Intellectual Property

The lawsuit Tiffany & Co. brought against Ebay in 2004 for contributory trademark infringement is currently being heard in the U.S. District Court in Manhattan. The outcome of this trial, though likely to continue on appeal, will greatly affect internet auction websites. A victory by Tiffany will not only spawn hundreds of additional lawsuits against Ebay, it will cost the internet auctioneer millions of dollars in policing costs.

Since its inception in 1995, Ebay has seen unprecedented growth. In the first quarter of 2007, Ebay had 588 million new listings. Ebay claims to sell about $2,000 in goods every second. Their gross merchandise volume for all the goods sold on their website was over $52 billions dollars in the first quarter this year. Despite this success, some retailers are not so enthusiastic. These retailers, including Tiffany argue that Ebay does not appropriately police its website to prevent counterfeiters. Based on this claim, Tiffany sued Ebay claiming that Ebay aided violations of the jeweler’s trademarks by allowing counterfeit items to be sold on its website. Tiffany claims that 95% of all the items sold under the Tiffany trademark are fakes. Tiffany’s complaint argues that Ebay is contributing to this trademark infringement by knowingly facilitating the sales between its users. Ebay, on the other hand, has argued that it has created numerous protocols to prevent fraudulent sales of trademarked goods.

In 1982, the US Supreme Court discussed what type of activity or conduct would create liability under contributory trademark infringement. The Court in Inwood Laboratories v. Ives Laboratories stated that liability for trademark infringement can extend beyond those who actually mislabel goods with the mark of another. Even if a manufacturer does not directly control others in the chain of distribution, it can be held responsible for their infringing activities under certain circumstances. The key test in the Ives case was if the manufacturer suggested, even if by implication, that they use their goods to infringe, then the manufacturer was liable for trademark infringement.

In the 1990’s two cases used the Ives test to specifically hold owners of a flea market liable for trademark infringement for counterfeit goods sold at their flea market. Because Ebay is, in essence, an online flea market, the court will likely look to these decisions for guidance in deciding the present case. In both of these cases, a landlord operated a flea market where sellers sold counterfeit goods. In Hard Rock Café Licensing Corp. v. Concession Services, the Seventh Circuit held that “willful blindness” is sufficient for liability under contributory infringement. In Fonovisa v. Cherry Auction, the Ninth Circuit held that landlords of flea markets who do more than merely rent space, and effectively supplies all aspects necessary for a marketplace, can be liable if it knows of infringing activity on the premises. In addition, the landlord who knowingly fails to prevent such action will also be liable. Ebay argues that it has met these standards.

Since the beginning of this lawsuit, Ebay has argued that it is aware of the risks of users selling counterfeit goods. Trying to meet the standards set forth in the above cases, Ebay has established programs to prevent trademark infringement. One of these programs is the VeRO program. VeRO stands for Verified Rights Owner where owners of intellectual property can notify Ebay of suspicious items for sale. Ebay claims that it is very responsive to inquiries through this program and immediately removes any items that are suspicious. From 2003 to 2006, Tiffany sent Ebay 284,000 notices of infringement to Ebay.

Tiffany, however, claims that Ebay’s system is ineffective. They charge Ebay with the responsibility of policing its sites, especially after they have been put on notice that such rampant counterfeiting is taking place. Tiffany claims that Ebay’s methods are ineffective partially because Ebay is profiting off each item sold on Ebay, regardless if the goods are counterfeit or not. Tiffany has argued that as long as Ebay reasonably anticipates the sale of an infringing product, they should be held liable. This standard was mentioned in dicta in the Ives case, and Tiffany would like this stricter standard applied to Ebay.

The outcome of this case will have major implications for Ebay as well as trademark owners whose goods are sold through Ebay. If Ebay is held liable, they will have to systematically change there verification process for goods sold and actively police its site. This would cost Ebay millions to police such activity. The real threat, however, may come from the additional lawsuits that will be filed from trademark owners claiming trademark infringement.

There is a growing trademark dispute between a small Alaskan museum devoted to a 900 piece display of hammers and the great Los Angeles based Hammer Museum (formerly known as the Armand Hammer Museum). On February 10, 2006, the Los Angeles based Hammer Museum filed an application with the United States Patent and Trademark Office to register the mark, HAMMER MUSEUM for museum services. Early this summer, Dave Pahl, the founder of the Alaska museum, became aware of the L.A. Hammer’s application and filed his own in July. Pahl filed his application based on use in commerce and listed the date of first use as April 14, 2000.

This story has already received a significant amount of coverage, including a page one spread in the Wall Street Journal. Most of the stories focus on the “David and Goliath” element; the Alaska museum took in revenue last year of around $8,000 (half of which were from t-shirt sales) while in 2006 the LA Hammer reported approximately $10 million in sales. The Journal wrote, “if one museum is granted the mark it could stop the other from using the name” and then notes that the LA Hammer says it can date its first use to 1999. Readers may come away from the story with the belief that all is lost for Pahl and his cultural oasis in the great tundra. But Pahl should not trade in his hammers for sled dogs. Pahl may have acquired rights to the mark that are senior to the Westwood based fine art museum – at least in Haines Alaska.

Common law trademark rights resulting from a prior but non-registered use are not wiped out by a later filed federal trademark registration application. Trademark rights stem not from registration of a mark but from actual use in commerce. While some civil law nations follow the “first to file” rule which grant senior rights to the first party to win the race to the trademark office, the United States follows the rule that ownership and priority go to the party who was first to use.

Common law rights are defined by the scope of actual use and the geographical territory in which the mark was used. While a merchant may acquire common law trademark rights in the name of a brick and mortar business, that interest is limited to the geographic area in which the merchant actually does business. As such, another merchant in another town can use the exact same name for a similar business and not infringe the common law rights of the first merchant if the first merchant does not advertise or do business in that town.

The LA Hammer Museum filed its application in 2006. Contingent upon the application maturing to registration, the LA Hammer Museum will enjoy a presumptive nationwide right in and to its mark as of the filing date. This presumptive nationwide right is one of the primary motivators for filing a trademark application. However, this right is subject to any common law rights in existence at the time of LA Hammer’s filing.

The LA Hammer states that it can show a date of first use of 1999 on a brochure for the “UCLA Hammer Museum.” This is prior to Pahl’s stated 2000 date of first use. However, depending on how this brochure was utilized, it very well may be that LA Hammer’s common law trademark rights in the mark HAMMER MUSEUM is geographically limited and excludes the town of Haines, Alaska. Assuming that the LA Hammer did not use this brochure to actively market its museum to residents of Haines, Pahl may have superior rights to the mark HAMMER MUSEUM in Haines -and perhaps even the entire state of Alaska.

The USPTO provides a mechanism which enables parties to sort out issues such as this called a Concurrent Use Proceeding and it recognizes that, under certain circumstances, a registered mark can and may function to identify more than one source of goods or services. A concurrent use proceeding is initiated by an applicant filing an application that is limited as to territory. The application will be examined as all trademark applications are examined, and if it appears that the application is fit for registration it will be published. If no opposition is filed, the Trademark Trial and Appeals Board (TTAB) will prepare notices and send them to any parties named in the application as concurrent users of the Mark. In the case of an owner of a registered mark, unless it consents to the concurrent use application, the matter will move forward as a concurrent use proceeding before the TTAB. In the proceeding, the TTAB will take evidence on the scope of geographical use of each of the marks and eventually decide who can use their mark in certain geographical areas.

Pahl may not have to go through all of this though. In the Wall Street Journal article, a representative of the LA Hammer is quoted as stating that they have no interest in stopping Pahl from using the mark HAMMER MUSEUM; she continues in stating “we are a fine-art museum in California, not a museum of hammers in Alaska, we think we have very different audiences.” Given that the LA Hammer appears to be indicating that it believes there is no overlap in the group of consumers who encounter the two marks, and therefore no likelihood of confusion, Pahl next step should be to work out a Coexistence Agreement which may very well allow his pending federal application to also go forward to registration.

The Ninth Circuit Court of Appeals issued an opinion last week that, while not necessarily controversial or new, serves as a good reminder for trademark litigators: There must be actual infringement to prevail in a trademark infringement lawsuit. While this would seem to be obvious, the Ninth Circuit thought it was an important enough reminder to actually publish the decision, and even more surprisingly, issued their unanimous opinion just over a month after oral argument.

The case, The Freecycle Network, Inc. v. Oey, — F.3d —, 2007 WL 2781902 (9th Cir. Sept. 26, 2007), involves the use of the terms “freecycle” and “The Freecycle Network” (“TFN”). According to its website, http://www.freecycle.org, “The Freecycle Network™ is made up of 4,129 groups with 3,906,000 members across the globe. It’s a grassroots and entirely nonprofit movement of people who are giving (& getting) stuff for free in their own towns. It’s all about reuse and keeping good stuff out of landfills. Each local group is moderated by a local volunteer.”

Initially, TFN used the term “freecycle” to refer generally to the act of free recycling goods. TFN accomplished this primarily via the Internet. In 2004, Tim Oey, a TFN member, advised TFN to trademark the term “freecycle” and the name “The Freecycle Network” and actively protect the use of the terms. Oey drafted, and TFN implemented, a policy which allowed the use of the term “freecycle” only in connection with TFN or TFN’s services. TFN filed for trademark registration of the term, but an opposition was filed and the application is still pending.

A year later, Oey had a change of heart and came out in opposition of the registration of the mark. He believed that the term “freecycle” should be left to the public domain. He sent an email to TFN group moderators (TFN group moderators run the Internet sites for the local TFN groups) and posted statements on the Internet that TFN had no right to trademark “freecycle” because it is a generic term. He also asked others to write to the US Patent and Trademark Office voicing opposition to TFN’s trademark application. TFN responded by severing ties with Oey, but Oey continued to make statements challenging the TFN’s right to trademark the term and urging others to continue to use the term generically.

In April of 2006, TFN filed suit against Oey and sought an injunction, claiming that Oey’s statements constituted contributory trademark infringement and trademark disparagement under section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a). The district court granted a preliminary injunction at TFN’s request based only on TFN’s Lanham Act claims. Oey was enjoined from “making any comments that could be construed as to disparage upon TFN’s possible trademark and logo” and requiring that he “remove all postings from the Internet and any other public forums that he has previously made that disparage TFN’s possible trademark and logo.”

The Ninth Circuit reversed and vacated the injunction on two grounds. First, the court pointed out that because there was no indication that Oey used the term to promote any competing service or to gain any commercial benefit, Oey did not use the term in commerce. Use of the term in commerce is a threshold requirement in a trademark infringement claim. Second, even if there were some commercial aspect to his use of the term “freecycle,” the court found that “such use was not likely to cause confusion, mistake, or deceive anyone as to the connection of Oey’s services (or any other) with TFN.” Rather, the court found, Oey simply expressed his view that TFN did not have a valid claim to the term “freecycle,” and encouraged others to voice the same view.

Finally, the court addressed TFN’s contention that Oey’s remarks disparaged TFN’s trademarks. TFN set forth the elements of its claim for trademark disparagement as making false statements with malice about TFN’s operations and the validity of its trademarks. However, as the Ninth Circuit pointed out, the Lanham Act contains no claim for trademark disparagement, and the “elements” listed by TFN cannot be found anywhere in the text of § 1125(a). Rather, these are the elements of a claim for slander of title, which is not found in the Lanham Act. The court supported its position that the Lanham Act does not contain a trademark disparagement claim by pointing to “the absolute dearth of precedent analyzing such a claim under the Act.”

The court explained that even if TFN’s invented trademark disparagement cause of action did exist, and even if it had the elements TFN claimed, it would still fail. Oey’s statements were not false! TFN’s application for trademark registration is still pending. There had been no formal determination of TFN’s rights. Thus, the court reasoned, Oey’s contention that “TFN lacked trademark rights in the term therefore cannot be considered a false statement of fact.”

Because the court found that there was no likelihood of TFN succeeding on the merits of its trademark infringement claim, and because the Lanham Act simply does not contain a cause of action for trademark disparagement, the district court abused its discretion in enjoining Oey. The Ninth Circuit vacated the injunction. In doing so, they provided a useful little reminder that to prevail on a trademark infringement claim, there must actually be infringement. And disparage the trademark at will, so long as you don’t disparage the product or infringe the mark. The Lanham Act does not prevent you from speaking your mind.

The United States Patent and Trademark Office (“PTO”) has revised the patent rules in an attempt to reduce the PTO’s workload, although the stated purpose is to “allow the Office to conduct a better and more thorough and reliable examination of patent applications.” The rule changes were initially proposed in January 2006 and the final rules were published in the Federal Register on August 21, 2007. The changes will take effect on November 1, 2007, although some rules will apply to patent applications filed before November 1, 2007 as well as those filed after November 1, 2007.

The key changes in the rules limit the number of continuing applications and requests for continued examination (RCEs) and also limit the number of claims that an application can contain. These new rules were controversial as soon as they were announced. In fact, one inventor has already filed a lawsuit against the PTO, alleging that the new rules are unconstitutional.

Continuing Applications

The new rules permit an inventor to file only two continuation or continuation-in-part (CIP) applications in one application family. An “application family” consists of the initial (parent) application and all of its continuations or CIP applications. A CIP may be the basis for two continuations or CIPs if it does not claim priority to the original parent application and its claims are not supported by the original disclosure.

If an inventor wishes to file a third continuation or C-I-P application, then he or she must file a petition explaining why the amendment, argument, or evidence could not have been presented in an earlier application. It is not clear what test the PTO will apply in deciding whether to grant a petition; however, it is expected that few petitions will be granted.

This rule will go into effect for applications filed after November 1, 2007. If a pending application has two continuations or CIPs already filed in its family, one more continuation or CIP application will be permitted after November 1, 2007.

The PTO’s rationale for this change (and the change in the RCE rules) is that the volume of continuing applications that contain patentably indistinct claims is “crippling” the PTO and drastically limiting the PTO’s ability to handle new applications. As evidence of this problem, the PTO notes that in 1980, 11.4% of the new applications were continuing applications, compared to 29.4% in 2006. The PTO also states that the practice of filing multiple continuing applications that often do not get resolved results in the public being left uncertain as to what is covered by a patent. Lastly, the PTO believes that continuing applications hinder innovation by slowing down the PTO’s ability to examine (and presumably allow) new applications.

Divisional Applications

Under the new rules, divisional applications may be filed as long as the parent was subject to a restriction requirement and the claims are to a non-elected invention and have not been examined.

A divisional application starts its own family. Thus, an inventor may file two continuation or CIP applications and one RCE based on the divisional application as the parent. Additional continuing applications or RCEs may be filed if a petition explaining the need is granted.

RCEs

The new rules limit the number of RCEs to one per family. Again, the “family” is the parent and all continuation or CIP applications. Thus, only one RCE can be filed in all of these applications. If the inventor wants to file a second RCE, he or she must file a petition justifying the RCE, as is required by the new rules on continuing applications.

The new rules prevent any further RCE being filed after November 1, 2007 if one RCE has already been filed in the application family. Thus, most experts recommend that if an RCE is desired in an application pending under a final office action as of November 1, 2007 that has one RCE already filed in the application family, then the inventor should file the response with the RCE by November 1, 2007. This results in the inventor being permitted two RCEs; if the response is not filed by November 1, 2007, then no further RCE can be filed.

Multiple Related Applications

The new rules limit the number of related applications that have patentably indistinct claims and a common assignee.

The rules require an inventor to list all other pending applications or patents that have a common inventor, a common owner, or a filing date or priority date within two months of the filing date or priority date of the new application. The PTO will presume that multiple applications include patentably indistinct claims if they have a common inventor, a common owner, the same filing date or priority date, and substantially overlapping disclosures.

The inventor can rebut the presumption be explaining why the claims are patentably distinct or by filing terminal disclaimers and explaining why two applications containing patentably indistinct claims should be permitted. Without a satisfactory explanation, the PTO will treat such multiple applications with patentably indistinct claims as one application and limit the claims to five independent claims and 20 dependent claims, for a total of 25 claims. The purpose of this rule is to prevent applicants from avoiding the new rule limiting the number of claims.

Number of Claims

The new rules limit the number of claims that can be filed in any application to five independent claims and 20 dependent claims, for a total of 25 claims. If a greater number of claims is filed, the applicant must file an Examination Support Document (ESD).

The ESD must address all of the claims and must be filed before a first office action. The ESD has to include a search, a list of references, and an explanation of the patentability of the claims over the references. The intent of the ESD is to “help focus examination” by aiding the examiner in understanding the invention and in obtaining the prior art before performing a search.

The ESD is so onerous that patent experts believe it should be avoided if at all possible, as it will likely have estoppel effects in the prosecution of the application and in future litigation.

Although this rule is not effective until November 1, 2007, it is retroactive in that it applies to all pending applications that have not received a first office action as of November 1, 2007.

The Pending Lawsuit

One day after the PTO published its final rules, an independent inventor filed a lawsuit against the PTO and its director in the federal court in the Eastern District of Virginia, challenging the new rules. The suit was filed by Dr. Triantafyllos Tafas, who holds eight patents and has 17 pending applications. He is represented by a law firm in Washington, D.C.

The complaint seeks a declaratory judgment and an injunction prohibiting the PTO from enforcing the new rules. The grounds are that the PTO exceeded its rulemaking authority granted it by Congress, that the new rules violate the Patent Act, that the PTO violated the Administrative Procedures Act, that the rules are impermissively retroactive, and that the rules are unconstitutional in that they violate the Fifth Amendment’s takings clause.

Tafas’ attorneys have stated that the new rules will force inventors to file multiple patent applications to cover what would formerly have been filed as one application describing multiple versions of the invention. They believe that this will limit the ability of independent inventors and small companies to obtain patent protection as it will be cost-prohibitive for them to file multiple applications, while large corporations who have the money will be able to do so. They argue that the overall effect will be a negative one on innovation.

While many practitioners and inventors alike agree that the patent process has become too cumbersome, the new rules are receiving far more criticism than praise. Most opinions are that the PTO has gone too far. It will be interesting to see what the court in Virginia does. There may well be other cases on file, and some will likely end up on appeal. In the meantime, patent applicants will have to struggle with the new rules or find the loopholes.

It’s not uncommon for companies to change or modify the terms under which they provide services to consumers. This is true whether the company is a traditional brick and mortar company or Internet based. When traditional companies make a change to service terms they usually send some type of written notice to the consumer. But for some reason this never caught on for Internet based companies. Often the Internet based Company would merely make changes to its terms of use (the contract which governs the consumers’ use of the relevant website and its services) and post the revised terms of use on its website. In most instances, unless the user reviewed the terms of use frequently and compared the current version to the version that was posted at the time the consumer became a user of the site, the user would be unaware of any changes.

Recently the Ninth Circuit addressed the enforceability of a modified terms of use when the company fails to provide notice to the consumer. In Douglas v. U.S, District Court, the plaintiff was a subscriber to AOL’s long distance telephone service. That service was subsequently taken over by Talk America. When Talk America took over AOL’s phone service it added for new provisions to the service’s terms of use: additional services charges; a waiver of the right to bring class actions; an arbitration clause; and a New York choice of law provision. Like so many Internet based service providers, Talk America did not affirmatively notify its users of the changes, but merely posted the revised provisions on line.

The Ninth Circuit held that merely posting the revised terms of use online is insufficient to bind previous users. While the plaintiff claimed that he had no reason to visit the Talk America website since AOL (and then Talk America) automatically charged his credit card for the services, the Ninth Circuit stated that even if he had visited the website he would no reason to look at the terms of use to determine if there had been any changes. “Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side.” Further, the Ninth Circuit noted that the plaintiff would not know when to check the website for possible changes to the contract terms without being notified that the contract has been changes and how.

The drafters of some terms of use have foreseen enforceability issues and included a provision which provides that continued use of the service constitutes the user’s acceptance of the revised terms. The Ninth Circuit qualified the scope of such language by providing that even if continued use could be considered assent, such assent can only be inferred after the user receives proper notice of the proposed changes. In this case, the Ninth Circuit concluded, proper notice had not been given.

Other then providing notice by mail, the Ninth Circuit did not give any additional insight into what forms of notice are acceptable. Would notice by email, SMS, MMS, text message, or postings on the Service be sufficient? It’s not clear, and the sufficiency would probably be based on numerous factors.

This ruling also brings up business issues that need to be considered when crafting the terms of use, such as what should a company do if a user objects or refuses to accept the revised terms of use? Unless the terms of use includes a termination provision granting the company the right to terminate at any time, or grants the company the right to terminate if the user refuses to accept the revised terms of use, the company may be obligated to continue to provide services under the original terms.

Last week, a judge for the United States District Court in Arizona has granted a summary judgment in favor of recording companies. The judgment finds the defendant, Jeffrey Howell, liable for copyright infringement for illegally sharing music files. Even though there was no evidence that the defendant actually distributed the music files, the judge found the defendant violated copyright laws by making the files available for distribution. This case is significant because it is the first case that specifically states that “making available” equates to distribution under copyright laws.

This case was brought by several large recording companies against Jeffrey Howell. The recording companies, in an attempt to thwart unauthorized online distributions, hired a company to investigate and detect such activities. The company notified the recording companies that Howell had made available 54 specific sound recordings of musical artists which the record companies owned a valid copyright. Howell had made these files available through a file sharing program named Kazaa in which third parties could access and download Howell’s files. The recording companies filed an action for copyright infringement against Howell and moved for summary judgment on that claim, arguing that there is no disputed material fact that Howell violated their exclusive distribution right for the 54 identified sound recordings. Howell, representing himself, denied these claims and argued that their file-sharing program was “not set up to share” and that the files were for private use and “for transfer to portable devices that is legal for ‘fair use.'”

Title 17, Section 106(3) grants copyright owners the exclusive right to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending. In order to succeed in a copyright infringement claim the plaintiff must satisfy two requirements to win a prima facie case of direct infringement. First, they must show ownership of the allegedly infringed material. Second, they must demonstrate that the alleged infringers violate at least one exclusive right granted to copyright holders under Section 106. The question in this case is whether Howell infringed the recording companies’ copyrights by making available files to be shared by third parties.

The district court held that the owner of a collection of works who makes them available to the public may be deemed to have distributed copies of the works in violation of copyright law. The court noted that in a case involving the online file-sharing program Napster defendants were found to have violated copyright owners’ distribution rights by employing “the Napster software to make their collections available to all other Napster users.” The court also cited several cases that suggest that Kazaa users commit direct infringement by employing the Kazaa program to make their collections of copyrighted sound recordings available to all other Kazaa users.

In one such case,a set of screenshots showing the contents of a defendant’s Kazaa shared folder was found to present a cognizable claim for copyright infringement under 17 U.S.C. § 106(3). In another case cited by the court, a Texas court equated the placement of items in a Kazaa shared folder with “publication” as defined by 17 U.S.C.§ 101 because it is a distribution, or an offer of distribution “in which further distribution, public performance or display is contemplated.” Based on these cases, the court in this case held that it is no defense that a Kazaa user did not directly oversee the unauthorized distribution of copyrighted material.

Howell, on the other hand, argued that the recording companies brought forth no evidence that he participated in the distribution. Howell claimed that when the distribution occurred he was at work. Howell argued that screen shots showing the music files in the shared Kazaa folders were not enough to show copyright infringement. Finally, Howell argued that he owned every music file that he transferred to Kazaa and was using the Kazaa program for personal use.

The court disagreed with Howell’s arguments. The fact that Howell owned the music did not deny the possibility of unauthorized distributions. More importantly, the court held that the mere presence of copyrighted works in a shared folder is enough to trigger liability for copyright infringement.

The court ordered damages in the amount of $40,500 and issued an injunction against Howell to cease the distributions. This ruling is significant because the defendant was found liable for simply “making available” music files for download. The plaintiff in this case brought forth no evidence that files were actually distributed, rather the evidence showed they were only made available for distribution. Because the court found that making available for distribution equates to actual distribution, recording companies will have a much easier time succeeding in future suits against file sharers.

In Magic Kitchen LLC v. Good Things International Ltd., et al., the California Court of Appeal (Second App. Dist., July 30, 2007) was confronted with the issue of whether to apply the statute of limitations or the equitable doctrine of laches to determine whether plaintiffs’ claims for trade dress infringement were barred as a matter of law. The Court held that it was unnecessary to address the split of authority on the issue because it found that plaintiffs’ claims for trade dress infringement were barred by the doctrine of laches. The Court affirmed the trial court’s entry of a directed verdict against plaintiffs as to these claims.

The Pampered Chef, one of the defendants, purchased and distributed a cooking tool from plaintiff, Kitchen Connection, Inc., called the “Tartmaster” from the mid-1980s until 1993. The Tartmaster is a hand-operated metal device used to cut and crimp the edges of dough and bread. Plaintiff sold Tartmasters to The Pampered Chef in two sizes: 3-inch and 4-inch. In 1992, defendant learned that the patent for the Tartmaster design had expired and the design was in the public domain. Defendant stopped purchasing the Tartmaster from plaintiff in early 1993. At about the same time, The Pampered Chef began sourcing 3-inch and 4-inch variations of the Tartmaster product, which it called the “Cut-N-Seal,” from defendants Good Things and Ten Mark in Taiwan. The Cut-N-Seal incorporated the same design as the Tartmaster but was made of stainless steel and used a different type of spring.

In mid-1993, plaintiff discovered that Pampered Chef was having copies of the Tartmaster made in Asia and sent a letter to The Pampered Chef stating that it was aware that it was selling the Tartmaster design. The letter also stated that The Pampered Chef was selling plaintiffs’ pancake molds in violation of plaintiffs’ patents as to those molds. Importantly, plaintiff did not claim any intellectual property rights to the Tartmaster. During the next decade, The Pampered Chef made substantial investment in its Cut-N-Seal product, including traveling to Asia, promoting the product and, in the late 1990s, developing and marketing a 3½ -inch version of the Cut-N-Seal. This 3½-inch version of the Cut-N-Seal was introduced into the market in 2000 and The Pampered Chef stopped selling the 3-inch and 4-inch versions at that time.

In January 2003, the plaintiffs filed suit against defendants and included claims for trade dress infringement in violation of section 43 of the Lanham Act (15 U.S.C. §1125). The parties tried the case over 17 days in two phases. After the trial court heard argument and the evidence, it granted defendants’ motions for non-suit, or in the alternative, for directed verdict finding that plaintiffs’ claims for trade dress infringement were barred by the statute of limitations and the doctrine of laches. Plaintiffs appealed.

Analyzing plaintiffs’ claims for trade dress infringement, the appellate court began by recognizing that “trade dress `refers to the “total image of a product” and may include features such as size, shape, color, color combinations, texture or graphics.’” Furthermore, “[a] seller’s adoption of a trade dress confusingly similar to a competitor’s constitutes unfair competition that is actionable under section 43(a) of the Lanham Act.”

The appellate court recognized that the purpose of trademark and trade dress protection is to enable a business “to identify itself efficiently as the source of a given product through the adoption of a mark which may in the form of a slogan, symbol, ornamental design or other visual insignia.” The court emphasized, however, that “trade dress protection `is not intended to create patent-like rights in innovative aspects of product design. Thus, trade dress protection unlike patent law . . ., does not foster innovation by preventing reverse engineering or copying of innovative product design features . . . Trade dress protection extends only to incidental, arbitrary or ornamental product features which identify the product’s source.’”

The court turned next to the primary issue whether it should apply the equitable doctrine of laches or the statute of limitation in determining whether plaintiffs’ claims for trade dress infringement were timely. Other courts had found the interplay between these two issues to be “somewhat illusive.” The Lanham Act does not contain an explicit statute of limitations, however, “some federal cases hold that Lanham Act claims are governed by the statute of limitations applicable to analogous state law claims.” Other jurisdictions disagree and hold that since the relief available under section 43(a) of the Lanham Act is primarily equitable, congress might have intended that “laches be the sole time limits bar to suit.” The appellate court held that it was unnecessary to resolve this debate because it found plaintiffs’ claims to be barred by the equitable defense of laches.

After recognizing the well known maxim “equity aids the vigilant, not those who sleep on their rights,” the court ruled that defendant needed to demonstrate three elements to assert a laches defense: “(1) delay in asserting a right or a claim; (2) the delay was not reasonable or excusable; and (3) prejudice to the other party against whom laches is asserted.”

The court recognized that the first element of delay is measured by the period “from when the plaintiff knew (or should have known) of the allegedly infringing conduct until the initiation of the lawsuit in which the defendant seeks to counterpose the laches defense.” The court found that if there is an applicable statute of limitations to an analogous state claim, a Lanham Act claim filed after the expiration of that period is strongly presumed to be barred by the doctrine of laches. The court held that it was undisputed that plaintiffs had learned Pampered Chef was selling 3-inch and 4-inch Cut-N-Seals no later than July 1993 and that its delay in filing the action for nearly 10 years (well after any statute of limitations would have run) made it presumptively untimely. Plaintiffs argued that even if some of their damages for trade dress infringement may have been untimely, they were nevertheless entitled to recover for damages incurred within the limitations period. The court rejected this argument finding that “when evaluating whether laches bars a damages claim, a continuing tort is considered a single act rather than a series of separate acts.”

Plaintiffs argued that even if their claims as to the older versions of the Cut-N-Seal were time-barred, they were timely as to the 3½-inch version because it was not introduced into the marketplace until less than three years before they filed suit. The appellate court rejected this argument and held that “where a family of products is alleged to infringe on a competitor’s trademark or trade dress, courts have held that delay is measured from the time the plaintiff became aware of `the conduct which [it] claims is infringement’ not the introduction of each individual product.” Because the size of the 3½-inch Cut-N-Seal was irrelevant to plaintiffs’ trade dress claim, it was barred on the same grounds as plaintiffs’ other claims.

In examining whether plaintiff’s delay was reasonable, the court recognized that “[d]elay has been held permissible, among other reasons, when it is necessitated by the exhaustion of remedies through the administrative process, when it is `used to evaluate and prepare a complicated claim,’ and when its purpose is `to determine whether the scope of proposed infringement will justify the cost of litigation.’” By contrast, “delay is impermissible when its purpose is to capitalize on the value of the alleged infringer’s labor, by determining whether the infringing conduct will be profitable.” The court rejected plaintiffs’ argument that its delay was reasonable because it was litigating other matters against defendant during the ten-year period. The court found that plaintiffs offered no reason why the litigation of other matters constituted a reasonable delay.

Finally, the court examined the prejudice to defendants as a result of plaintiffs’ delay in bringing the lawsuit. The court cited case law that “found prejudice sufficient to support a finding of laches where, as a result of plaintiffs delay in bring suit, a defendant has invested resources in developing and marketing a product.” The court affirmed the trial court’s finding that the undisputed evidence showed that defendants were prejudiced because The Pampered Chef invested significant resources in developing and selling the Cut-N-Seal which included traveling to Taiwan, producing millions of Cut-N-Seals, developing the 3½-inch version, creating recipes, printing catalogs and promoting the product. The court further noted that had plaintiff brought its claim in a timely manner, The Pampered Chef could have invested “its resources in other areas or altered the Cut-N-Seal in a way that would have avoided the present suit.” Thus, the court found that defendants had established the three elements to warrant a finding that plaintiffs’ claims were barred by the doctrine of laches.

It is important that once a company learns that a competitor is infringing on its trade dress rights, it file suit as soon as possible to protect those rights. Failure to act in a timely manner could result in a court finding that such claims are barred by the doctrine of laches and/or the applicable statute of limitations.