Intellectual Property

In APPLE INC. v. PEPPER ET AL., case number 17-204, the United States Supreme Court considered a case alleging Apple has monopolized the retail market for the sale of apps and has unlawfully used its monopolistic power to charge consumers higher-than competitive prices. As an early defense in the case, Apple asserted that the consumer plaintiffs could not sue Apple because they supposedly were not “direct purchasers” from Apple under Illinois Brick Co. v. Illinois, 431 U. S. 720, 745–746 (1977). The Supreme Court disagreed, reasoning the plaintiffs purchased apps directly from Apple and therefore are direct purchasers under Illinois Brick. However, the Court did note that this case was still at the early pleadings stage of the litigation, so the Court did not assess the merits of the plaintiffs’ substantive antitrust claims against Apple, nor did the Court consider any other defenses Apple might have. In other words, the Court’s holding was limited to determining whether the Illinois Brick direct-purchaser rule barred these plaintiffs from suing Apple under the antitrust laws.

As some background on the matter, in 2007, Apple began selling iPhones, and in July 2008, Apple started the App Store. The App Store now contains about 2 million apps that iPhone owners can download. By contract and through technological limitations, the App Store is the only place where iPhone owners may lawfully buy apps. For the most part, Apple does not itself create apps. Rather, independent app developers create apps. Those independent app developers then contract with Apple to make the apps available to iPhone owners in the App Store. Through the App Store, Apple then sells the apps directly to iPhone owners. To sell an app in the App Store, app developers must pay Apple a $99 annual membership fee. Apple requires that the retail sales price end in $0.99, but otherwise allows the app developers to set the retail price. Apple also keeps 30 percent of the sales price, no matter what the sales price might be. In other words, Apple pockets a 30 percent commission on every app sale.

In response, in 2011, four iPhone owners sued Apple, alleging that Apple has unlawfully monopolized “the iPhone apps aftermarket.” The plaintiffs allege that, via the App Store, Apple locks iPhone owners “into buying apps only from Apple and paying Apple’s 30% fee, even if” the iPhone owners wish “to buy apps elsewhere or pay less.” Plaintiffs further allege that the 30 percent commission is “pure profit” for Apple and, in a competitive environment with other retailers, “Apple would be under considerable pressure to substantially lower its 30% profit margin.” The plaintiffs then allege that in a competitive market, they would be able to “choose between Apple’s high-priced App Store and less costly alternatives.” And they allege that they have “paid more for their iPhone apps than they would have paid in a competitive market.”

In response to the plaintiffs’ allegations, Apple moved to dismiss the complaint at the pleading stage, arguing that the iPhone owners were not direct purchasers from Apple and therefore may not sue. Apple cited the Illinois Brick case as authority, which held that direct purchasers may sue antitrust violators, but also ruled that indirect purchasers may not sue. The District Court agreed with Apple and dismissed the complaint. According to the District Court, the iPhone owners were not direct purchasers from Apple because the app developers, not Apple, set the consumers’ purchase price. The Ninth Circuit reversed. The Ninth Circuit concluded that the iPhone owners were direct purchasers under Illinois Brick because the iPhone owners purchased apps directly from Apple. According to the Ninth Circuit, Illinois Brick means that a consumer may not sue an alleged monopolist who is two or more steps removed from the consumer in a vertical distribution chain. Here, however, the consumers purchased directly from Apple, the alleged monopolist. Therefore, the Ninth Circuit held that the iPhone owners could sue Apple for allegedly monopolizing the sale of iPhone apps and charging higher than-competitive prices.

In then analyzing the issue, the U.S. Supreme Court held that under Illinois Brick, the iPhone owners were direct purchasers who may sue Apple for alleged monopolization, thus agreeing with the holding of the Ninth Circuit.  The Supreme Court reasoned that Section 4 of the Clayton Act provides that “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue.” That broad text readily covers consumers who purchase goods or services at higher-than-competitive prices from an allegedly monopolistic retailer. The Court also reasoned that it has previously held that “the immediate buyers from the alleged antitrust violators” may maintain a suit against the antitrust violators, but has also ruled that indirect purchasers who are two or more steps removed from the violator in a distribution chain may not sue.

Applying that reasoning here, and unlike the consumer in Illinois Brick, the iPhone owners are not consumers at the bottom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain. Thus, the Court determined the absence of an intermediary in the distribution chain between Apple and the consumer is dispositive.

Apple argued that Illinois Brick allows consumers to sue only the party who sets the retail price, whether or not the party sells the good or service directly to the complaining party. But the Court found three main problems with Apple’s argument. First, Apple argued it contradicts statutory text and precedent by requiring the Court to rewrite the rationale of Illinois Brick and to gut its longstanding bright-line rule. However, the Court reasoned any ambiguity in Illinois Brick should be resolved in the direction of the statutory text, which states that “any person” injured by an antitrust violation may sue to recover damages. Second, Apple’s theory is not persuasive economically or legally. It would draw an arbitrary and unprincipled line among retailers based on their financial arrangements with their manufacturers or suppliers. And it would permit a consumer to sue a monopolistic retailer when the retailer set the retail price by marking up the price it had paid the manufacturer or supplier for the good or service but not when the manufacturer or supplier set the retail price and the retailer took a commission on each sale. Third, Apple’s theory would provide a roadmap for monopolistic retailers to structure transactions with manufacturers or suppliers so as to evade antitrust claims by consumers and thereby thwart effective antitrust enforcement.

Next, contrary to Apple’s argument, the Court found the three Illinois Brick rationales for adopting the direct-purchaser rule cut strongly in plaintiffs’ favor. First, it promoted the longstanding goal of effective private enforcement and consumer protection in antitrust cases. Second, Illinois Brick should not be treated as a “get-out-of-court-free card” for monopolistic retailers to play any time that a damages calculation might be complicated. Third, this is a case where multiple parties at different levels of a distribution chain are trying to recover the same passed-through overcharge initially levied by the manufacturer at the top of the chain.

Therefore, in sum, the Court found Illinois Brick does not bar the consumers from suing Apple for Apple’s allegedly monopolistic conduct, and affirmed the judgment of the U. S. Court of Appeals for the Ninth Circuit. However, as noted above, this ruling only considered whether plaintiffs could proceed through the pleadings stage, and did not consider the full merits of the substantive antitrust claims against Apple.

If you’re a fan of branding and sports, you may have wondered who will affix their name to the Raiders’ new stadium in Las Vegas. The construction is underway, but the team has yet to announce whose name the stadium will bear. However, we may have discovered a clue based upon a recent filing with the USPTO.

On March 29, 2019, Allegiant Airlines, a Las Vegas-based airline, filed a trademark application for ALLEGIANT STADIUM. This filing has caused significant speculation that Allegiant has either entered into a deal with the Oakland Raiders for the naming rights of the stadium, or is, at the very least, engaged in meaningful negotiations to that end. But despite the coincidental timing, Allegiant claims that it is not tied to the $1.8 billion stadium. In fact, in response to a request for comment, an Allegiant representative stated, “The purpose was to protect the trademark for Allegiant Stadium for any future uses, should we need it.” The representative did confirm that Allegiant has engaged in sponsorship discussions with the Raiders.

Although the representative’s statement may be true, those of us who are familiar with trademark applications and registrations have some reason to question Allegiant’s sincerity. A party cannot simply file a trademark application and obtain the exclusive right to utilize that trademark in commerce without actually putting it to use. While the USPTO permits applicants to file on an intent-to-use (“ITU”) basis, there are temporal limitations. Specifically, even if a party applied for, and obtained, each of five extensions permitted by the USPTO, they would only have 36 months to use the mark before it returned to the public domain. So, although it’s possible that Allegiant is looking to protect its right to use ALLEGIANT  STADIUM in conjunction with a professional sports arena, these opportunities don’t frequently arise. With that said, it’s quite possible that Allegiant is simply trying to protect its right to use the mark if and when it is able to reach an agreement with the Raiders. The cost to file a trademark application and obtain a notice of allowance is reasonable enough to warrant a peremptory filing, even if the deal may never come to fruition. This is especially true when we’re talking about a $25 million per year kind of deal.

Allegiant is certainly no stranger to marketing in the sports industry. Its name appears on the ice at T-Mobile Arena, home of the Las Vegas Knights, and it was recently named the official airline of the Las Vegas Aviators, the Triple-A affiliate of the Oakland Athletics. However, those sponsorships are likely significantly less costly than the $25 million per year that the Raiders are seeking for the stadium rights. For that reason, some industry experts have expressed belief in Allegiant’s representation. In short, these individuals expressed that they do not believe that Allegiant would be willing to spend that amount of money to have its name on the stadium. They believe it would impose a financial burden on the airline, but they also noted that companies have often been willing to stretch themselves for unique opportunities like this.

I suppose we won’t know until a deal is complete, or close to it, but we can be certain we won’t have to wait long. The stadium is set for completion on July 31, 2020.

Nespresso has filed a lawsuit against Jones Brothers Coffee Distribution Company alleging trademark and trade dress infringement. In support of its trademark infringement claim, Nespresso alleges that Jones Brothers’ use of the words “Nespresso Compatible” in connection with its coffee capsules will cause consumers to believe that the Jones Brothers product is endorsed and/or sponsored by Nespresso because “Nespresso Compatible” is used prominently and without a disclaimer nearby.

Generally a trademark owner can stop others from using its trademark in order to prevent the public from being confused about the source of the goods or services. However, “fair use” presents a circumstance under which a third party can legally use another’s trademark. There are two types of trademark fair use. The first is the classic fair use situation where the mark itself has a descriptive meaning and the third party uses the term descriptively to describe its products or services.

The other type of trademark fair use is called nominative fair use. Nominative fair use involves the use of a trademark to refer to the actual mark owner’s goods or services. Where a third party’s product or service cannot be readily identified without using another party’s trademarks, this is a good indication that the use may be nominative fair use. In order to rely on nominative fair use as a defense, the user would need to have only used as much of the mark as was necessary and did nothing to suggest an endorsement or approval by the trademark owner.

Nominative fair use comes up in a variety of situations.

One situation involves compatibility advertising; use a third party’s trademark in order to inform the consuming public about a product’s fit with another product. The Supreme Court encourages the use of third party trademarks in compatibility advertising because it “assists consumers and furthers the societal interest in the fullest possible dissemination of information.” Whether compatibility advertising has morphed into an ad that creates the likelihood of consumer confusion is in the detail of the advertisement copy itself and whether it is factually ambiguous. This is why, in the case of comparative or compatibility advertising, courts consider factors such as the following: (1) whether the use of the plaintiff’s mark is necessary to describe both the plaintiff’s product or service and the defendant’s product or service, that is, whether the product or service is not readily identifiable without use of the mark; (2) whether the defendant uses only so much of the plaintiff’s mark as is necessary to identify the product or service; and (3) whether the defendant did anything that would, in conjunction with the mark, suggest sponsorship or endorsement by the plaintiff holder, that is, whether the defendant’s conduct or language reflects the true or accurate relationship between plaintiff’s and defendant’s products or services.  (Depending on what Circuit you are in, these factors may be in addition to the factors normally considered when engaging in a likelihood of confusion analysis).

In the case of comparative or compatibility advertising, it seems that the first factor would almost always be answered in the affirmative; how can one describe how a product is compatible with a competitor’s product without mentioning the competitor’s product by name.

It is in analyzing the second nominative fair use factor that the issue of prominence comes into play; how prominently was the competitor’s mark featured on the defendant’s products. If the defendant uses the competitor’s mark too prominently – places too much of an emphasis on the competitor’s mark – the defendant will have stepped over the line into likelihood of confusion. This was the case in Nespresso USA, Inc v. Africa America Coffee Trading Co.; a prior case Nespresso brought (and won by default judgment) based on Africa America’s use of “Nespresso compatible” in connection with the sale of single serving coffee capsules.

It is in connection with the third nominative fair use factor that disclaimers come into play. Disclaimers can weigh against a finding of likelihood of confusion, but not always.  This was the case in Weight Watchers Int’l, Inc. v. Stouffer Corp., which dealt with advertisements for Stouffer’s Lean Cuisine product and its compatibility with the Weight Watchers points exchange diet program. In its advertisements, Stouffer mounted a campaign based on the Weight Watchers point exchange compatibility of certain of its Lean Cuisine frozen food products. In particular, the court noted one Stouffer magazine ad which read: “Lean Cuisine Entrees Present 25 Ways To Get More Satisfaction From Your Weight Watchers Program,” and then in smaller letters, “Weight Watchers Exchanges For Lean Cuisine Entrees.” The Stouffer ad contained a disclaimer that the exchanges it lists are based solely on published Weight Watchers information, and that the list of exchanges does not imply approval or endorsement of the Lean Cuisine entrees by Weight Watchers. Disclaimers often can reduce or eliminate consumer confusion; however each disclaimer must be judged by considering the business and its consumers, as well as the proximity of the disclaimer to the infringing statements. Here the court noted that Stouffer’s disclaimer appeared in minuscule print on the very bottom of the ad and because of the location and size of the disclaimer, it does not effectively eliminate the misleading impression conveyed in the ad’s large headline.

A good comparative or compatibility advertisement requires solid legal analysis as well as compelling copy. The lesson here is that brands and advertising agencies should get legal input before using a third party’s trademark in advertisements or otherwise in connection with its products or services.

Many businesses rely on their websites to promote their company and drum up business. Having a “professional” looking web page is considered a must and companies spend a lot of money in creating and maintaining their web presence. However, a recent case out of the Ninth Circuit Court of Appeals demonstrates that care must be taken in connection with the creation of a company’s website, especially when obtaining “stock” or other photos from a third party to help promote your business.

In Erickson Productions, Inc. v. Kast (decided April 16, 2019), the Ninth Circuit was asked to review a jury’s finding of copyright infringement involving the use of certain photos on the updated website for the defendant’s company. Kast operated several companies, including Atherton Trust, a real estate wealth management company. In 2010, Kast was looking for ways for Atherton Trust to be appointed by the State of California to manage the estates of disabled persons and set about creating a new website to help attract this new business. He hired a website developer to update Atherton Trust’s website and entered into an agreement with that developer by which his approval was required on all work, “including the design, development and finalization of the website.”

Kast worked with the developer to give his ideas as to what he wanted his new website to look like and apparently made numerous favorable comments towards an existing website for Wells Fargo Private Bankers. The revamped website for Atherton Trust that was eventually created included three photos that had apparently been copied from the Wells Fargo website. These three photos were taken by Jim Erickson and licensed to Wells Fargo for use on its web page. Neither Kast, his company or his web developer obtained licenses for the photos to use on the Atherton Trust website. Erickson soon learned of the use of his photos on the Atherton Trust website and in July 2011, sent a cease and desist letter to Atherton Trust demanding that his photos be removed and payment for the infringement of his photos copyrights. Although Kast immediately removed the three offending photos from the Atherton website, he declined to pay any money to Erickson. Erickson sued and, after a jury trial, was awarded damages of $450,000 ($150,000 for each offending photograph). Kast appealed this decision to the Ninth Circuit.

a. Vicarious Liability

The first issue of Kast’s appeal dealt with the jury’s finding that Kast was vicariously liable for copyright infringement because he had employed a developer who had directly infringed on Erickson’s copyrights in his photos that were used on the Atherton Trust website. The Ninth Circuit began by noting that the elements that a Plaintiff must prove to establish vicarious liability are that the defendant has “(1) the right and ability to supervise the infringing conduct; and (2) a direct financial interest in the infringing activity.” Kast focused his argument to the Ninth Circuit on the second prong and claimed that there was no evidence that he had received a direct financial benefit as a result of the use of the photos on the Atherton Trust website. The Ninth Circuit agreed with him and held that it was improper to award damages against him on a theory of vicarious liability.

The Ninth Circuit reasoned that, “[t]he essential aspect of the `direct financial benefit’ inquiry is whether there is a causal relationship between the infringing activity and any financial benefit a defendant reaps…” Erickson claimed that Kast had received at least three direct financial benefits as a result of the infringement: (1) the photographs drew customers to the Atherton Trust website; (2) Kast avoided paying licensing fees for the use of the photos; and (3) Kast was able to “rush” his new website’s launch. The Ninth Circuit rejected each of these arguments.

First, the Ninth Circuit held that there was no evidence that any consumer went to the Atherton Trust website to view Erickson’s photographs or purchased any services from Atherton Trust as a result of the photographs. Next, the Ninth Circuit rejected the argument that the avoidance of licensing fees could be a direct financial benefit in this case. The Court reasoned that avoiding licensing fees could only be a direct financial benefit if the web page developer had somehow lowered his fees as a result of avoiding having to pay licensing fees. However, there was no evidence that the developer had done so. Finally, the Ninth Circuit rejected the argument that the “rush” of the website was a direct financial benefit because, once again, there was no evidence that launching the website earlier had resulted in any business to Atherton Trust.

While the Ninth Circuit held that it was error to impose liability against Kast under a vicarious liability theory, it did affirm liability against him under a contributory liability theory.

b. Contributory Liability

The Ninth Circuit found that Kast was liable for contributory infringement, which is when a defendant “(1) has knowledge of another’s infringement; and (2) either (a) materially contributes to; or (b) induces that infringement.” Kast’s attack on this theory was really one directed at the jury instructions given by the trial judge, which included a definition of “knowledge” as including Kast having only a “reason to know” of the infringement. Kast argued to the Ninth Circuit that only “actual knowledge” or “willful blindness” would be sufficient to impose contributory infringement liability.

However, Kast had failed to raise this objection at his trial. The Ninth Circuit concluded that because of this failure, its review was limited to considering only whether the jury instruction constituted “plain error.” The Court found that the trial court did not commit “plain error” in this regard because there had been inconsistency in prior Ninth Circuit cases regarding the knowledge element for contributory infringement liability.

For instance, in 2013, the Ninth Circuit in Luvdarts, LLC v. AT&T Mobility, LLC, held that “actual knowledge of specific acts of infringement” and “willful blindness of specific facts” would be the only two mental states that allowed for a finding of contributory infringement. However, in 2011, the Court had affirmed a lower court’s decision to instruct the jury that contributory liability could be imposed where the defendant “knew or had reason to know” of the infringement. Thus, because the Court declined to find that this instruction as “plain error,” it affirmed the jury’s finding of contributory infringement against Kast.

c. Willfulness Finding

Finally, Kast urged the Court to reverse the verdict of willfulness on his part regarding the infringing activities. A finding of no willfulness would substantially reduce the amount of damages that could be awarded against Kast. Statutory damages in a case not involving willfulness are capped at $30,000 per work infringed. (See 17 U.S.C. §504(c)(1).) However, if there is a finding of willfulness, statutory damages can rise up to $150,000 per work infringed. (Id., § 504(c)(2).)

Kast urged the Ninth Circuit to reverse the finding of willfulness saying that the trial court had improperly instructed the jury that willfulness could include whether he “should have known” of the claimed infringement. The Ninth Circuit began by nothing that willfulness “requires an assessment of a defendant’s state of mind.” A plaintiff seeking to establish willfulness under the Copyright Act must prove “(1) that the defendant was actually aware of the infringing activity; or (2) that the defendant’s actions were the result of reckless disregard for or willful blindness to the copyright holder’s rights.” (Citing, Unicorlors, Inc. v. Urban Outfitters, Inc., 853 F.3d 980, 991 (9th Cir. 2017).

The Ninth Circuit concluded that a “should have known” standard does not fit within the statutory framework because it is essentially a negligent standard. To say that a defendant such as Kast “should have known” of the infringing activity meant that, while he may have been negligent, he was not necessarily guilty of willfulness under the Copyright Act. The Ninth Circuit further concluded that had the jury been properly instructed, it may not have found that Kast acted “willfully” and could not have awarded more than $90,000 in damages. Therefore, the Ninth Circuit reversed the verdict and remanded it back to the trial court to make a new determination as to the amount of statutory damages that should be awarded to Erickson.

The facts of the Erickson case serve as a reminder that when developing or updating your company website, you should pay careful attention to where content for the site is coming from and whether any licensing fees should be (and have been) paid. Otherwise, the owners of the website face the prospect of being held vicariously and/or contributorily liable for any content on the web page that infringes on another person’s copyrights.

A lot of things are patentable.  Under 35 U.S.C. §101, machines, articles of manufacture, processes, and compositions of matter (including new chemical compounds) are patentable.  But some things are not:  the exceptions are laws of nature, natural phenomena, and abstract ideas.

The Federal Circuit Court of Appeals has many times had to decide what these terms mean.  To make that determination; the court applies the two-part test set forth set forth by the Supreme Court in Alice Corp v. CLS Bank International, 573 U.S. 208 (2014).  First, the court decides if the claims sought to be patented fall within patent-ineligible subject matter, such as abstract ideas.  If so, then in a second step, the court decides if the claims contain some element that transforms the abstract idea into patent-eligible subject matter.

In 2016, the Federal Circuit applied the Alice test to decide whether a method of playing a wagering card game was patentable.  In re Smith, 815 F.3d 816 (Fed. Cir. 2016).  In that case, the court held that the claimed method of playing the card game was similar to the method of mitigating financial settlement risks that was claimed in Alice and the method of hedging risks in consumer transactions that was claimed in Bilski v. Kappos, 561 U.S. 593 (2010).

In 2018, the Federal Circuit decided whether a method of playing a wagering dice game was patentable.  In re Marco Guldenaar B.V., 911 F.3d 1157 (2018).  In that case, the claims required providing a set of three dice, in which the first die had one face marked, the second die had two faces marked, and the third die had three faces marked; wagering on an outcome where one or more of the marked faces of the dice would appear; rolling the dice; and paying out money if the wager outcome occurred.  The patent application had been rejected by the PTO on the grounds that the claims were directed to patent-ineligible subject matter.  The PTO found that the claims, for the rules for playing a game, fell within “methods of organizing human activity” and constituted an abstract idea.  The PTO also rejected the claims on the printed matter doctrine.

The Patent Trial and Appeal Board affirmed the PTO’s rejections.

The Federal Circuit affirmed the decision of the PTAB, holding that the claims were ineligible as directed to an abstract idea.  The court said that the claims for a method of playing a wagering game were similar to the claims that were in rejected in Smith.  The court agreed with the PTAB that the claims were the rules for playing a game, and were also a method of organizing human activity.  The court explained that rules for playing a game are an abstract idea, but that, under the Alice test, they may be patent-eligible if the claims include an inventive concept that transforms the abstract idea into something more.  However, the court found that the steps of placing a wager, rolling the dice, and making a payout on the wagered outcome were merely conventional steps, not an inventive concept.  Thus, under Alice, the claims were a patent-ineligible abstract idea.

The court further held that the rejection of the claims on the printed matter doctrine was proper.  The applicant had argued that the markings on the dice made the claims patentable.  The court held that the markings were printed matter, which is not patentable, because the content of information is not patent-eligible subject matter under §101.

Lastly, the court clarified that the fact that the claims are directed to a physical game is not determinitive.  Just because something is physical does not mean that it overcomes the abstract idea exception to patentability.  Rules for playing a game may involve physical steps, but they still constitute an abstract idea.

On March 25, 2018, the District Court in Nichia Corporation v. VIZIO, Inc., Case No. 8-16-cv-00545 (CACD 2019-03-25, Order), granted defendant’s motion to preclude plaintiff’s damages expert from testifying that plaintiff should recover, as compensatory damages, its costs incurred in a related Inter Partes Review (IPR) proceedings.  The Court found such testimony would constitute an improper circumvention of 35 U.S.C. § 285’s requirements for an attorney fee award.

35 U.S.C. § 285 authorizes a court to award reasonable attorneys’ fees to the prevailing party in “exceptional cases.”  In Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), the Supreme Court defined an “exceptional case” as one that “stands out from others with respect to the substantive strength of a party’s litigating position . . . or the unreasonable manner in which the case was litigated.”  Under Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744 (2014), district courts are to apply a “totality of the circumstances” test to determine whether a case is exceptional.

Moreover, the Federal Circuit recently issued a decision in Stone Basket Innovations, LLC v. Cook Medical LLC that clarified the requirements for litigants seeking attorneys’ fees under 35 U.S.C. § 285.  There, the Federal Circuit found dispositive Cook Medical’s failure to provide “early, focused, and supported notice [to Stone Basket] of its belief that it was being subjected to exceptional litigation behavior.”  According to the Federal Circuit, a “party cannot simply hide under a rock, quietly documenting all the ways it’s been wronged, so that it can march out its ‘parade of horribles’ after all is said and done.”  Indeed, where there is no indication of willful ignorance or failure to assess the soundness of pending claims, post-judgment notice of its assertion that the claims were always baseless cannot mandate an award of fees under a “totality of the circumstances” analysis.

Here, Plaintiff Nichia initiated the instant action on March 23, 2016, alleging that certain televisions of Defendant VIZIO infringe four of its patents directed to light emitting diode (“LED”) semiconductor chips and phosphor materials that are combined to produce white light.  The asserted patents (1) list the same four inventors; (2) share a common specification; and (3) claim priority to the same Japanese patent application, P 09-081010, and the same U.S. Patent Application No. 08/902,725, which issued as U.S. Patent No. 5,998,925 on July 29, 1997.

Before trial VIZIO moved to preclude Nichia’s damages expert from testifying that Nichia should recover, as compensatory damages, its costs and fees “for defending the validity challenge to the patents-in-suit at the patent office.”  VIZIO argued Nichia’s attempts to do so were “an end run around the strict requirements for attorney’s fees under Section 285 of the Patent Act” and is directly contrary to law.  In his expert report, Plaintiff Nichia’s expert states:

I have been informed by Counsel that as a result of VIZIO’s infringement of Nichia’s patents-in-suit by the accused TVs, Nichia initiated this lawsuit. VIZIO then decided to initiate a separate proceeding at the patent office in which it challenged the validity of the patents-in-suit… I understand that the cost to Nichia for defending the validity challenge to the patents-in-suit at the patent office was approximately $800,000…[T]he total damages amount should be adjusted upward by approximately $800,000 to account for this additional damage….

Nichia contended that these costs and fees are proper damages under § 284, arguing that this section simply provides that a court should “award the claimant damages adequate to compensate for the infringement . . . in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.”  However, the Court found that the expert’s inclusion of attorneys’ fees in his calculated reasonable royalty rate is improper.

The Court reasoned that the Federal Circuit’s opinion in Mahurkar v. C.R. Bard, Inc., 79 F.3d 1572, 1581 (Fed. Cir. 1996), addressed a similar question and was instructive.  In that case, the district court awarded litigation expenses to a prevailing plaintiff as part of its royalty rate.  But, the Federal Circuit reversed, explaining that in sections 284 and 285, the Patent Act sets forth statutory requirements for awards of enhanced damages and attorney fees. The statute bases these awards on clear and convincing proof of willfulness and exceptionality.  At no point does it suggest allowing enhancement of a compensatory damage award as a substitute for the strict requirements of these statutory provisions.

The Court here reached a similar conclusion, reasoning “the American Rule is a ‘bedrock principle’ of this country’s jurisprudence. It provides that, in the United States, ‘[e]ach litigant pays his own attorney’s fees, win or lose. The American Rule may only be displaced by an express grant from Congress.” (citations removed). The statute at question here, 35 U.S.C. § 284, contains no such express grant from Congress. Instead, Congress has provided for attorneys’ fees only in “exceptional cases.”

Thus, the court found that to the extent that Plaintiff believes it is entitled to recover its attorneys’ fees, it cannot do so simply by lumping it into its compensatory damages, but must instead meet the more stringent requirements of 35 U.S.C. § 285.  Therefore, the court granted VIZIO’s motion to exclude Plaintiff Nichia’s expert from testifying about the costs and attorney’s fees incurred in the related IPR.

The Supreme Court has granted review in the matter known as Mission Product Holdings Inc. v. Tempnology LLC, No. 17-1657, where it will decide whether a licensee loses its right to use a licensed trademark if the licensor files bankruptcy and the bankruptcy trustee chooses to reject the licensor’s license agreement. This decision could significantly impact numerous licensees throughout the world if the Court affirms the First Circuit Court of Appeal’s decision below, holding that a licensee loses its right to use a licensor’s trademarks once the licensor has filed a petition for bankruptcy and the trustee has elected to reject the agreement pursuant to Section 365(a) of the Bankruptcy Code.

Under Section 365(a) of the Bankruptcy Code, a bankruptcy trustee can assume or reject a debtor’s pre-bankruptcy executory contracts, depending on whether the benefits of continued performance outweigh the burdens to the bankruptcy estate. Under that provision, a rejection is treated as a breach by the debtor if certain conditions are met. If those conditions are met, the other party to the agreement is entitled to file a claim for damages in the bankruptcy action, however valueless that may be.

The Bankruptcy Code, however, does not address the matter at issue before the Supreme Court, which is whether rejection of a trademark license agreement strips the licensee of the right to use the mark. Although Section 365(n) protects the rights of “intellectual property” licensees, the Bankruptcy Code’s definition of “intellectual property” does not expressly include trademarks. While most trademark practitioners would be dumbfounded if a court were to interpret “intellectual property” in a manner that doesn’t include trademarks, the First Circuit did exactly that.

Accordingly, the Supreme Court has granted review to resolve a circuit split between the First Circuit, whose holding is discussed above, and the Seventh Circuit, which held that a licensee’s trademark rights survive rejection of the agreement in bankruptcy. See Sunbeam Prods. v. Chi. Am. Mfg., 686 F.3d 372 (7th Cir. 2012). This case has caused numerous IP groups, as well as the United States Government, to file amicus briefs. Interestingly, the U.S. Government has stated that a trademark owner cannot revoke a licensee’s right to use the trademark by rejecting its license agreement under the Bankruptcy Code’s contract rejection mechanism.

Similarly, Mission Product Holdings, the petitioner in this case, has urged the Court to reject the First Circuit’s holding in favor of the Seventh’s, arguing that, “[a]s the great majority of courts and scholars have recognized, rejection is not a special bankruptcy power to terminate or rescind a contract.” It also does not “allow the trustee to revoke interests in property that the debtor granted to a counterparty under the contract before bankruptcy.”
In contrast, Tempnology, the opposing party, contends the First Circuit made the correct decision. Specifically, Tempnology argues, “The Bankruptcy Code’s strong policy of permitting a debtor to free itself of ongoing obligations under a contract … and the right to reject such obligations applies to the burden of policing trademarks.” As such, Tempnology argues, the First Circuit was correct that a licensee’s right terminate upon rejection.

But this issue was addressed by the American Intellectual Property Law Association’s (“AIPLA”) amicus brief, wherein the AIPLA urged the Court to hold that a licensee’s rights outside of the bankruptcy context govern whether the licensee’s rights survive the licensor’s rejection under the Bankruptcy Code. The AIPLA argues that in the “absence of the Bankruptcy Code specifically addressing trademark licenses, the effect of the breach must be decided under applicable non-bankruptcy law and the language of the contract.” The AIPLA rejected the First Circuit’s rationale that a licensee’s right must terminate in order to avoid restricting a licensor-debtor’s right “to free itself from performing executory obligation” by forcing it to police its marks. The AIPLA contends the First Circuit’s approach was flawed because the duty to monitor a trademark’s use does not arise under the terms of a license agreement, but is instead an independent obligation imposed by federal trademark law.

The United States Government may have said it best: “If a landlord has rented a family an apartment and has agreed to pay the utilities, the landlord cannot later terminate the family’s lease simply by refusing to pay the cable bill[.]” The same principles apply, or at least they should, to trademark licensing agreements. For that reason, among others, I suspect the Supreme Court will overturn the First Circuit’s decision and protect the rights of the licensees.

Over twenty years ago, the Ninth Circuit decided the case of Dr. Seuss Enterprises., LP v. Penguin Books USA, Inc.  That case involved a copyright infringement lawsuit brought by Dr. Seuss over a book entitled The Cat NOT in the Hat! A Parody by Dr. Juice.  This book was about the O.J. Simpson trial presented in Seuss style rhyming verse and animation. The work begins:

A happy town

Inside L.A.

Where rich folks play

The day away.

But under the moon

The 12th of June.

Two victims flail

Assault!  Assail! 

Somebody will go to jail! Who will it be?

Oh my!  Oh me!

The book also presents a view of the OJ Simpson criminal murder trial from OJ’s perspective: “A man this famous/Never hires/Lawyers like/Jacoby Meyers/When you’re accused of a killing scheme/You need to build a real Dream Team.” The book’s illustrations included Simpson depicted 13 times in the distinctively scrunched and shabby stovepipe hat worn by the Cat in the Hat.  The defendants claimed that their use was non-infringing fair use; the court did not agree.

Over twenty years later (and just this month), the Ninth Circuit decided the case of Dr. Seuss Enterprises v. Comicmix, LLC et al., which involved a copyright infringement lawsuit over a Star Trek and Dr. Seuss mashup entitled Oh, The Places You’ll Boldly Go.  This work intermixes Star Trek characters like Captain Kirk, Spock and the Starship Enterprise in the Seuss world; for example, the cover features Kirk standing on a small moon or asteroid above the Enterprise  evoking the rainbow ringed disc and tower or tube pictured on the original work’s cover, The defendants admitted that they “painstakingly attempted” to make their illustrations “nearly identical” in certain respects to illustrations in the Dr. Seuss book, Oh, The Places You’ll Go, and went to great lengths to mimic the Seuss writing style.  The defendants claimed that their use was non-infringing fair use; the court agreed.  As the Grinch said, “how could it be so?”

In Cat NOT in the Hat, the defendant’s case relied mostly on fair use; primarily that the work was a parody.  The Ninth Circuit, in determining the first fair use factor – the purpose and character of the use – found the book was not a parody.  The court noted that while the book “does broadly mimic Dr. Seuss’ characteristic style, it does not hold his style up to ridicule” and that “[t]he stanzas have no critical bearing on the substance or style of The Cat in the Hat.”  The court essentially closed the door on the defendant’s case when it noted that there is “no effort to create a transformative work with “new expression or meaning.”

In Oh, The Places You’ll Boldly Go, the defendants also relied on the fair use defense and claimed that their work was a parody. While the Ninth Circuit, similar to Cat NOT in the Hat found the work not to be a parody, the court went on to determine that it was “highly transformative.”

It’s challenging to reconcile the treatment of the first fair use factor in the two cases, as the Ninth Circuit in Cat NOT in the Hat did not go into an analysis of the transformative nature of the work separate and apart from the inquiry into whether it was a parody.  In the Boldly Go case the court went to great lengths to explain how and why the work is transformative.  The court noted that while the defendants borrowed (liberally at times) from the Seuss work, the “elements borrowed were always adapted or transformed” by the inclusion of Star Trek (or Trek like) characters; the defendants’ additional material reframed the original material from a unique Star Trek viewpoint.

In considering the third factor^[1], whether the amount and substantiality of the portion used in relation to the copyrighted work as a whole are reasonable in relation to the purpose of copying, the court in Cat took great issue with the defendant’s frequent use of the Cat in the Hat image and rejected the philosophical parallels the defendants attempted to draw between the two works, calling it a completely unconvincing post-hoc characterization.

However, in Boldly Go the court found that the defendants took no more from the original work than was necessary in order to create a mash-up of Go and Star Trek.  The court went to great lengths to examine the elements of the Seuss work entitled to copyright protection and measure the extent of the defendants’ copying of those elements.  For example, the court noted that Seuss “may claim copyright protection in the unique, rainbow-colored rings and tower on the cover of Go!  Plaintiff, however, cannot claim copyright over any disc-shaped item tilted at a particular angle.”  Even though Boldly Go was found not to be a parody, the court found that it did not “copy more than is necessary to accomplish its transformative purpose.”

Like Cat, Boldly Go liberally copied certain aspects of Go, however, the court specifically noted that the defendants did not copy verbatim text or replicate entire images.  To the author’s understanding, neither did Cat NOT in the Hat. The only significant difference that may explain the disparate treatment of this factor is that Cat NOT made liberal use of the Cat figure while Boldly Go apparently made no use of any major Seuss character.

The last fair use factor examines the effect (e.g., market harm) the infringing work may have on the value of the copyrighted work.  The key purpose is to determine to what degree the infringing work is a substitute for the original work.  Transformativeness and this factor are closely related; if a new work is transformative it’s not a substitute for the original work. In Cat NOT in the Hat the court said that because the work was not transformative, “market substitution is at least more certain, and market harm may be more readily inferred.”

In Boldly Go the court noted that Go is an extremely popular book for graduates and Seuss or its licensees have published many derivatives of Go.  The plaintiff claimed the work in question would harm its licensing opportunities.  The court found that Boldly Go is not a substitute for the original work as a children’s book; its impact on the market for graduation gifts or derivatives is a closer question. Because the court found Boldly Go to be transformative, the plaintiff was required to introduce evidence showing harm and such showing must be by a preponderance of the evidence.  The court found that the plaintiff failed to meet this burden.  Because the plaintiff introduced no evidence tending to show that it would lose licensing opportunities or revenues as a result of publication of Boldly Go or similar works, the potential harm to plaintiff’s market remains hypothetical.  As such, the court concluded that this factor favors neither party.

In Cat Not in the Hat the court found that the weight of the fair use factors favored a finding against fair use while Bold Go resulted in the opposite.  While these cases may seem tough to reconcile, there are distinct factual differences that may have caused the same court to find one way or another.  Also, followers of fair use cases appreciate that fair use is by no means static; it’s more like an active pendulum.

^[1] In both matters, the second factor – the nature of the copyrighted work – favored the plaintiff.  This is usually the case with dealing with creative works.

The United States Supreme Court granted a writ of certiorari in Iancu v. NantKwest to determine whether a patent applicant, win or lose, must pay the salaries of the United States Patent and Trademark Office’s (“USPTO”) in-house attorneys in district court actions challenging the rejection of patent claims by USPTO patent examiners.

When a patent applicant files for a patent, the USPTO assigns an examiner to review the application and determine whether the claims are patentable and a patent should issue.  If the patent examiner rejects claims in a patent application, the applicant can appeal that decision to the USPTO’s Patent Trial and Appeal Board (“PTAB”).  If that appeal is not successful, the applicant has two options for challenging the rejection.  The applicant can either 1) appeal the rejection directly to the Court of Appeals for the Federal Circuit or 2) file a civil action in the District Court for the Eastern District of Virginia.  35 U.S.C. §145.  Unlike in an appeal to the Federal Circuit, if the applicant brings an action in the district court, “[a]ll the expenses of the proceedings shall be paid by the applicant” regardless of the outcome of the litigation.  Id. 

There are pros and cons to these two options for challenging an examiner’s decision.  The Federal Circuit typically offers faster resolution, but it relies only on the record that was before the USPTO and does not review the matter de novo.  In contrast, filing a civil action in district court is slower, litigation expenses may be higher, and the patent applicant is required to pay the USPTO’s expenses regardless of whether the applicant wins or loses.  The district court, however, offers the applicant the option to present new evidence that was not presented to the USPTO, and the court must review that new evidence de novo.

While the statutory language requiring an applicant to pay all expenses in district court actions has long been in effect, the USPTO had not sought to recover attorneys’ fees in the past.  The USPTO, however, argues that two things changed in 2013 that led it to seek attorneys’ fees.  First, “in the America Invents Act, Congress directed the agency to set its fees so as ‘to recover the aggregate estimated costs to the [USPTO] for processing, activities, services, and materials relating to patents *** and trademarks.’”  Second, proceedings under Section 145 “have grown increasingly expensive and the single largest expense to the USPTO is often the time that agency employees must devote to those matters.’”

Therefore, for the first time in Shammus, the USPTO sought attorneys’ fees as part of its expenses under Section 145’s trademark provision.  Allowing recoupment of attorneys’ fees, the Court of Appeals for the Fourth Circuit explained that “the imposition of all expenses on a plaintiff in an ex parte proceedings, regardless of whether he wins or loses, does not constitute fee-shifting that implicates the American Rule.”  Shammus v. Focarino, 784 F.3d 219 (4^th Cir. 2015).  The “American Rule” assumes each party pays its own attorneys’ fees absent explicit statutory authority to the contrary.

In Iancu, the USPTO has sought attorneys’ fees under Section 145’s patent provision.  The question raised in Iancu is whether the “expenses” that the applicant must pay in a district court proceeding challenging an examiner’s rejection of patent claims include the salaries for attorneys’ employed by the USPTO who work on the case.  In Iancu, the USPTO sought to recoup over $78,000 in attorney and paralegal salaries and over $33,000 in expert witness expenses.  The district court allowed reimbursement for the expert witness expenses but not the salaries.  The district court distinguished between the two types of expenses in finding that in light of the presumption under the “American Rule,” Section 145 was not sufficiently “specific and explicit” to cover attorneys’ fees or salaries.  The Federal Circuit, in a divided decision, reversed finding that “expenses” include “attorneys’ fees.”  Acting sua sponte, the Federal Circuit en banc reheard the case and ruled 7-4 that Section 145 does not cover attorneys’ fees because the statutory language “all the expenses” is not sufficiently “specific and explicit” to overcome that presumption of the “American Rule.”

In its petition for certiorari, the USPTO points to the Shammus ruling regarding trademark actions in support of its argument that the “American Rule” only applies in fee-shifting scenarios where a prevailing party is seeking to recoup expenses rather in cases such as this where the applicant must always pay the expenses.  However, the Federal Circuit en banc stated “Shammas’s holding cannot be squared with the Supreme Court’s line of non-prevailing party precedent applying the American Rule.”  The Federal Circuit “noted that a statute awarding attorneys’ fees to a losing party would represent ‘a particularly unusual deviation from the American Rule” because “[m]ost fee-shifting provisions permit a court to award attorney’s fees only to a prevailing party, a substantially prevailing party, or a successful litigant.’”

The USPTO also makes policy-based arguments for the reimbursement of attorneys’ salaries.  It argues that applicants have an alternative appellate process where they do not have to pay the USPTO’s expenses, a substantial amount of attorneys’ time is devoted to Section 145 district court proceedings given the additional discovery and new evidence presented, and it is unfair to make other patent applicants effectively underwrite the cost of Section 145 proceedings.

In its opposition to the petition for certiorari, NantKwest pointed out that “expenses” in Section 145 is at best ambiguous.  The fact that “expenses” could be construed to encompass attorneys’ fees or salaries is not sufficient to “specifically and explicitly” authorize attorneys’ fees and overcome the presumption of the “American Rule” that each party pays its own attorneys’ fees absent explicit statutory language to the contrary.  The USPTO, however, argues that even if the American Rule applies, “[a]ll the expenses of the proceedings” “is sufficiently specific and explicit to overcome the presumption … and authorize reimbursement of the USPTO’s” attorneys’ salaries.

The Supreme Court will decide this issue in the upcoming months, so stay tuned.

This week, the Supreme Court resolved a split in the circuits regarding an issue in copyright law that affects copyright owners in California.  Until now, the law in the Ninth Circuit was that a copyright owner could file suit for infringement as soon as they filed a copyright application in the Copyright Office.  However, in Fourth Estate Public Benefit Corp. v. Wall-Street.com, LLC (U.S. Supreme Court, March 4, 2019), the Court rejected this approach, holding that a copyright owner cannot file suit for infringement until the work has been registered by the Copyright Office.

The plaintiff, Fourth Estate Public Benefit Corp., is a news group who writes online articles.  The defendant, Wall-Street.com, is a website for news articles.  Pursuant to a license, Fourth Estate licensed its articles to Wall-Street.com.  Wall-Street.com cancelled the license, but continued to publish Fourth Estate’s articles, in violation of the license.   Fourth Estate filed applications in the Copyright Office to register the copyrights in its articles, and then filed suit against Wall-Street.com for copyright infringement.  Wall-Street.com moved to dismiss the complaint on the grounds that Fourth Estate had not registered its copyrights within the meaning of the Copyright Act of 1976, as amended, as of the filing of the complaint.  The district court granted Wall-Street.com’s motion to dismiss.  The Eleventh Circuit Court of Appeals affirmed.

Copyright protection exists as soon as a work of expression is created.  However, under the Copyright Act, a copyright owner cannot file an action for infringement until “registration…has been made.” 17 U.S.C. §411(a).

The circuit courts are divided as to the meaning of the phrase “registration…has been made,” as set forth in §411(a).  Some circuits, including the Ninth Circuit, take the “application approach,” holding that a copyright has been registered, and therefore an action for copyright infringement can be filed, once the copyright owner has filed its application for registration and the application has been received by the Copyright Office.  Other circuits, including the Eleventh Circuit, take the “registration approach,” holding that a copyright has not been registered, and therefore an action cannot be filed, until the Copyright Office has actually registered the work.

The Supreme Court granted certiorari in the case to resolve the split in the circuits.  The Court held that the “registration approach” is the correct interpretation of §411(a), and that “registration” means action taken by the Register of Copyrights.

The Court explained that the first §411(a) sets forth the rule that an action for infringement cannot be filed until registration of the copyright has been made, while the second sentence provides an exception to the rule.  The second sentence states that if a copyright application has been submitted to the Copyright Office, but registration has been refused, the applicant can file an action for infringement if they provide notice of the action and a copy of the complaint to the Register of Copyrights.   The Court reasoned that if “registration” meant application, then the second sentence would be superfluous; an applicant could just file suit as soon as they filed their copyright application.

The Court said that the third sentence of §411(a) further supports the “registration approach.”  That sentence provides that the Register of Copyrights may optionally join an action with respect to the issue of registrability of the copyright. According to the Court, this sentence would be meaningless if a suit could be filed before the Register had acted on the copyright application.

The Court noted that other sections of the Copyright Act support this interpretation.  For example, §411(a) refers to examination of the application by the Register of Copyrights, and includes the steps of determining whether the work is copyrightable and deciding whether to allow or refuse registration. The statutes also provide for preregistration, a specific process which allows an applicant seeking a copyright for a work for which predistribution infringement is a risk (such as a film or musical composition) to receive a limited review by the Copyright Office and the right to file an infringement action prior to registration.

Fourth Estate argued that an applicant may run out of time to file suit while waiting for the Copyright Office to register their copyright.  The Court found this argument unpersuasive, pointing out that the average time to obtain a copyright registration is about seven months, leaving plenty of time left in the three-year statute of limitations, and that, in certain cases, an applicant can request expedited processing.

So, the message of this case is clear: the best practice for copyright owners in California, and throughout the U.S., is to file an application to register their copyright as soon as possible for any work for which they might, at some time in the future, need to file an infringement suit.