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Viacom V. Youtube: Are Our Internet Privacy Rights Really In Danger?

By: Dale C. Campbell and Serena Crouch, Third Year Law Student at McGeorge School of Law

Internet users and privacy advocates across the nation fear they are losing the continuing battle to protect internet privacy rights. A court decision in a lawsuit between Viacom and YouTube.com is the most recent battlefield regarding data likely to provide the video viewing habits of millions around the world.

In March 2007, Viacom sued YouTube and Google, Inc. in the United States District Court, Southern District of New York, seeking at least $1 billion in damages for alleged copyright infringement. Viacom claims that YouTube built its business by willfully offering Viacom’s copyright protected material such as episodes of “The Daily Show with Jon Stewart” and the cartoon “SpongeBob SquarePants.” Viacom claims that neither YouTube nor its users are licensed to upload its material in the manner it is being used.

Viacom recently sought a court order requiring YouTube to produce various documents, one of which was YouTube’s Logging database. Each time a video is watched, the Logging database records the login ID of the viewer, the IP address of the computer being used, and the time it was watched. Viacom requested this information to prove that Viacom’s protected videos are being watched in a higher proportion than the non-protected videos on YouTube. With this information, Viacom hopes to prove that YouTube is gaining a financial benefit, one prong necessary to prove YouTube is vicariously liable for its users’ infringement of Viacom’s copyrighted material. Viacom also hopes the information can be used to bar YouTube’s defense that its website is capable of substantial non-infringing uses.

YouTube opposed Viacom’s request, claiming the request was unduly burdensome because it would be expensive and time-consuming for YouTube to determine which information in the database is privileged or work product material. However, the Court rejected that argument, holding that YouTube failed to rebut Viacom’s argument that the content of the database does not need to be viewed for privileged information because it simply records the number of times each video was viewed by members of the public. The Court also ruled that production of the database would not be unduly burdensome because the contents, while containing twelve terabytes of information, could be copied onto a few over-the-counter hard drives. Therefore, the burden on YouTube did not outweigh Viacom’s need for the information.

YouTube made a second argument that disclosure of the information violated the rights of third parties because the contents of the database would disclose the viewing habits of its users. YouTube, however, did not provide independent evidence concerning how the database could be used to identify specific users. In response, Viacom argued that the login ID of YouTube’s users is an anonymous pseudonym that users create themselves and could not identify any specific individual without more information. Viacom even cited Google’s own representations on its website that, “[i]n most cases, an IP address without additional information cannot [identify its user].” As a result, the Court found YouTube’s concern regarding privacy rights was speculative and did not outweigh Viacom’s need for the information.

The Court also noted in passing that YouTube had cited the Video Privacy Protection Act (VPPA), which prohibits videotape service providers from disclosing personal information of its customers. However, the Court paid little attention to the law and, in fact, only mentioned it in a single footnote. While some have argued that the Court ignored the VPPA because it narrowly interpreted the statute to apply only to videotape cassette service providers, it seems that even a broad interpretation to encompass videos on the internet would still not have benefited YouTube since YouTube failed to establish that the Logging database actually contained personal information of the viewers.

Internet privacy advocates, such as Electronic Frontier Foundation, argue that this ruling is a “set-back to privacy rights.” The opinion of the Court, however, does not appear to overrule the VPPA nor does it appear to set a new legal precedent for future cases.

For any disclosure of information to fall under the VPPA, the provider must disclose personally identifiable information of its customers. The Court’s ruling is based on a finding that YouTube and Google failed to meets its burden of proving that YouTube’s Logging database contains any personally identifiable information.

Privacy advocates are properly concerned that an IP address is the first step needed to identify a specific person. Once an IP address is obtained, a computer expert can determine the internet service provider and then subpoena the internet service provider to obtain the name of the person assigned the specific IP address. Also, Electronic Frontier Foundation has made the argument that a user’s login ID can identify a specific person if the creator, for example, decides to use their name as their login ID.

While all these arguments are correct, YouTube and Google failed to make these arguments in opposition to Viacom’s request for production of its Logging database. In fact, YouTube failed to refute Viacom’s argument that a user’s login ID is anonymous and, without more information, cannot identify a specific person. YouTube also failed to provide expert information that an IP address in some cases cannot identify a person, while in other cases, with a few simple steps, can be used to identify a specific person.

The Court was mindful of third parties’ rights to privacy, but found, in this case, that the Logging database did not contain such information. The Court never stated that personally identifiable information should not be protected nor did it overrule the VPPA. It simply stated, in its brief discussion, that YouTube and Google failed to prove that their Logging database contains personally identifiable information.

Our internet privacy rights have not been fully eroded . . . yet. Individuals should not fear the possibility of companies suing them individually by using this ruling to obtain their personal information and viewing habits. The Court’s ruling is based on the type of information in YouTube’s Logging database and the arguments (or lack thereof) presented by both sides. Individuals and privacy advocates should not critique the Court for granting Viacom’s motion, rather advocates should be concerned that YouTube and Google did not make a convincing argument that the information stored in their Logging database contains personally identifiable information. The Logging database is being produced because YouTube and Google failed to meet its burden, not because the Court has cut new ground in reducing privacy rights or overruled the VPPA.

Internet Search Adwords: Are Your Trademarks Protected?

Search engine websites sell keywords as a component of their advertising programs. By purchasing an advertising keyword, a business’s advertisement will appear next to the search results whenever a person enters the advertising keyword as a search term. Trademark questions arise whenever a competitor purchases an advertisement keyword that is confusingly similar to the protected mark of another competitor, thereby causing its advertisement to pop up next to the search results.

The Northern District Court recently addressed this issue in Storus Corp. v. Aroa Marketing (2008) WL 449835 (N.D. Cal.). Storus sells a money clip under the mark “Smart Money Clip.” Defendant Aroa also sells money clips in addition to other luxury personal items. Aroa purchased the advertisement keyword “smart money clip” offered by Google as part of its internet advertising program known as “AdWords.” By typing “smart money clip” in Google’s search engine, Aroa’s advertisement would appear to the right of all other search results. Aroa’s advertisement appeared as:

Smart money clip

www.steinhouseonline.com Elegant Steinhouse accessories. Perfect to add to any collection.

Storus sued, claiming that Aroa had used a mark that was confusingly similar to Storus’s valid, protectable trademark. Storus claimed that Aroa’s use of its mark created “initial interest confusion.”

“Initial interest confusion occurs when the defendant uses the plaintiff’s trademark in a manner calculated to capture initial customer attention, even though no actual sale was finally completed as a result of the confusion.” (Intrastellar Starship Services Ltd. v. Epix, Inc., 304 F.3d 936, 941 (9th Cir. 2002).) Initial interest confusion does not mean that a customer purchases one product, believing that they are actually purchasing the product of another. This is known as “source confusion.” Rather, initial interest confusion occurs when a defendant uses a plaintiff’s mark to divert people looking for the plaintiff’s product to the defendant’s website, thereby inappropriately benefiting from the goodwill plaintiff had established in its mark. (See Brookfield Communications, Inc. v. West Coast Entertainment Corp., 174 F.3d 1036, 1058 (9th Cir. 1999).)

In Storus, the Northern District Court found, without discussion, that Aroa had “used” plaintiff’s mark and focused its analysis on whether there was a likelihood of confusion by utilizing the eight Sleekcraft factors. (See AMF, Inc. v. Sleekcraft, 599 F.2d 341, 348-49 (9th Cir. 1979).) However, in the context of infringing use on the internet, the Court first evaluates what has been termed the “internet trinity”: (1) similarity of the marks; (2) relatedness of the goods or services; and (3) the parties’ simultaneous use of the Web as a marketing channel. If the “internet trinity” analysis suggests confusion, the burden shifts to the defendant to prove that the remaining Sleekcraft factors “weigh strongly against the likelihood of confusion.” (See Perfumebay.com v. eBay, Inc., 506 F.3d 1165, 1174-75 (Fed. Cir. 2007).)

The Storus court found a likelihood of confusion after evaluating the internet trinity. The Court also found that defendant had failed to present any evidence concerning a lack of actual initial interest confusion and failed to present any evidence weighing against the likelihood of confusion.

However, the Court came to a different conclusion with respect to the second defendant sued by Storus – SkyMall. Storus contended that SkyMall’s web page infringed its trademark because when a customer typed in the phrase “smart money clip,” the customer was directed to a page showing the Aroa money clip. However, the Court found a lack of factual evidence that SkyMall actually “used” the mark “smart money clip.” The evidence presented to the Court established that the reason the customer was directed to the Aroa money clip was because the search mark phrase “smart money clip” also included the phrase “money clip.” To prevail at trial, Storus will have to prove that SkyMall’s search engine directs a customer searching for “smart money clip” to a page in SkyMall’s electronic catalog that contains the entire phrase “smart money clip.” The evidence presented was insufficient to draw that conclusion at summary judgment.

The findings in Storus are consistent with prior Ninth Circuit opinions prohibiting a defendant from using a plaintiff’s mark in “metatags” by causing initial customer confusion. Although a customer immediately notices upon entering the website that it is not the website of the trademark holder and, therefore, there is no actual source confusion, the misdirection of the user as a result of the embedded metatags violates the initial confusion doctrine.

However, at least one other circuit court comes to a different conclusion. The Second Circuit Court of Appeals that the use of protected marks in metatags does not infringe another’s trademark. The Second Circuit, rather than focusing on the element of confusion, instead focuses on whether a defendant “uses” a mark in commerce by employing hidden metatags. Courts in the Second Circuit have consistently held that there is no trademark “use” if the mark is not placed on any product, good, or service or where the mark is not used in a way that would indicate source or origin. (See 1-800 Contracts, 14 F.3d 400 and FragranceNet.com, Inc. v. FragranceX.com, Inc., 493 F.2d 545, 550 (E.D.N.Y. 2007).) The Second Circuit Court has criticized the Ninth Circuit, accusing it of jumping to the “likelihood of confusion” prong without first properly analyzing whether the mark is “used in commerce.”

Defendants who find themselves appearing in courts in the Ninth Circuit need to focus on the “use” element of trademark infringement and encourage the court to heed the viewpoints set forth by Circuit Judge Berzone in his concurring opinion in Playboy Enterprises, Inc. v. Netscape Communications, 354 F.3d 1020, 1034 (C.A. 9 2004). Judge Berzon argues that the “initial interest confusion” doctrine should not be expanded into situations where a party is never confused. For example, Judge Berzon felt that a different result would occur if an internet advertisement, such as in Storus, clearly stated that the ad is not for the trademark owner’s product. Judge Berzon analogized the situation to a department store carrying multiple brands of jeans. If a customer asked the store clerk where she can locate Levi’s jeans, no trademark violation occurs when the clerk directs the customer to the area of the store containing Levi’s jeans as well as Calvin Klein jeans. Judge Berzon cautioned that the initial interest confusion doctrine should not expand to internet advertisements where a potential customer is simply advised of alternative competitive products through advertisements that clearly do not identify themselves with the mark of another.

Lack of Enablement – A Stronger Tool for Invalidity

One of the requirements of a valid patent is enablement. As set forth in 35 U.S.C. section 112, paragraph 1, a patent’s specification must contain “a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same.” The Court of Appeals for the Federal Circuit has explained that the enablement requirement is met “when one skilled in the art, after reading the specification, could practice the claimed invention without undue experimentation.” AK Steel Corp. v. Sollac, 344 F.3d. 1234, 1244 (Fed. Cir. 2003). Although anticipation or obviousness based on the prior art is a more frequently asserted basis for invalidating a patent in patent infringement litigation, the Federal Circuit’s decision in Sitrick v. Dreamworks, LLC, 516 F.3d. 993 (Feb. 1, 2008) suggests that lack of enablement may be becoming a far more powerful tool.

In Sitrick, the plaintiff owned two patents that covered technology that allows integration of a user’s audio signals or visual image into a preexisting video game or movie. The specifications of the two patents described the invention as it was used in video games, but the claims covered both video games and movies. Dreamworks produced DVDs that included a product that permitted users to add their own voice to movies. Sitrick sued Dreamworks for infringement of both patents.

During claim construction, Dreamworks argued that the claims should be narrowed to cover only video games. The plaintiff opposed that construction, and the court construed the claims as plaintiff requested, to cover both video games and movies.

Dreamworks moved for summary judgment, including for invalidity for lack of enablement. The District Court for the Central District of California granted the motion, finding all of the challenged claims invalid for lack of enablement with respect to movies.

The Court of Appeals affirmed. The court explained that in order to satisfy the enablement requirement, “the full scope of the claimed invention must be enabled.” Sitrick, supra, at 999. The court explained its rationale:

“Enabling the full scope of each claim is ‘part of the quid pro quo of the patent bargain.’ AK Steel, supra, 344 F.3d. at 1244. A patentee who chooses broad claim language must make sure the broad claims are fully enabled. ‘The scope of the claims must be less than or equal to the scope of the enablement’ to ‘ensure that the public knowledge is enriched by the specification to a degree at least commensurate with the scope of the claims.’[citation omitted].”

The court found that because the district court had construed the claims to cover both video games and movies (as the plaintiff had argued), the patents had to enable both embodiments. The specifications described the detailed steps required for integrating a visual image into a video game, but these steps were not usable for the same process in movies and the patents did not describe how to integrate an image into a movie.

The court stated that it was irrelevant if the patents were enabled for video games – the enablement requirement was not met unless the patents were enabled for both embodiments of the invention, video games and movies. Sitrick, supra, at 1000.

The court held that Dreamworks’ evidence, consisting of the specifications of the two patents and expert testimony, was clear and convincing evidence of lack of enablement. The patents did not teach how to use, in movies, the technology described for using the invention in video games. In addition, defendants’ experts testified that a person skilled in the art could not use the specifications to utilize the invention in movies because video games and movies differed in many respects.

In an earlier case, Automotive Technologies International, Inc. v. BMW of North America, Inc. 501 F.3d. 1274 (Fed. Cir. 2007), the court reached the same conclusion. In that case, the plaintiff’s patent covered side impact sensors used in airbags. The patent’s specification described mechanical sensors in detail, but also mentioned electronic sensors, and the claims covered both types of sensors. The district court granted a defendant’s motion for summary judgment on invalidity on the grounds that the full scope of the claims covered electronic sensors as well as mechanical sensors, but the specification did not teach a person skilled in the art how to make and use the invention with an electronic sensor.

On appeal, the plaintiff argued that because one embodiment, mechanical sensors, was enabled, the claims were enabled. The Court of Appeals held to the contrary, at 1285:

“…[T]he claim construction of the relevant claim limitation resulted in the scope of the claims including both mechanical and electronic side impact sensors. Disclosure of only mechanical side impact sensors does not permit one skilled in the art to make and use the invention as broadly as it was claimed, which includes electronic side impact sensors. Electronic side impact sensors are not just another known species of a genus consisting of sensors, but are a distinctly different sensor compared with the well-enabled mechanical side impact sensor that is fully discussed in the specification. Thus, in order to fulfill the enablement requirement, the specification must enable the full scope of the claims that includes both electronic and mechanical side impact sensors, which the specification fails to do.”

The plaintiff also argued that a person skilled in the art would be able to figure out how to use an electronic sensor in the invention. The court disagreed. “‘It is the specification, not the knowledge of one skilled in the art, that must supply the novel aspects of an invention in order to constitute adequate enablement.’ Although the knowledge of one skilled in the art is indeed relevant, the novel aspect of an invention must be enabled in the patent.” Id. at 1283. The court explained that “when there is no disclosure of any specific starting material or of any of the conditions under which a process can be carried out, undue experimentation is required.” Id. at 1284.

Thus in both Strick and Automotive Technologies, the plaintiffs had sought and obtained a broad claim construction, but had lost the case on summary judgment due to their failure to show that the scope of the claims was enabled.

Some commentators have questioned whether the Federal Circuit is setting the enablement standard too high. That remains to be seen. At this point, however, it is clear that patent litigation plaintiffs should carefully consider the specification in seeking a broad claim construction, and defendants should scrutinize the broad claims to see if invalidity based on lack of enablement can be asserted.

Intentional Interference Claims and Preemption by the California Uniform Trade Secrets Act

On March 5, 2008, the United States District Court for the Northern District of California (“District Court”) in First Advantage Background Services Corp. v. PrivateEyes, Inc., (“First Advantage”) found, inter alia, that the California Uniform Trade Secrets Act, California Civil Code section 3426, et seq. (“CUTSA”) preempts common law claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets. The First Advantage opinion holds that claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets may be preempted by CUTSA.

PrivateEyes, a California corporation who conducts background checks for employers, entered into an agreement with First Advantage’s predecessor, whose duties First Advantage assumed. First Advantage agreed not to use confidential information received from PrivateEyes to solicit business from vendors with whom PrivateEyes was in contract. First Advantage solicited business despite the agreement not to, and also disclosed PrivateEyes’ confidential and proprietary information to the same vendor. After First Advantage sued PrivateEyes alleging a number of claims related to their agreement, PrivateEyes filed a counterclaim asserting various causes of action. First Advantage filed a motion to dismiss some causes of action found in PrivateEyes’ counterclaim. The District Court granted First Advantage’s motion in part, allowing PrivateEyes leave to amend some of the claims, which PrivateEyes did when it filed its First Amended Counterclaim. Thereafter, the District Court entertained First Advantage’s motion to dismiss.

The District Court began its discussion by addressing First Advantage’s motion to dismiss PrivateEyes’ fifth cause of action: intentional interference with prospective economic advantage. Citing Korea Supply Co. v. Lockheed Martin Corp., the District Court noted that PrivateEyes would need to satisfy the following elements in order to prevail: “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.”

In dismissing PrivateEyes’ intentional interference claim in PrivateEyes’ initial counterclaim, the District Court found that the intentional interference claim failed to “allege an independently wrongful act outside a simple breach of contract,” a necessary requirement to satisfy the intentional interference claim’s third element. To survive a motion to dismiss, PrivateEyes would have to “plead and prove that the defendant’s acts are wrongful apart from the interference itself.” An independently wrongful act is one that “is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” PrivateEyes’ amended counterclaim alleged three specific independently wrongful acts in an attempt to satisfy the third element of the intentional interference claim: misappropriation of trade secrets, breach of confidence, and trade libel.

PrivateEyes alleged that First Advantage misappropriated trade secrets in violation of CUTSA because it improperly disclosed PrivateEyes’ confidential information, including PrivateEyes’ profit margins. First Advantage argued, however, that CUTSA preempted PrivateEyes’ intentional interference claim because CUTSA preempts any common law claim based on conduct which could support a trade secret claim. Relying on Reeves v. Hanlon, a California Supreme Court case, PrivateEyes argued that trade secrets misappropriation can form the basis of an intentional interference claim.

In Reeves, the court found the defendants “violated CUTSA for stealing a confidential client list, and found to have committed intentional interference based on wrongful acts including destruction of the plaintiffs’ computer files, misappropriation of confidential information, and improper solicitation of plaintiffs’ clients.” The District Court disagreed with PrivateEyes’ reading of Reeves. Specifically, the District Court stated that although Reeves discussed misappropriation in its analysis of the intentional interference claim, that discussion in and of itself did not “foreclose preemption” for a number of reasons. First, the District Court noted that the defendant in Reeves had not raised the issue of preemption. This was important because in San Jose Constr., Inc. v. S.B.C.C., Inc., the appellate court refused to rule on CUTSA preemption because the issue of preemption had not been raised below. Second, Reeves is distinguishable as it was specifically limited to whether an employer could bring an intentional interference claim against a competitor that hired the employer’s former at-will employees. Lastly, because there was no dispute as to the wrongful acts beyond misappropriation, the preemption analysis would have had no impact on the court’s decision. The District Court recognized that in Cadence Design Sys., Inc. v. Avant! Corp., the only other California Supreme Court decision on point, the court suggested that CUTSA preempted all common law claims based on trade secret misappropriation.

The District Court also discussed California Civil Code section 3426.7(b), which identified the three categories of cases not preempted by CUTSA. Specifically, in addition to cases based on breach of contract and criminal remedies, any claims not based on trade secret misappropriation are not preempted by CUTSA. As a result, courts have interpreted this statute to mean that all claims which are based on trade secret misappropriation are preempted by CUTSA.

Applying this rule to PrivateEyes’ allegations in their First Amended Counterclaim, the District Court recognized that PrivateEyes had specifically alleged a CUTSA violation. Because the intentional interference claim was a common law claim based on trade secret misappropriation, the District Court held that CUTSA preempted the claim.

The District Court also addressed PrivateEyes’ additional support of its intentional interference claim. Specifically, PrivateEyes alleged that First Advantage had engaged in a common law breach of confidence because it had improperly disclosed PrivateEyes’ “confidential and proprietary information to CCE in violation of its agreement to maintain the confidential nature of this information.” However, the District Court was critical of PrivateEyes’ breach of confidence claim because the language and facts used “in support of its allegation of breach of confidence are identical to those [PrivateEyes] offered in support of its misappropriation claim.” Further, the District Court noted that the only other difference between the two claims was the existence of a contract, which by itself is inadequate to avoid preemption. Thus, the District Court held that CUTSA preempted the intentional interference claim based on breach of confidence because this was “still a common law claim based on facts which would amount to the misappropriation of trade secrets.”

The District Court’s decision in the First Advantage case suggests that CUTSA will preempt any claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets. Although the plaintiff in First Advantage attempted to avoid preemption by CUTSA by basing its intentional interference claim on misappropriation of trade secrets and breach of confidence, the District Court followed an increasing body of authority holding that any common law claims based on trade secret misappropriation are preempted by CUTSA.

The Ninth Circuit Just Doesn’t Like Karaoke

The Ninth Circuit just doesn’t like karaoke. At least, that’s what plaintiffs, manufacturers of karaoke machines, in two recent opinions involving copyright law would likely say. In both decisions, the Ninth Circuit affirmed the district courts’ dismissal of the complaints without leave to amend. Both of these decisions discussed the various copyrights that are implicated in a karaoke device, including the copyright of the performance of the song itself, the song lyrics, and the synchronization of the two. Both decisions also involved the licenses required by karaoke device manufacturers.

In the first, Leadsinger, Inc. v. BMG Music Publishing, 512 F3d 522 (9th Cir. 2008), the court addressed a matter of first impression in the Circuit: How does the Copyright Act apply to karaoke devices? Plaintiff Leadsinger is a karaoke device manufacturer. The device it manufactures is “an all-in-one microphone player” that connects directly to a television and has recorded songs imbedded in a microchip in the microphone. While playing, the Leadsinger device, like most karaoke devices, plays music and projects the song lyrics visually on the screen synchronized with the music.

Copyright law grants the copyright owner the exclusive rights reproduce and distribute the copyrighted work in “phonorecords.” However, as the Leadsinger court noted these exclusive rights are subject to a compulsory license under section 115, which “subjects phonorecords to a compulsory licensing scheme that authorizes any person who complies with its provisions to obtain a license to make and distribute phonorecords of a nondramatic musical work.” If, as Leadsinger argued, its karaoke device was a “phonorecord,” then the compulsory license under section 115 would allow the use of the songs and lyrics.

The gravamen of the dispute involved license fees that BMG demanded of Leadsinger. As the court explained, “in addition to the mechanical fee required under to secure a compulsory license, BMG has demanded that Leadsinger and other karaoke companies pay a ‘lyric reprint’ fee and a ‘synchronization fee.’ Leadsinger has refused to pay these additional fees and filed for declaratory judgment to resolve whether it has the right to visually display song lyrics in real time with song recordings….” In essence, Leadsinger believes that the compulsory mechanical license under 17 U.S.C. § 115 should cover everything, and it should not be required to pay a separate fee to show the lyrics or to synchronize the lyrics with the music.

The Copyright Act defines “phonorecords” as “material objects in which sounds, other than those accompanying a motion picture or other audiovisual work, are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” 17 U.S.C. § 101. “Audiovisual works” are defined as “works that consist of a series of related images which are intrinsically intended to be shown by the use of machines, or devices such as projectors, viewers, or electronic equipment, together with accompanying sounds, if any….” Id.

The Ninth Circuit found that the use of the lyrics, in projecting them on the screen synchronized with the music, met every element of an “audiovisual work,” and therefore was not a phonorecord. The court found that the “images of successive portions of song lyrics are ‘intrinsically intended to be shown by the use of machine [sic] … together with accompanying sounds.’” As an audiovisual work, it was excluded from the compulsory licensing scheme in § 115.

The end result was that Leadsinger could not rely just on the compulsory license fees it paid to BMG to make and distribute copies of phonorecords, it also had to pay BMG fees for synchronization licenses and reprint licenses to display the song lyrics.

In the second case, Sybersound Records, Inc. v. UAV Corp. et al., — F3d —, 2008 WL 509245 (9th Cir. 2008), the Ninth Circuit continued its apparent disdain for karaoke. In that case, Plaintiff Sybersound Records, another karaoke device manufacturer, sued several of its competitors over the same licenses that were at issue in Leadsinger. In Sybersound, however, the complaint was that the other manufacturer defendants were not paying the license fees, therefore they were able to undercut Sybersound’s prices and compete unfairly. Sybersound claimed it was injured because it did pay all required license fees, and therefore its costs were higher than his competitors.

Sybersound’s problem, however, is that they didn’t own the copyrights on which they claimed the license fees were due. Because it didn’t own the copyrights, Sybersound did not have standing to complain about the actual infringement due to failure to pay the license fees. Apparently recognizing this problem, Sybersound sued instead for violations of California’s unfair competition law, RICO violations, and intentional interference. But all of these claims rested on one alleged wrong – the infringement of the copyrights Sybersound lacked standing to address. The court held that because Sybersound lacked standing to sue for copyright infringement, it also lacked standing to sue for related claims that required the copyright claims to be decided. The court also held that the unfair competition claim was preempted by the federal Copyright Act. Therefore, the court affirmed the dismissal of the complaint without leave to amend.

Thus, for the second time in two months, the Ninth Circuit pulled the plug on karaoke plaintiffs. However, in so doing, it left us with a few reminders of what should probably be obvious points. First, karaoke devices, and the recordings that are played on them, contain more than one copyright. Each of these rights is separate and requires a separate license. Second, a plaintiff can only complain of the infringement of rights it owns. And third, a plaintiff cannot easily plead around this standing requirement by recasting its complaint in terms of other related claims. Or perhaps it’s really as simple as the Ninth Circuit just doesn’t like karaoke.

Federal Circuit Applies Supreme Court’s New Test for Declaratory Judgment Jurisdiction

The Federal Circuit Court of Appeals recently reversed a district court’s dismissal of a declaratory judgment action, relying on the Supreme Court’s decision in MedImmune Inc. v. Genentech Inc., 127 S.Ct. 764 (2007). See Micron Technology, Inc. v. MOSAID Technologies, Inc., 2008 WL 540182 (Feb. 29, 2008)

Micron was one of the four largest manufacturers of dynamic random access memory (DRAM) chips. Micron, together with Samsung Electronics Company, Ltd, Hynix Semiconductor, Inc., and Infineon Technologies of North America, controlled seventy-five percent of the worldwide market for these chips.

MOSAID held patents on the circuit technology that was used in the manufacture of DRAM chips. In 2001 and 2002, MOSAID sent a series of four letters to Micron inviting Micron to license MOSAID’s patents.

After sending letters to all four of the manufacturers who declined to enter into licenses with MOSAID, MOSAID began patent infringement litigation against each of the manufacturers. MOSAID first sued Samsung. Infineon then sued MOSAID for declaratory judgment of noninfringement. MOSAID and Samsung settled. MOSAID then sued Hynix, who later settled. MOSAID then settled with Infineon. In each settlement, MOSAID granted the manufacturer a license under its patents. MOSAID made statements in public and in its 2005 annual report that it intended to “aggressively” pursue all other DRAM manufacturers to force them to license MOSAID’s technology, and that it would be “unrelenting” in its litigation strategy. The industry believed that Micron was the next target of MOSAID.

In July 2005, Micron filed a declaratory judgment in the Northern District of California seeking a declaration of noninfringement of 14 patents owned by MOSAID. The following day, MOSAID sued Micron and two other defendants, in the Eastern District of Texas, for infringing seven patents. MOSAID later added one more defendant and three more patents to the Texas action.

MOSAID then moved to dismiss the California action for lack of subject matter jurisdiction. The district court granted MOSAID’s motion on the grounds that Micron had no reasonable apprehension of being sued by MOSAID. The district court found that there was no evidence of threats from MOSAID to Micron for the last four years, no threats from MOSAID to Micron’s customers, and no public statements by MOSAID that it intented to sue Micron.

Micron appealed and the Federal Circuit reversed.

The court first held that the district court in California did have subject matter jurisdiction over the case. The district court had applied the wrong test – the “reasonable apprehension” test is not the proper test, according to the Supreme Court in MedImmune. The correct test, which the appellate court repeatedly stated “is more lenient,” is “whether the facts alleged under all the circumstances show that there is a substantial controversy between parties having adverse legal interests of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” Micron, quoting MedImmune, 127 S.Ct. at 771.

In applying this test, a district court must look at the evidence of all of the circumstances. In this case, the evidence included the series of letters from MOSAID to Micron, the previous suits from MOSAID against the other three manufacturers, and MOSAID’s public statements of its intent to aggressively pursue litigation against the remaining manufacturers.

The appellate court explained that this case was just the type of case for which the Declaratory Judgment Act was intended. The court explained the purpose of the Act as follows, quoting from a previous decision in Electronics for Imaging, Inc. v. Coyle, 394 F.3d 1341, 1346 (Fed. Cir. 2005):

“[A] patent owner…attempts extra-judicial patent enforcement with scare-the-customer-and-run tactics that infect the competitive environment of the business community with uncertainty and insecurity…Before the Act, competitors victimized by that tactic were rendered helpless and immobile so long as the patent owner refused to grasp the nettle and sue. After the Act, those competitors were no longer restricted to in terrorem choice between the incurrence of a growing potential liability for patent infringement and abandonment of their enterprises; they could clear the air by suing for a judgment that would settle the conflict of interests.”

The court next addressed the district court’s discretion not to hear a case even if it has subject matter jurisdiction. The court explained that, based on MOSAID’s filing of its patent infringement suit against Micron in Texas one day after Micron filed its declaratory judgment action in California, “the parties in this dispute are really just contesting the location and right to choose the form for their inevitable suit.” Because of the “more lenient” test for declaratory judgment jurisdiction, the court noted that there is an increased likelihood of “a forum-seeking race to the courthouse between accused infringers and patent holders.” As a result, district courts must perform an analysis under 28 U.S.C. §1404(a), considering the factors of convenience. In essence, if there is subject matter jurisdiction in two different forums, the real issue is “the convenience and suitability of competing forums.”

The court stated that under §1404(a), in general, the forum of the first-filed action controls, but that the interests of justice and convenience factors could alter that rule. In particular, courts should consider the convenience of witnesses, the lack of jurisdiction over necessary or desirable parties, and the existence and possible consolidation of related cases.

In this case, the court found that MOSAID is a Canadian company, but that it had operations in the Northern District of California. Both MOSAID and Micron did business in both California and Texas; there were no related cases in Texas; and there was no evidence regarding the convenience or availability of witnesses. Therefore, the first-filed forum, the Northern District of California, was proper.

E-Discovery Ethical Rules Remain Unchanged

Lawyers can’t turn around without being bombarded with CLE brochures announcing yet another e-discovery workshop. Electronic discovery is a new medium for storing information, but the time-tested rules concerning an attorney’s ethical duty to the court and opposing counsel in connection with discovery have not changed. On January 7, 2008, Magistrate Judge Barbara L. Major on the United States District Court, Southern District of California, issued an order granting sanctions against Qualcomm Incorporated and several of its attorneys in connection with discovery abuses. ( See Qualcomm Incorporated v. Broadcom Corporation, U.S.D.C., S.D. Cal. Case No. 05-CV-1958-B (BLM). The Qualcomm decision commands the attention of all corporate counsel and litigators involved in the discovery process. As stated by Magistrate Judge Major, the decision “provide[s] a roadmap to assist counsel and corporate clients in complying with their ethical and discovery obligations and conducting the requisite ‘reasonable inquiry.’”

Plaintiff Qualcomm sued defendant Broadcom alleging Broadcom’s infringement of several Qualcomm patents. Broadcom filed a counterclaim alleging inequitable conduct and waiver. Broadcom’s waiver defense was based upon Qualcomm’s participation in the Joint Video Team (“JVT”) in 2002 and early 2003 during which the digital video signals standards were adopted. Whether Qualcomm participated in the JVT in 2002 and early 2003 was a crucial fact because, if Qualcomm did participate, it would have to have granted royalty-free licenses to its technology.

Broadcom served document demands requesting all documents reflecting Qualcomm’s participation in the JVT and also requesting any emails received or sent by Qualcomm setting standards for processing digital video signals. Qualcomm, in response to those document demands, said that it produced all non-privileged documents it located after a reasonable inquiry.

Broadcom also took the deposition of the person most knowledgeable under Rule 30(b)(6). The court found the counsel’s conduct during the preparation and designation of the PMK to be extremely troubling. Qualcomm initially designated one PMK who did not have personal knowledge concerning Qualcomm’s participation, or lack of participation, in the JVT in late 2002 to early 2003 despite being so designated. Qualcomm recognized this deficiency and designated a new representative. That new representative testified falsely that Qualcomm did not participate until December 2003. Broadcom was able to impeach the witness with the only email it had in its possession dated December 2002, reflecting Qualcomm’s earlier participation. Nevertheless, Qualcomm and its counsel continued to deny any earlier participation in the JVT and even doubted that the December 2002 email was even received by Qualcomm.

While preparing a witness for trial, the trial team reviewed the witness’s laptop and discovered 27 separate emails dating back to August 6, 2002, which made it clear that Qualcomm had been involved with the JVT and in establishing the standards for digital signals prior to late 2002. The Qualcomm trial team decided not to produce the emails yet call the witness at trial, asking carefully-tailored questions if the witness had ever “read” emails from the JVT. During cross-examination, Broadcom’s attorney asked if the witness ever received such emails, to which she answered truthfully that she had. Broadcom demanded the immediate production of the emails.

Even after knowing of the 21 emails, trial counsel argued a motion in limine to exclude the one December 2002 email in Broadcom’s possession by arguing there was no evidence that the email was actually sent to Qualcomm and that there was no evidence of anything ever being sent. Trial counsel made these representations to the court after he had been made aware of the 21 emails on the witness’s computer.

Broadcom immediately demanded the production of all emails after the witness admitted she had several on her laptop. In a side-bar conversation, trial counsel, despite having participated in the decision not to produce them, told the court that he had seen the emails and was not even sure if Broadcom had previously requested or if they fell within a previously request of Qualcomm. Qualcomm turned over the 21 emails over the lunch hour.

The jury returned verdicts in favor of Broadcom, finding that Qualcomm was guilty of inequitable conduct and the patents were unenforceable due to waiver.

The court ordered a post-trial investigation into the discovery abuses. Qualcomm objected to the investigation and argued that it had performed an adequate search for documents. Despite Qualcomm’s argument that it conducted an adequate search, the post-trial investigation revealed that a simple word search of archived emails searching for “JVT” and other single search terms readily revealed the existence of 46,000 documents containing over 300,000 pages. Qualcomm’s in-house counsel wrote a letter to the court advising it of these further findings, apologizing to the court for not conducting a more thorough search earlier, and further acknowledging that the located documents were inconsistent with argument made by counsel at trial.

The court focused on Federal Rule 26(g)(2), which provides for sanctions against individual attorneys who failed to comply with their ethical obligations. Rule 26(g)(2) provides that every discovery response must be signed by an attorney and that the attorney’s signature “constitutes a certification that to the best of the signer’s knowledge, information, and belief, formed after a reasonable inquiry,” the response is consistent with the rules of law. The courts have confirmed that Rule 26(g)(2), like Rule 11, requires that the court impose “an appropriate sanction” on the attorney if a discovery response is not formed after a reasonable inquiry and therefore is without substantial justification.

Qualcomm argued in opposition to the sanctions that at no time did Broadcom file a motion to compel the production of documents. The court gave no weight to this argument, noting that the responding attorney has a duty to respond to discovery in good faith and the court will not require the asking party to file motions if the responding party affirms that it will produce all responsive documents. This is especially the case here, where Qualcomm had already affirmed that it would produce all non-privileged responsive documents. Litigants are not required to file motions to compel in order to preserve their rights in the event the opponents fail to properly discharge their obligations to produce relevant information.

The court emphasized that the parties and the attorneys have a duty to respond to discovery in good faith. That good faith must be after a reasonable inquiry, which will be dependent upon individual facts and circumstances. The court noted that, in the age of electronic discovery where clients and attorneys cannot physically touch each document, the attorneys must work closely with their clients to ensure that the attorney and the client have discharged their duty to respond in good faith after reasonable inquiries. “Attorneys must take responsibility for ensuring that their clients conduct a comprehensive and appropriate document search.”

The attorneys at Qualcomm produced no substantial justification for their failure to produce the 46,000 documents. This lack of justification is reinforced by the fact that trial counsel did not disclose the 21 emails when found, surgically asked questions of the witness to avoid disclosing that she had received the 21 emails, and did not voluntarily search for any additional documents after locating the first 21.

In view of all the factors, the court noted the following factors influencing its decision on sanctions: Trial counsel did not properly designate the Rule 30(b)(6) deponents; did not require a search of archived emails; did not give the 30(b)(6) witness relevant documentation; and, did nothing to ensure that the witness would be knowledgeable. The attorney has the obligation to ensure that the Rule 30(b)(6) witness is fully knowledgeable of the facts upon which he/she will testify. Secondly, Qualcomm’s attorney repeatedly argued that the court and the jury should to ignore the December 2002 email that Broadcom had obtained and repeatedly tried to discredit that the email ever existed in an effort to distort the evidence. Qualcomm even brought a motion for summary judgment, offering testimony that it had not participated in the JVT during 2002 and had not received any information from the JVT.

The court issued sanctions against Qualcomm and several of its attorneys; this article will focus on the duties of the attorneys and the sanctions imposed on them. The court relied upon the Rules of Professional Conduct, Rule 5-200, which provides that a lawyer shall not seek to mislead the judge or jury by a false statement of fact or law, and Rule 5-220, that a lawyer shall not suppress evidence when the lawyer or the lawyer’s client has a legal obligation to reveal or produce. The court, in reviewing the rules and in reviewing counsel’s activities, referred several attorneys to the State Bar for investigation. The court emphasized that it was inconceivable that Qualcomm had actively and successfully hidden this information so effectively from its lawyers that the lawyers could not know or suspect that suppressed documents existed. The court also immediately rejected any thought that the retained attorneys were so inept or disorganized that they could not have discovered this information if a reasonable inquiry had been made. The court then questioned whether there was sufficient evidence that the counsel actively participated with Qualcomm to hide the documents and all evidence of Qualcomm’s early involvement in the standards. The court noted that Qualcomm continued to exert the attorney-client privilege and, therefore, evidence on this issue was limited, although there was circumstantial evidence based on trial counsel’s failure to disclose the 21 emails promptly upon their discovery.

Ultimately, the court found the evidence supported a finding that Qualcomm did not tell its retained lawyers about the evidence. The lawyers suspected there was additional evidence or information but chose not to conduct a reasonable search. This was not a case where only one or two smoking-gun documents were not found, but instead 46,000 critical documents had not been produced. These documents were not from just one employee, but dozens of employees, several of whom testified falsely at trial and in depositions.

The court noted that different attorneys had different levels of culpability, but emphasized that lead counsel are responsible for the activities of the individuals working under their direction and that junior attorneys have an ethical obligation to comply with the rules and the ethical obligations independent of what they may be instructed by supervising attorneys. Emails and other electronic discovery impose differing challenges which attorneys must overcome in order to discharge their discovery obligations. The ethical rules and discovery obligations have not changed with e-discovery – an attorney must still make a reasonable inquiry and may sign a discovery response only if it is “formed after a reasonable inquiry.”

Dale is a shareholder with Weintraub Genshlea Chediak practicing in the Litigation and Intellectual Property Sections. Dale has a broad range of litigation experience in all areas of business, intellectual property and real estate litigation. He has tried over forty jury trials to conclusion and has had numerous court trials and binding arbitrations since his admission to practice law in 1981.

Trademark Infringement and the Importance of Establishing Likelihood of Confusion

On December 28, 2007, the Ninth Circuit issued its opinion in the case titled Applied Information Sciences Corp. v. eBay, Inc., in which it clarified the plaintiff’s burden in a federally registered trademark infringement action. The Ninth Circuit’s opinion demonstrates the importance of a plaintiff in a trademark infringement claim being prepared to offer evidence of the likelihood of confusion in order to avoid dismissal of its trademark infringement claims.

Applied Information Sciences Corp. (“AIS”) is a specialized software vendor that applied in 1994 to register a trademark “SmartSearch”. In 1998, the U.S. Patent and Trademark Office issued AIS a registration for use of that mark on “computer software and instruction manuals sold together which allow the user to retrieve information from on-line services via phone line in the fields of agriculture and nutrition, books, chemistry, computers and electronics, education, law, medicine and biosciences, news, science and technology, social sciences and humanities.” AIS marketed a line of SmartSearch products from 1995 to 2004.

AIS claimed that eBay began using its SmartSearch mark without its consent in 2000 in violation of federal trademark and California unfair competition laws. eBay’s website displayed the words “Smart Search” as a link on its home page which allowed the user to utilize advance search options. AIS demanded that eBay pay a license fee or stop using the mark. eBay refused and AIS filed its trademark infringement claim against eBay in 2004. Both parties moved for summary judgment. The District Court granted eBay’s motion on the ground that it found that AIS did not have a valid protected interest in the mark.

The Ninth Circuit began by recognizing that AIS had to establish the following to prevail on its trademark infringement claim: (1) a valid, protectable trademark; and (2) eBay’s use of the mark in a manner likely to cause confusion. Thus, AIS first had to establish “whether the words used by a manufacturer in connection with his product are entitled to protection.” The Ninth Circuit recognized that AIS could satisfy this burden in one of three ways: (1) it has a federally registered mark in goods or services; (2) its mark is descriptive but has acquired a secondary meaning in the market; or (3) it has a suggestive mark which is inherently distinctive and protectable. AIS argued that its trademark was entitled to protection on the basis of its federal registration. Unlike the District Court, the Ninth Circuit agreed with AIS’ position.

The Ninth Circuit ruled that registration of a mark “on the principal register in the patent and trademark office constitutes prima facie evidence of the validity of the registered mark and of [the registrant’s] exclusive right to use the mark on the goods and services specified in the registration.” Without a registration, a plaintiff in a trademark infringement action would have to establish his right to the exclusive use of the mark in a common law infringement action. The Ninth Circuit concluded that AIS, by demonstrating that it held a federal registration, had made a prima facie showing that it held a valid protectable interest in the use of the SmartSearch mark.

The Ninth Circuit continued that “a registered trademark holder’s protectable interest is limited to those goods or services described in its registration.” Specifically, the Court recognized that the scope of validity and the scope of relief for infringement are not the same because “although the validity of a registered mark extends only to the list of goods or services, an owner’s remedies against confusion with its valid mark are not so circumscribed.” Thus, a trademark owner may only seek redress if another’s use of a registered mark on a different set of goods and services is likely to cause confusion with the owner’s use of the mark in connection with its registered goods.

The Ninth Circuit reiterated its holding in Interstellar Starship Services, Ltd. v. Epix Inc., 184 F.3d 1107 (9th Cir. 1999), in which it emphasized that a markholder’s rights to protect its interest in a registered mark were not limited to infringement actions against those using the mark in connection with the specified goods for services. In fact, the Court expressly rejected an argument that the plaintiff was required to show that the scope of its valid interests extended to the defendant’s use of the mark.

The Ninth Circuit recognized that a plaintiff trademark owner, upon establishing a valid protectable interest, could then proceed to the second prong of a trademark infringement analysis, the likelihood of confusion resulting from the defendant’s alleged infringing use. Once a plaintiff, such as AIS, had established a protectable interest by proving it is the owner of a registered trademark, it does not have the additional burden of showing that the defendants allegedly confusing use involves the same goods or services listed in the trademark registration.

Thus, the Ninth Circuit disagreed with the District Court’s analysis which found that AIS’ registration was limited to computer software and instruction manuals in the various fields listed in the registration. This led to the District Court’s erroneous conclusion that “because AIS’ federal registration did not include eBay’s use of the mark as `a hyperlink for its web based training service,’ AIS’ infringement action failed for a lack of a protectable interest.” The Ninth Circuit held that both eBay’s and the District Court’s reading of its previous decision in Levi Strauss & Co. v. Blue Bell, Inc., 778 F.2d 1352 (9th Cir. 1985) was “questionable.”

The Ninth Circuit distinguished the Levi Strauss case from the present case by noting that in Levi Strauss the plaintiff was attempting to extend its own use of its registered mark to goods not specified in its federal registration. Specifically, Levi Strauss’ registered trademark was limited to pants pocket tabs but Levi Strauss was seeking to recover for infringement involving clothing pocket tabs generally. The Ninth Circuit concluded that this analysis was largely irrelevant in the present case because, having established a valid protectable interest by demonstrating its federal registration, AIS had discharged its burden of establishing the validity of the SmartSearch mark in connection with those goods listed in the registration. Thus, the sole question to address was the issue of the likelihood of confusion.

The Ninth Circuit held that AIS had failed, in opposing eBay’s motion for summary judgment, to produce any admissible evidence showing a likelihood of confusion or any evidence addressing any of the Sleekcraft [AMF Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979)] factors required for a likelihood confusion analysis. On this sole basis, the Ninth Circuit affirmed summary judgment in favor of eBay.

The Ninth Circuit’s decision in the AIS case reaffirms the necessity and importance of a plaintiff in a trademark infringement claim being prepared to establish the likelihood of confusion to prevail. Although the plaintiff in AIS was able to demonstrate that it had a valid protectable interest, its failure to offer evidence as to the likelihood of confusion factor in opposing a summary judgment resulted in the Ninth Circuit affirming summary judgment in the defendant’s favor.

The Federal Circuit Finds Mental Process Unpatentable

Patentable subject matter (i.e. what kinds of things can be patented) includes processes, machines, articles of manufacture, and compositions of matter. 35 U.S.C. §101. Abstract ideas, natural phenomena, and laws of nature are non-patentable (or non-statutory) subject matter. Computerized methods of doing business are increasingly likely to be rejected as non-patentable subject matter by the PTO, and the courts are becoming more likely to affirm these rejections. In re Comiskey, 499 F.3d 1365 (Fed. Cir. Sept. 20, 2007) is such a case.

Comiskey filed a patent application in 1999, claiming a method for performing mandatory arbitration of one or more documents. Claim 1 contained the following steps: registering the document and its author; inserting an arbitration provision into the document; enabling the complaining party to request arbitration; conducting an arbitration; supporting the arbitration; and determining an arbitration award. Claim 1 did not require the use of a computer, although the specification described an automated system and method and several dependent claims required an Internet connection or other electronic communication.

Not surprisingly, especially to lawyers who have been utilizing arbitration for many years, the PTO rejected most of Comiskey’s claims as obvious under §103 and repeated the rejection in four more office actions through the prosecution of the application. Comiskey appealed to the Board of Patent Appeals and Interferences, who affirmed the examiner’s rejections. Comiskey then appealed to the Federal Circuit.

The appellate court asked Comiskey and the PTO to brief the issue of patentable subject matter under §101. Comiskey contended that the court should not be permitted to rely on a new basis for rejecting the claims, but that even if §101 was considered, the claims satisfied its requirements. The court held that it could decide the case based on §101, even though the examiner had not made a rejection under that section.

The PTO asserted that Comiskey’s claims were not patentable subject matter, arguing that the claims were directed to an abstract idea because they did not require a particular machine and did not alter the state of a starting material. Rather, the PTO argued, Comiskey’s claims dealt with how humans interact in resolving disputes.

The court held that many of Comiskey’s claims were non-patentable subject matter under §101, citing two leading cases on the subject, Diamond v. Diehr, 450 U.S. 175, 188 (1981) and State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1372 fn 2 (Fed. Cir. 1998). The court emphasized that the questions of novelty and obviousness are never reached unless §101 is first satisfied. “Only if the requirements of §101 are satisfied is the inventor allowed to pass through to the other requirements for patentability, such as novelty under §102 and, of pertinence to this case, non-obviousness under §103.” Id. at 1371.

The court reviewed the case law dealing with the patentability of business method inventions, emphasizing that the courts have clearly found abstract ideas to be non-patentable. The court identified two key concepts. First, abstract ideas with no practical application are not patentable. Id. at 1376. For example, a method for converting binary-coded decimal numerals into binary numerals was found not patentable because the claim would completely pre-empt the mathematical formula and allow a patent on an idea. Gottschalk v. Benson, 409 U.S. 63 (1972). The court explained that a mathematical algorithm must produce “a useful, concrete, and tangible result” to be patentable. Id. at 1376, quoting AT&T Corp. v. Excel Communications, 172 F.3d 1352 (Fed. Cir. 1999).

Second, in order to be patentable, an abstract idea, as used in a method claim, must be embodied in, or operate, transform, or involve another class of statutory subject matter. As explained by the Supreme Court, an abstract idea as used in a method claim must either be tied to a specific apparatus or operate or transform a machine, article of manufacture, or composition into a different state. See Parker v. Flook, 437 U.S. 584 (1978). In other words, a claim that involves an abstract idea as well as one of the other classes of statutory subject matter may be patentable. Id. at 1377. However, a mental process or a process of human thinking is not patentable standing alone even if it does have a practical application. Id.

Based on this analysis, the appellate court held that Comiskey’s claims were not patentable subject matter. The claimed invention was a business system for arbitration that depended on a mental process. Comiskey’s independent claims did not require a machine and did not describe an alteration in the state of another class of patentable subject matter. According the court, “Comiskey…seek[s] to patent the use of human intelligence in and of itself.” Id. at 1379.

With respect to Comiskey’s claims that did require a use of a machine, the appellate court found these claims to contain patentable subject matter. “When an unpatentable mental process is combined with a machine, the combination may produce patentable subject matter…” Id. However, the court believed that these claims were likely to be unpatentable under §103 as obvious. The court stated, “The routine addition of modern electronics to an otherwise unpatentable invention typically creates a prima facie case of obviousness”. Id. at 1380. The court remanded the case to the PTO to determine whether these claims were nonobvious.

Can A Company Go Too Far In Preventing Its Employees From Being Hired Away By Its Customers?

Can a company go too far in preventing its employees from being hired away by its customers? The Fourth District Court of Appeal recently answered, “yes,” but gave some indication where the line of permissible restrictions is crossed. (VL Systems, Inc. v. Unisen, Inc. (June 2007) 152 Cal.App.4th 708.)

The plaintiff VL Systems (“VLS”) was a computer consulting company and defendant Unisen was its client. VLS employed consultants to work with its customers on their particular projects and billed the customer for the consultant’s time on an hourly basis. The contract between VLS and Unisen included a “no-hire provision” in which Unisen agreed that “[b]uyer will not attempt to hire seller’s personnel” for a period of 12 months after the work was completed. The contract further provided for liquidated damages equal to 60 percent of the employee’s compensation in the event Unisen breached the no-hire restriction.

The scope of the consulting contract between VLS and Unisen was rather small. VLS hired a new employee, David Rohnow (“Rohnow”), after the contract with Unisen was completed. Rohnow never worked on the project with Unisen since it was already completed. Rohnow worked for VLS for six months then elected to seek employment elsewhere. Rohnow responded to an advertisement placed by Unisen seeking a director of information technology. Unisen hired Rohnow knowing he had worked for VLS, but Unisen did not believe the no-hire provision applied since Rohnow had not work on the Unisen project. VLS demanded that Unisen pay the liquidated damages provided for under the contract. Unisen refused and VLS brought suit.

The Court balanced two important public policies. The first is the public policy established in Business and Professions Code section 16600 which states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” The second public policy balanced by the Court is the freedom of contract. The Court acknowledged that it should not blithely apply public policy reasons to void contract provisions. (Dunkin v. Boskey (2000) 82 Cal.App.4th 171, 183-84.)

The only case in California that came close to the issues presented in this appeal was Webb v. Westside District Hospital (1983) 144 Cal.App.3d 946 (overturned on other grounds), which upheld a no-hire provision included in a contract between a hospital and temporary employee service. The Court distinguished the Webb case by noting that the no-hire provision in Webb was limited solely to employees who had actually worked for the hospital and that the employment agency had suffered actual damages by the contract being terminated prior to the hospital hiring away its employees.

Without any binding precidence, the Court looked to more general public policies to determine whether VLS’s no-hire provision was enforceable. Narrowly-drawn no-hire provisions that might otherwise limit the employment mobility of individuals if necessary to protect the legitimate business interests of the former employer. Examples include restrictions on a former employee’s right to solicit away other employees and restrictions on former employee’s right to use trade secrets. (See L’Oreal Corp. v. Moyes (1985) 174 Cal.App.3d 268, 279.) Here, the Court found that VLS’s no-hire provision was not so narrowly drawn. It applied to all employees, whether or not they actually worked for the client and whether or not they were actually employed by VLS during the period that VLS worked for the client. The Court found that this broad no-hire provision “is not necessary to protect VL Systems’ interests and is outweighed by the policy favoring freedom of mobility for employees is therefore unenforceable.” (VL Systems, supra, 152 Cal.App.4th at 718.)

VLS attempted to argue that its no-hire provision was not a restraint on employee mobility, noting that the provision did not prohibit a client from hiring away an employee, it only established an agreed-upon price for doing so through the liquidated damages provision. The Court rejected that argument, noting that the liquidated damages provision was sufficiently punitive and would “unfairly narrow the mobility of the employee.”

The Court made it quite clear that its decision was limited to the facts before it and that its decision should not be interpreted to mean that all no-hire provisions were unenforceable under Business and Professions Code section 16600. Conversely, the Court declined to establish a bright line test as to when a no-hire provision goes too far as to become unenforceable. However, some guidance can be gleaned by understanding the factual distinctions the Court noted between the Webb decision and the case before it.

A narrowly-drawn no-hire provision that is reasonable in time and that applies solely to employees who actually work for the client have the best chance of being senforced. The public policy upholding private party contracts should prevail over the public policy favoring employee mobility when necessary to protect the legitimate business interest of the employer. As stated by the VLS Court, “This is not a case where the happy client of a consulting firm attempts to poach an employee.” (Id. at 715.) Contractual no-hire provisions, if narrowly drawn and necessary to protect the business of the company, are quite different than the facts in VL Systems.