; handbags; purses and wallets; tote bags; umbrellas.” The other applications cover goods such as clothing, sleepwear, swimwear, and undergarments; jewelry; and fragrances. Although the registration for the mark KYLIE JENNER should not be too contentious, Ms. Jenner’s team of attorneys also filed two applications for the mark KYLIE for use in “Entertainment in the nature of providing information by means of a global network in the fields of entertainment and pop culture; entertainment services, namely, personal appearances by a celebrity, actress and model” and also “Providing information by means of a global computer network in the field of fashion.” The other KYLIE application covers “Advertising services, namely, promoting the brands, goods and services of other; endorsement service, namely promoting the goods and services of others.”

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In Lexmark International, Inc. v. Impression Products, Inc., No. 14-1617 (Fed. Cir. 2016), the U.S. Court of Appeals for the Federal Circuit decided en banc that a U.S. patent owner’s “first sale” of items in a foreign country does not exhaust the patent owner’s right to sue for patent infringement when those items are later imported into the U.S. In contrast, the Supreme Court in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013) came to a different conclusion under copyright law, finding that the “first sale,” or exhaustion, doctrine allows the owner of a copy of a copyrighted work, which was lawfully made in a foreign country, to import and sell that copy in the United States without further permission from the copyright owner. But, as the Federal Circuit recognized, patent law and copyright law are not always aligned.

The Lexmark dispute arose in conjunction with Lexmark’s toner cartridges for its printers. Lexmark offers its customers the choice of buying a “Regular Cartridge” at full price with no restrictions on its re-use/resale or a discounted cartridge, subject to a single-use/no-resale restriction. Lexmark sold some of the cartridges in the United States and some abroad. Some of the foreign-sold cartridges and all of the U.S.-sold cartridges at issue were sold subject to an express single-use/no-resale restriction.

Lexmark sued Impression for patent infringement after Impression purchased two categories of recycled Lexmark cartridges for resale in the United States. The first category consists of cartridges that Lexmark originally sold abroad, some with and some without the single-use/no-resale restriction, and Impression later imported into the United States for resale. The second category consists of cartridges that Lexmark originally sold in the United States subject to the single-use/no-resale restriction and were later acquired and resold by Impression.

Relying on the doctrine of patent exhaustion, Impression denied liability arguing that Lexmark’s “first sale” had exhausted its U.S. patent rights in all of the cartridges, thus permitting Impression to sell and import them. The doctrine of patent exhaustion, also known as the “first sale” doctrine, addresses the situation where a patented article (or an article sufficiently embodying a patent) is sold by the patent owner or with the authorization of the patent owner. Such “first sales” exhaust the patent owner’s rights to control future sales and use of the patented article and confer on the buyer the authority to engage in certain acts, such as reselling the patented article.

The Lexmark case raised two patent exhaustion questions. First, in light of the Supreme Court’s Kirtsaeng decision regarding copyright exhaustion, does an authorized foreign sale exhaust U.S. patent rights? Second, are post-sale restrictions allowed, or does the Supreme Court’s ruling in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), preclude post-sale restrictions because all patent rights are exhausted by the “first sale”?

In light of these two recent Supreme Court decisions, the Federal Circuit heard Lexmark en banc to consider whether two of its prior holdings regarding patent exhaustion were still good law. In both instances, the Federal Circuit reaffirmed its prior rulings.

As to the first category of cartridges, the Court concluded, consistent with Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), U.S. patent rights are not waived, “either conclusively or presumptively, simply by virtue of a foreign sale, either made or authorized” by a U.S. patent owner. Distinguishing Kirtsaeng, the Court noted that unlike the Copyright Act, the Patent Act does not contain a congressionally prescribed exhaustion rule, much less a definition of infringement subservient to an exhaustion rule.

As to the second category of cartridges, the Court also concluded, consistent with Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), “a sale made under a clearly communicated, otherwise-lawful restriction as to post-sale use or resale does not confer on the buyer and a subsequent purchaser the ‘authority’ to engage in the use or resale that the restriction precludes.” In reaching its decision, the Court found that Quanta addressed a different issue.

Dissenting, Judge Dyk wrote that a foreign sale should exhaust U.S. patent rights absent an explicit reservation of those rights by the authorized seller. He further wrote that the majority’s opinion allowing post-sale restrictions, such as the single-use/no-resale restriction, cannot be reconciled with the exhaustion rule announced by the Supreme Court in Quanta.

There is little doubt that the Supreme Court will be asked to consider these patent exhaustion issues.

If you’ve ever applied for, or researched copyright law, you likely learned one thing above all else: it’s not a perpetual right. So, how, you might wonder, have companies like The Walt Disney Company managed to maintain copyrights on certain creations for almost 100 years? In the case of the Walt Disney Company, the answer is simple. It is powerful enough that it actually changed United States copyright law before its rights were going to expire.

When copyright law was first codified in the United States pursuant to the United States Copyright Act, the copyright duration was limited to 14 years. Today, copyrights can last over 100 years. That’s a huge change, and there are an overwhelming number of copyright experts that will tell you that it is all because of a mouse.

Now that may be a slight overstatement. The copyright duration changed some prior to the creation of Mickey Mouse. The Copyright Act of 1790 included a provision that provided for an additional 14-year term if the creator was alive. Of course, at that point, copyright protection only applied to select creations such as maps and books. But 41 years later, in 1831, the Act was amended to allow for an initial 28-year term, with eligibility for a 14-year extension. Thereafter, in 1909, the Act was changed again to allow for a 28-year renewal instead.

Then the mouse was born. In 1928, Walt Disney released the first Mickey Mouse cartoon: Steamboat Willie. At that point, the work was entitled to protection for 56 years (28 years for the initial term and the 28-year extension). Under the Copyright Act at the time, the copyright on Mickey Mouse should have expired in 1984. But before Disney’s mascot could be pushed into the public domain by operation of law, Disney embarked on a serious lobbying mission to get Congress to change the Copyright Act.

Disney’s lobbying paid off in 1976 when Congress passed legislation which changes the copyright scheme such that individual authors were granted protection for their life, plus an additional 50 years, and for works authored by a corporation, the legislation granted a retroactive extension for works published before the new system took effect. The result was that the maximum term for already-published works was extended from 56 years to 75 years, thereby extending Mickey Mouse’s protection out to 2003.

If the extensions ended there, then obviously Mickey Mouse would be in the public domain right now. But 5 years before Mickey Mouse’s copyright was set to expire, Congress changed the scheme again. In 1998, Congress passed the Sonny Bono Copyright Term Extension Act of 1998, which lengthened copyrights for works created on or after January 1, 1978 to “life of the author plus 70 years,” and extends copyrights for corporate works to 95 years from the year of first publication, or 120 years from the year of creation, whichever expires first. Once again, Mickey Mouse’s copyright protection lived to fight another day. Now, Mickey’s copyright will not expire until 2023. But even that is only 7 years away. The question is: what will Disney do now? Disney would not possibly allow its most famous character to go into the public domain, would it?

Although no one can be certain, if the past is any indication of the future, we can expect that Disney will, assuming they have not already, ramp up the lobbying effort and try to get Congress to pass additional legislation to extend its Mickey Mouse copyright. Whether or not this happens, it is indisputable that Mickey Mouse’s effect on United States copyright law has been profound.

Two weeks ago, the Federal Circuit Court of Appeals limited the factors a district court may consider in determining the amount of attorneys’ fees to award in an “exceptional” patent infringement case. Lumen View Tech., LLC v. Findthebest.com, Inc. (January 22, 2016) 2016 U.S. App. LEXIS 1087.

Lumen was the exclusive licensee of a patent covering a method for facilitating bilateral and multilateral decisionmaking. The method required analyses of preference data from two groups of people. Findthebest.com (FTB) offered a website with a search feature called “AssistMe” that gave the user information on products and services related to the user’s specific input.

Lumen sued FTB in the Southern District of New York for patent infringement. FTB’s counsel told Lumen on several occasions that FTB’s search method did not use a bilateral or multilateral process. Lumen ignored FTB’s statements, and filed its infringement contentions before obtaining any discovery. FTB then filed a motion for judgment on the pleadings on the grounds that the patent was invalid under 35 U.S.C. §101 as directed to an unpatentable abstract idea. The district court ruled in favor of FTB and dismissed the case. FTB then filed a motion seeking a determination that the case was “exceptional” under 35 U.S.C. §285 and for recovery of its attorneys’ fees on that grounds.

The district court ruled that the case was exceptional and that FTB was entitled to fees. The court awarded FTB the lodestar amount with a multiplier of two, for a total of about $300,000. The court found that the multiplier was justified in order to deter Lumen from filing similar frivolous lawsuits in the future. The court said that the lodestar amount was too small, because the case had been resolved at an early stage, to be an effective deterrent, and so chose to use the multiplier of two.

On appeal, the Federal Circuit affirmed the district court’s exceptional case ruling. The determination of whether a case is “exceptional” is within the district court’s discretion. The test is the “totality of the circumstances” test set forth by the Supreme Court in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S.Ct. 1749 (2014). The appellate court explained that a district court may find a case exceptional based on the strength of a party’s litigation position (considering the facts and the law) or on the unreasonableness of a party’s litigation conduct. The district court had based its finding on the fact that Lumen did not conduct any pre-filing investigation or infringement analysis, and that Lumen’s own claim construction required the use of preference data from multiple parties. The appellate court held that the district court had not abused its discretion in finding the case exceptional:

“The allegations of infringement were ill-supported, particularly in light of the parties’ communications and the proposed claim constructions, and thus the lawsuit appears to have been baseless. Claim construction was unnecessary before finding noninfringement in this case, especially because Lumen View conceded that the claims require preference data from multiple parties.”

As to the district court’s fee award, the Federal Circuit vacated the award and remanded the case. Lumen had argued on appeal that the district court had impermissibly based its enhancement of the lodestar on the need for deterrence, a factor that was already considered in the finding of an exceptional case.

The appellate court explained that the district court has the discretion to decide the amount of reasonable attorneys’ fees to be awarded under §285. In certain cases, the court may enhance the lodestar amount to consider factors that are not covered by the lodestar. For example, the lodestar may be enhanced when the attorney’s time or hourly rate does not reflect the “true market value” of the work performed because the attorney was particularly specialized or because extraordinary litigation expenses were incurred. Factors that are unrelated to the performance of the prevailing party’s counsel, however, are not appropriate in enhancing the lodestar.

In this case, the appellate court held found that the district court had not justified its decision to enhance the lodestar two-fold. According to the court, deterrence cannot be considered in deciding the amount of attorneys’ fees to be awarded under §285. The court vacated the fee award and remanded the case to the district court for further consideration of the amount to be awarded.

The Ninth Circuit’s recent decision in the case of Dolby Systems, Inc. v. Christenson, focuses primarily on the issue of which party bears the initial burden of proof with regard to a “first sale” defense in a copyright infringement action. As the reader will see, however, this case really provides a cautionary tale as to the consequences a party may face when it plays games during discovery.

Adobe, a software publisher and the copyright holder for titles such as the “Photoshop” series sued Christenson in October 2009 alleging copyright and trademark infringement. (This column will not address the trademark issues.) Christenson ran a website on which he “re-sells” Adobe software, which he purchases from third party distributors apparently without Adobe’s authorization. Adobe claimed that it does not sell its software, but merely licenses them and that Christenson infringed on its copyrights when he “re-sold” its titles. Christenson claimed that his activities were protected under the First Sale Doctrine, claiming that he lawfully purchased the software from third parties, who had also “purchased” the software from Adobe.

Adobe’s lawsuit against Christenson was apparently quite contentious. The Ninth Circuit observed that the lower court proceedings were “punctuated by discovery disputes, sanctions and multiple rulings on the admissibility and exclusion of evidence.” Both parties filed cross-motions for summary judgment. The District Court, after excluding certain evidence offered by Adobe because it had not been produced during discovery, granted summary judgment in Christenson’s favor as to the copyright infringement claim after recognizing that the First Sale Defense applied. Adobe appealed this finding to the Ninth Circuit.

The Ninth Circuit began by first recognizing that Adobe had established a prima facie case of copyright infringement. That is, Adobe had to “prove ownership of a valid copyright and violation by Christenson, the alleged infringer, of at least one of the exclusive rights conferred by the Copyright Act.”   The Ninth Circuit found that Adobe had provided admissible evidence that “established ownership of valid copyrights with a long list of computer software.” The Court then noted that the Copyright Act confers several rights on copyright owners, “including the right of distribution” and that it was undisputed that Christenson had sold copy of Adobe’s copyrighted works on his website without Adobe’s authorization. The Ninth Circuit concluded that “Adobe easily established a prima facie case of copyright infringement.” But that did not end the analysis. The Court then turned to Christenson’s defense under the First Sale Doctrine.

In a copyright infringement action, a defendant may raise the affirmative defense of the First Sale Doctrine which essentially provides that “the owner of a particular copy … lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.… “ (17 U.S.C. §109(a).) The Ninth Circuit recognized the purpose of this defense is to limit a copyright owner’s exclusive distribution rights to the “first sale” only and that once the copyright owner has placed the item into the stream of commerce, the owner “has exhausted [its] exclusive statutory right to control its distribution.” However, it was unclear under prior precedent as to who bore the burden of proof with regard to the First Sale Doctrine. Furthermore, the Ninth Circuit recognized that in digital copyright cases, such as the one before it involving the transfer of software, one crucial factor is to distinguish between a “sale” and a “license.” For more than a century, the U.S. Supreme Court has recognized that the sale of an item can create a defense to a copyright claim while the mere granting of a license will not.

After reviewing the history of the Copyright Act and the amendments thereto, including the issue of the First Sale Defense, the Ninth Circuit recognized that the distinction between a “sale” and a “license” is not always so clear and that it had previously recognized that some software “licensing” agreements actually created a sale. The Ninth Circuit reasoned that to determine whether it was in fact a license, the copyright owner must specify: (1) that it is granting a license; (2) that the license significantly restricts the user’s ability to transfer the software; and (3) that there are notable use restrictions imposed on the user. If a copyright holder cannot satisfy these factors, a court is likely to find that a sale of the software has taken place instead of the granting of a license.

Normally, a defendant raising an affirmative defense bears the burden of proof in establishing the applicability of that defense. The Ninth Circuit concluded that this rule is no different for a defendant asserting the First Sale Defense. That is, the Ninth Circuit held “the party asserting the First Sale Defense bears the initial burden of satisfying the statutory requirements” in that it must show ownership through a lawful acquisition. In essence, “the party asserting a First Sale Defense must come forward with evidence sufficient for a jury to find lawful acquisition of title through purpose or otherwise to genuine copies of the copyrighted software.” Once the defendant has made that showing, “the burden shifts back to the copyright holder to establish such a license or the absence of a sale.”

The Ninth Circuit concluded that this burden shifting procedure made sense because “the copyright holder is in a superior position to produce documentation of any license and without the burden shifts the First Sale Defense would require a proponents prove a negative, i.e., that the software was not licensed.” The court found that this approach was both fair and comported with the legislative history concerning the Copyright Act.

Turning to the case before it, the Ninth Circuit agreed with the lower court that it was undisputed that the defendant had produced evidence that he had lawfully purchased genuine copies of the Adobe software from third party suppliers, i.e. the defendant produced copies of invoices showing his purchases of the software.

Adobe argued that the defendant could not have lawfully acquired the software products because it always licenses its software and does not sell copies of it. However, the Ninth Circuit held that the burden of proof on this issue shifted back to Adobe to come forward with admissible evidence to prove the existence of the claimed licenses. The Ninth Circuit recognized that normally Adobe would produce copies of the specific license agreements so that the court could determine whether in fact a true license had been granted. The Ninth Circuit continued that putting the burden on Adobe of providing copies of the license agreements was not an undue burden since “Adobe and Adobe alone knows the parties with whom it contracts.”

As explained above, there had been a litany of discovery disputes, which apparently included Adobe’s refusal to produce copies of its licensing agreements during discovery. That is, Adobe refused to produce the agreements it had with the “sellers” of the software to Christensen. In fact, it appears that Adobe delayed until after the close of discovery and only in opposing the defendant’s summary judgment motion, to produce these documents. However, the trial court refused to consider this evidence because it had not been produced during discovery and the Ninth Circuit found that it was not error to do so. Given that Adobe, as a result of the exclusion of this evidence, could not come forward with admissible evidence to show that it had granted a license with respect to the software products “re-sold” to the defendant, the Court held that the defendant had met its burden of establishing the First Sale Defense and affirmed the dismissal of Adobe’s copyright infringement claim.

While the Adobe v. Christenson case helped clarify the burdens of proof when the defense of the First Sale Doctrine is raised in a copyright infringement claim, the moral of the case appears that a plaintiff should not “play games” during discovery. Reading between the lines, it is clear that had Adobe timely produced the licensing agreements at issue, it is unlikely that Christenson would have been entitled to summary adjudication of the copyright infringement claims. In fact, Adobe may have even been entitled to judgment in its favor without the necessity of a trial.

In business, there are numerous opportunities for pitfalls, mistakes and errors and they come up in all different legal areas – from basic formation issues to labor and employment to intellectual property. Mistakes and missteps involving intellectual property can be particularly problematic because IP is a company asset; it constitutes a part of (often a significant part of) a company’s valuation. In my 20 years working with start-up companies – and even fully grown-up companies, I have seen mistakes involving company intellectual property prove to be disastrous. With careful planning and good counsel, these mistakes are completely avoidable.

#1. Failure To Transfer the IP From The Founder Into the Company. It is a foundational item for any company – if the company is being formed around a piece of IP or if a piece of IP is intended for use by a company, the company should make sure the founder that owns the IP must contribute it to the company. While a very basic issue, this problem plagues more start-ups than you can imagine. Most often it happens during the informal, pre-formation time frame when founders are kicking around an idea and developing code and no one has consulted a lawyer. Conflict between the founders develop and there is a divergence of opinion on the value brought to the table by the non-developer founders; the developers decide to split with the IP and form a new company. While this will likely generate lawsuits just as soon as the developer’s company is in a financing round, the non-developer founders will very likely not receive as much as they would have had the IP been properly assigned to the company.

How to Avoid This Pitfall: As soon as the project morphs from “dorm-room chit chat” to something real, it’s time to bring in the lawyer and get the material terms of the deal down on paper and make sure the IP is or will be properly assigned to the company.

#2. Entanglements With a Founder’s Former or Present Employer. Most entrepreneurs working on a start-up still keep a day job in order to pay the bills. This can present a problem, especially for a technical founder. If a founder uses their employer’s facilities, computers, equipment, or other technology during company time to develop a new invention for the start-up, this could raise serious issues over IP ownership, especially if the technology is in the same field as the employer. Additionally, it’s very common for employment agreements to include a clause vesting IP ownership with the employer where IP is created using company equipment or facilities.

How to Avoid This Pitfall: In California, an employee is the owner of any inventions developed entirely on his/her own time without using the employer’s equipment, supplies, facilities or trade secret information except where (i) the invention relates to the employer’s business, or research or development of the employer; or (ii) results from work performed by the employee for the employer. Founders that are still employed (or just your ordinary moonlighter) should not use their employer’s equipment or facilities to work on their start-up or side project. Additionally, the start-up should not be in a line of business that relates to that of the founder’s employer.

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