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Contractual Arbitration: Is It Binding On Victims Of Elder Abuse?

Published: November 1, 2007

by Edward J. Corey, Jr., Kelly E. Dankbar

California Trusts and Estates Quarterly
Volume 13, Issue 3
Fall, 2007
I. INTRODUCTION

These days, it is virtually impossible to open a bank or brokerage account, or even be admitted to a nursing home, without unwittingly agreeing to resolve any future disputes with the company through binding arbitration. Arbitration clauses are standard in many industries, and once accepted on an industry­-wide basis they become unavoidable and non-negotiable: one either agrees to arbitrate disputes or foregoes the desired or needed services.

Each of us is affected by arbitration agreements in virtually every facet of our lives, but the elderly are particularly impacted by such agreements. Whether contracting for long-term care, seeking care from a hospital, or entrusting their retirement assets to the management of a financial advisor, the elderly are asked to sign binding arbitration agreements which, unbeknownst to them, usually take away rights guaranteed to the elderly by law. Since 1992, the California Legislature has enacted a series of laws specifically designed to protect seniors who are victims of elder financial abuse. Yet arbitration provisions wipe away these rights with merely a signature.

In a ruling by the Sacramento County Superior Court, however, the plaintiff in an elder-financial-abuse case successfully defeated the defendant financial institution’s arbitration provisions, thereby allowing the plaintiff to avail herself of rights and remedies that her contract with the financial institution had specifically limited. This ruling provides a blueprint for all elders who are victims of abuse—whether it be financial abuse, physical abuse, or neglect—to have their lawsuits resolved in a public forum, before a sympathetic jury, with all the rights and remedies the law provides. Shortly after this ruling was issued, the California Court of Appeal, First District, held that enforcing arbitration clauses against abused seniors violated California public policy.1

After briefly discussing how arbitration became the favored means of resolving consumer disputes, this article analyzes arbitration in the context of elder-abuse cases and reflects on the courts’ evolving scrutiny of arbitration clauses as they apply to seniors and their successor representatives.

II. PERCEIVED BENEFITS OF ARBITRATION

A. Historical Overview: The Evolution of Arbitration

In 1925, Congress enacted the Federal Arbitration Act (FAA.).2 The statute dictates that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or equity for the revocation of any contract.” The statute was passed by Congress because state courts were failing to enforce arbitration agreements. California, showing its support for arbitration, enacted a parallel statute two years later.3

Why would a party seek to resolve disputes in arbitration instead of in court? The answer varies from dispute to dispute, but foremost, parties perceive arbitration as faster and more cost-effective than court proceedings. They also perceive arbitration as providing parties with more control over the dispute resolution process. For example, in arbitration, parties sometimes may pick their judge and determine when their claims will be heard.

Courts construing the FAA have opined that it established a “manifest liberal federal policy favoring arbitration agreements.”4 Arbitration, however, is not a panacea, particularly where the rights of a disadvantaged class such as seniors are concerned.

B. Prevailing Realities: A Closer Look at the Impact of Arbitration

In a commercial context, the perceived benefits of arbitration may be actual benefits, but if a dispute is between a company and an individual, particularly an elderly individual, arbitration may have devastating effects. For example, a recent New York Times article, When Winning Feels a Lot like Losing,5 tracked the case of an elderly woman whose life savings had been squandered by her stock broker. The brokerage firm lost nearly $300,000 of the victim’s investments, but the arbitrator awarded the victim only $5,000 in compensatory damages. Adding insult to injury, the arbitration costs were $10,000. The victim, bound by an arbitration clause, recovered a fraction of her losses from Morgan Stanley and was ordered to pay more than twice the amount of her judgment in arbitration costs and fees, rendering the outcome a net loss despite her “victory” at arbitration.

This case highlights what consumer advocates have been saying for years: despite its perceived advantages, there are circumstances in which arbitration results in an injustice. Consumer-rights advocates have been challenging arbitration clauses not only in the elder-abuse context, but also in cases against retail giants such as Gateway. In El Dorado County, a resident has been trying to avoid arbitrating a case against the manufacturer of his computer, which he claims sold him a defective product. Arbitration would cost more than the computer at issue in the case. The aggrieved party has asked the small claims court to allow his dispute to proceed and to deny the company’s motion to compel arbitration.6

The economic burden of arbitration is not the only problem consumers face. In arbitration proceedings, discovery is limited, there is no right to a jury trial, all decisions are final and cannot be appealed. Also, damages are limited, so plaintiffs cannot get punitive damages, attorney’s fees or, in those cases where they otherwise would be available, treble damages. The awarding of attorney’s fees, as well as special damages, is particularly important in elder abuse cases. Often, elderly victims of financial abuse are left nearly penniless. If prohibited from seeking an award of attorney’s fees or special damages, attorneys have little incentive to represent such victims. Finally, arbitration is a private proceeding and, although some see this as beneficial, this denies plaintiffs the important public validation that many seek. This aspect of arbitration also keeps from the public’s view the rampant problem of elder abuse.

III. EVOLUTION OF PROTECTIVE LEGISLATION FOR SENIORS

In 1991, the California Legislature passed Senate Bill 679, which added certain provisions to the Welfare and Institutions Code.7 Recognizing that elderly persons are a “disadvantaged class in need of special protection,” the Legislature added Welfare and Institutions Code section 15657, authorizing the award of attorney’s fees and costs in elder-abuse cases. Prior to the enactment of this legislation, commonly known as the Elder Abuse and Dependent Adult Civil Protection Act (EADACPA), few civil cases were brought in connection with elder abuse due to problems of proof, court delays, and the bar’s lack of incentives to prosecute these types of suits. The Legislature specifically declared that, by adding Section 15657, it intended to “enable interested persons to engage attorneys to take up the cause of abused elderly persons.”8

The Legislature was particularly concerned about rising levels of abuse, neglect and abandonment of elderly persons by their families or caretakers. The Legislature has documented that nearly 225,000 Californians are victims of elder and dependent-care abuse each year and, as our population ages, the number of cases is expected to rise in the coming years.9 The Legislature recognized that the elderly are a disadvantaged class in need of protection from hidden acts of elder abuse. For these reasons, EADACPA not only established civil actions and remedies, but with Welfare and Institutions Code sections 15657 et seq. recognizes a right in the decedents’ successors in interest to bring these actions against alleged abusers.10

The Legislature is continuing in its efforts to protect seniors from elder abuse. On July 12, 2007, Governor Schwarzenegger signed into law Senate Bill 611, which will add Welfare and Institutions Code section 15657.01, allowing plaintiffs in elder­ financial-abuse cases to request attachment of the defendant’s property to recover any judgment filed against them.11 This recent legislation reflects the prevailing public policy that elder abuse is an important issue and requires special legislative measures to deter abusers and compensate those who prosecute them.

California law does not just create statutory rights of action for elders and their families to use when responding to abuse; the law also provides for double or treble damages, as a deterrent to elder abuse and neglect.12 Because seniors face unique challenges when seeking legal assistance, statutes which provide for punitive damages and attorney-fee awards increase the likelihood that seniors will receive adequate representation. These most important elements—punitive damages and attorney fees—are often lost when arbitration clauses are enforced. This is unconscionable, given that seniors often waive with a signature rights and protections of which they know nothing, leaving little incentive for lawyers to take their cases.

IV. ARBITRATION OF ELDER ABUSE CLAIMS: CAN IT BE AVOIDED?

Despite the public policy favoring arbitration, courts have become increasingly aware of several contexts in which arbitration agreements are unenforceable as a matter of law. To defeat a motion to compel arbitration, a plaintiff must show that public policy in his or her state prohibits enforcing the agreement, usually on the grounds that it is unconscionable. One such special circumstance is employment law, where courts have refused to enforce agreements lacking certain procedural protections.13

In 2000, the California Supreme Court set forth its requirements for enforcing and protecting statutory rights in arbitration. In an employment-law case, Armendariz v. Foundation Health Psychcare Services, Inc.,14 the court held that rights guaranteed under the California Fair Employment and Housing Act (FEHA)15 cannot be abridged by an arbitration agreement between employer and employee. To protect those statutory guarantees, the court imposed the following standards on arbitration of statutory claims: 1) the arbitration agreement must provide for a neutral arbitrator; 2) the agreement must provide for more than minimal discovery; 3) the arbitrator must produce a written award or disposition; 4) the process cannot limit relief guaranteed under the statute; and 5) the process may not require the employee to pay unreasonable expenses to access the arbitration forum.16

Recently, the United States Court of Appeals for the Ninth Circuit declined to compel arbitration in an employment dispute where the knowledgeable paralegal employee had signed an arbitration agreement with employer law firm O’Melveny & Myers. Davis v. 0’Melveny & Myers17 is one more example of the courts’ increasing skepticism of arbitration agreements in the special context of employment. The court reasoned that the arbitration agreement left the employee no opportunity to negotiate; the employee either had to bind himself to the arbitration agreement or leave the employer. This was unconscionable and unenforceable18 The Davis case reiterates that federal courts should apply state law regarding the formation of contracts when analyzing the enforceability of arbitration agreements.19 In California, this requires analyzing the procedural and substantive unconscionability of the agreement.20

Attorneys representing victims of elder abuse are now applying the Armendariz principles to defeat arbitration agreements on similar grounds. In this endeavor, attorneys will be aided by the Legislature’s recognition of seniors as a disadvantaged class and by the legislation enacted over the past 15 years. This legislation articulates a vibrant public policy to support elders and their successor representatives in the face of abuse and neglect. After Armendariz, it seems clear that California public policy will not support a motion to compel arbitration where an elderly plaintiff is asserting rights guaranteed under California law.

A. Elder Financial Abuse

The authors have successfully applied the Armendariz principles in the context of financial elder abuse. Arguing that arbitration was not an appropriate method of dispute resolution in elder-abuse cases, the authors compared the rights and remedies which are created for the elderly under EADACPA to the rights and remedies which are created for employees under FE1HA. Both statutes were created for a public reason: EADACPA was created to protect all elders from physical abuse, financial abuse, and neglect; FEM. was created to protect all employees from sex discrimination and sexual harassment in the workplace. Following the holding of the California Supreme Court in Armendariz, the authors argued that an arbitration agreement involving an elderly party must provide adequate safeguards for the selection of neutral arbitrators and must not unreasonably limit the plaintiff’s right to discovery; the arbitrator must be required to issue a written award; the agreement must allow the plaintiff all of the same types of recovery that he or she would be allowed in court; and, the agreement must not require the plaintiff to pay unreasonable costs or arbitrators’ fees.21

The groundbreaking litigation was brought by Evelyn Ugarte, successor trustee of the trust created by Frank Vierra (“Frank”), an 84-year-old retired school custodian. Frank entrusted his retirement savings to a financial advisor with WM Financial Services, Inc., an investment arm of Washington Mutual Bank. Unbeknownst to Frank, the financial advisor took advantage of Frank and depleted Frank’s assets to the point that he was virtually penniless when he died. After Frank’s death, Frank’s cousin, acting as successor trustee (the “Plaintiff”), filed suit against the financial advisor, his former employer WM Financial Services, Inc., and Washington Mutual Bank, for fraud, breach of fiduciary duty and elder financial abuse, among other claims.

Like every other customer who has ever opened an account at a bank or financial institution, when Frank opened his accounts at Washington Mutual, he signed a customer agreement which contained an arbitration clause. To no one’s surprise, Washington Mutual Bank and WM Financial Services, Inc. (“Washington Mutual”) moved to force Plaintiff into arbitration. However, because the case involved statutory claims of elder financial abuse, Plaintiff defeated Washington Mutual’s motion.

In Ugarte v Washington Mutual Bank,22 the authors argued that the same requirements Armendariz established for claims under FEHA should be applied to arbitration agreements involving EADACPA claims. The trial court agreed. The elderly are guaranteed certain rights and remedies which are generally not available to those under the age of 65 (i.e., the recovery of attorney’s fees and costs and the ability to triple exemplary or punitive damages). The authors argued that an elder cannot he denied those rights simply because he or she was forced to agree to an arbitration provision as a condition of opening a hank account. The court further agreed and, finding that Washington Mutual’s arbitration agreement contained none of the Armendariz minimum requirements, ruled that as a matter of law, Washington Mutual’s arbitration agreements were unconscionable at the time that they were made. Washington Mutual’s arbitration agreement. was unenforceable in Plaintiff’s elder financial abuse case and the court refused to order the case to arbitration.

In a later case, the First District Court of Appeal upheld a trial court denial of a rehabilitation center’s motion to compel arbitration. In Fitzhugh v. Granada Heathcare and Rehabilitation Center, LLC. et al, the court held that in enacting EADACPA, the legislature was expressing the public policy that, “under no circumstances may a patient or resident waive his or her right to sue for violations of rights under the Patients Bill of Rights, or other federal and state laws and regulations, which would include the existing Elder Abuse and Dependent Adult Civil Protection Act.23 The court went on to say that the Legislature has acted in certain terms to protect the elderly as a particularly vulnerable class and that to enforce arbitration agreements against seniors is a violation of public policy.

B. Nursing Homes

Compelling seniors to arbitrate may be objectionable not only in the financial abuse context, but also in cases against hospitals and nursing homes. The nursing home environment, however, presents additional issues which makes it less certain whether plaintiffs may successfully rely on the Armendariz principles. Particularly challenging in these cases is that often the person who signs the arbitration agreement is not the senior but is instead the senior’s agent under an advance heath care directive.

In Garrison v. Superior Court,24 an ailing senior designated her daughter to be her attorney in fact and placed no restrictions on her daughter’s agency power. The daughter signed an arbitration provision on her mother’s behalf when she admitted her mother for care at a nursing facility. The court considered an array of statutes when determining whether a durable power of attorney for health-care decisions includes the right to bind a patient to arbitration. Because the power of attorney was granted for the purpose of making health-care decisions, the court read Probate Code sections 4683(a), 4684 and 4688 to include the power to bind the patient and their successors to arbitration. The extensive power granted in the durable power of attorney was central to the court’s holding that the arbitration provision relied on by the nursing home would be enforced over the family’s objections. The court noted that the durable power of attorney specifically stated that it was executed so as to facilitate health-care decisions.25 When the mother died and the family sought to pursue actions for elder abuse and medical malpractice against the care facility, the family was forced to arbitrate the dispute based on the agreement signed by the daughter at the time of admission. In Garrison, the durable power of attorney specifically referenced the Probate Code. This, the court found, supported the proposition that the daughter had wide discretion in her mother’s care.

In Hogan v. Country Villa Health Services,26 the Fourth District Court of Appeal also ruled for a nursing home in a case to compel arbitration. The court reasoned that because the daughter (pursuing damages after her mother’s death) had been authorized to make health-care decisions for her mother, it was within the daughter’s agency to bind her mother and her mother’s successors to arbitration. This durable power of attorney which established the daughter’s agency was key to the court’s holding. The court cited a variety of other medical care cases to support its rationale that power of attorney agency allows parties to bind one another to arbitration clauses. The plaintiff relied most heavily on the court’s earlier decision in Garrison. Principally, the court noted that the daughter had been authorized to make such decisions under Probate Code section 4701.

On appeal, the plaintiff family in Hogan raised the concerns of the Armendariz case and argued that public policy mandated setting aside the arbitration agreement, but the family did not raise this argument at trial. Because the issue was raised for the fast time on appeal, the court held this argument to be waived. Thus, the Court of Appeal has yet to provide guidance on whether the Armendariz principles affect enforceability of an arbitration agreement signed by an agent under a durable power of attorney. Further complicating matters, not all durable powers of attorney are executed pursuant to statute.

Just two weeks after ruling in Hogan, the Fourth District spoke again to elder abuse issues. In Flores v. Evergreen at San Diego, LLC,27 the court declined to uphold an arbitration provision signed by a husband when admitting his wife to a facility. At the time of admission, the husband did not have his wife’s power of attorney and the court found that marital status alone was not sufficient to establish the husband’s right to submit his wife’s claims to arbitration. Certainly there was no statutory authority granting the husband such agency which, considering the public policies evident in elder-abuse prevention statutes, should not be implied. And, although the wife later granted the husband a power of attorney, the instrument was not prepared pursuant to statutory guidelines, was narrowly construed and could not be used to ratify the husband’s earlier actions. The court’s ruling was justified not only by the absence of express statutory authority granting agency to the husband, but by the “plethora of statutes and regulations” meant to ensure that arbitration agreements are obtained with informed consent and are limited in scope.28

Among these safeguards is California Civil Code section 1599.81, which requires arbitration agreements. to be on forms separate from the form admission and treatment contracts. The court also cited Civil Code section 1430, which forbids binding arbitration for violations of the Patients Bill of Rights or other statutory or regulatory rights. The Flores court concluded by noting, “because arbitration agreements waive important legal rights, the Legislature has imposed heightened requirements on arbitration provisions in nursing home contracts.”29

The question remains what would happen if principals specifically excluded from their durable powers of attorney the right to bind the principal to an arbitration provision. Would providers still contract with seniors’ families to give seniors the care they need? Or would the existence of such a prohibition make it impossible for an agent to gain for the principal admission to a care facility? What would happen if an agent prohibited from agreeing to arbitration nevertheless signed an arbitration agreement? If the principal later suffered actionable harm, would the prohibition on arbitration be enforceable? Or could the defendant compel arbitration by arguing its reliance on the arbitration agreement?

V. CONCLUSIONS

Although the cases involving claims under EADACPA should, as a matter of law, preclude attempts to arbitrate, efforts to codify in EADACPA a prohibition against arbitration have been fiercely opposed. Hope is not lost, however. The impact of the trial court’s ruling in the Washington Mutual case and the appellate holding in Fitzhugh extends beyond the bounds of these two cases. Now, any financial institution, nursing home, health maintenance organization, hospital, or any other person or entity who contracts with an elder (i.e., any person age 65 or older) must be on notice. If an entity or its employee neglects or abuses an elder, the arbitration agreement will likely be unenforceable, unless the arbitration agreement meets certain minimum requirements. Absent these requirements, disputes alleging abuse or neglect of an elder likely will be decided by a jury, rather than an arbitrator. Juries have the power to award punitive damages, and under the appropriate factual circumstances, can also award double and treble damages, including punitive damages. The court’s ruling in the Washington Mutual case was clearly a victory for Plaintiff, but it was also a victory for all susceptible persons 65 years and older, for their families and for their advocates.

ENDNOTES

  1. Fitzhugh v. Granada Heathcare and Rehabilitation Center, LLC. et al. (2007) 150 Cal.App.4th 469.
  2. 9 U.S.C. § 1, et seq.
  3. Stats, 1927, ch.225.
  4. Gilmer v. Insterstate/Johnson Lane Corp. (1991) 500 U.S. 20, 25.
  5. Morgenson, When Winning Feels a Lot like Losing (Dec. 10, 2006) N.Y. Times, business section pages 1 and 10.
  6. Sangree, Stubborn PC Owner Takes on Gateway (June 7, 2007) Sacramento Bee, pages B1 and B2.
  7. Well. & Instit. Code, § 15600 et seq.
  8. Welf. & Inst. Code, § 15600(j).
  9. Assembly Concurrent Resolution No. 8 (Dymally, Jan. 14, 2005).
  10. Code Civ. Proc., k 377.30.
  11. Stats 2007, Chapter 45, Welf. & Inst. Code, § 15657.01.
  12. Prob. Code, § 859 and Civ. Code, § 3345.
  13. Davis v. O’Melveny & Myers (2007) 485 F. 3d 1066.
  14. Armendariz v. Foundation Health Psychcare Services, Inc (2000) 24 Cal. 4th 83.
  15. Gov. Code, §§ 12900 et seq.
  16. Id. at 102.
  17. Davis v. O’Melveny & Myers, supra, 485 F. 3d 1066.
  18. Id. at 1075.
  19. Id. at 1068.
  20. Circuit City Stores, Inc. v. Adams (9th Cir. 2002) 279 F. 3d 889, 892.
  21. Armendariz, supra, 24 Cal. App. 4th 83.
  22. Sacramento Superior Court Case No. 01-AS06203- Evelyn Ugarte (Successor Trustee of the Frank Vierra Family Trust Dated April 20, 1999) v. Washington Mutual Bank FA. et al.
  23. Fitzhugh v. Granada Heathcare and Rehabilitation Center; LLC. et al., (2007) 150 Cal.App.4th 469, 476 (emphasis added).
  24. Garrison v Superior Court (2005) 132 Cal.App.4th 253.
  25. Id. at 258.
  26. Hogan v. Country Villa Health Services (2007) 148 Cal. App. 4th 259.
  27. Flores v. Evergreen at San Diego, LLC. (2007) 55 Cal. Rptr. 3d 823, 828.
  28. Id. at 830.
  29. Id. at 832.

California Trusts and Estates Quarterly
Volume 13, Issue 3
Fall, 2007

Blind Internet Users Victorious in Discrimination Action Against Website

Published: October 16, 2007

by Jeffrey Pietsch
The IP Law Blog

Earlier this month, a California district court certified a class on behalf of blind internet users against Target.com under the American Disabilities Act and California law. National Federation of the Blind v. Target Corp. (N.D. Cal. Sept. 28, 2007). The class claims that the Target.com website is inaccessible to the blind and therefore violates federal and state laws prohibiting discrimination against the disabled. This ruling should give notice to website owners that websites, especially those available in California, should be made to be accessible to the blind.

The plaintiff, a blind college student, uses the internet for various reasons, including shopping. The plaintiff goes online to compare prices, research goods and make decisions about making purchases at physical stores. The plaintiff uses a screen reading software device to access the internet. The software reads embedded data on a website and vocalizes this information to the blind user. The plaintiff claims that the Target.com website fails to use such embedded data despite it being technologically simple and not economically prohibitive. The plaintiff claims that since Target.com lacks this embedded data, blind users are unable to navigate the website and are denied full and equal access to the physical target stores.

The court certified classes in this case based on federal and state law. The nationwide claim is based on the ADA’s requirement that all disabled people have full and equal enjoyment to goods and services of any place of public accommodation. Courts have been reluctant to hold websites to the standards set forth by the ADA because they are not considered to be a place of public accommodations. The court in this case, however, recognized that Target.com’s inaccessibility issues may have hindered the plaintiffs’ full enjoyment of the physical stores. The court found that Target’s physical store and its website are highly integrated. Many internet users use the website to pre-shop before shopping in the physical store. Target.com was inaccessible to the blind, and they were prevented from pre-shopping which caused some blind users to expend extra time and expense in shopping. In some cases, the blind users were diverted to more user friendly websites. The court held that the nexus between the website and the physical store was enough to cause harm to blind users who could not access the Target.com website. In these situations, plaintiffs who were unable to pre-shop did not have full and equal enjoyment of the goods and services at the physical stores.

Unlike the ADA, the California state disability laws do not require a nexus between a website and a physical store. The California Unruh Civil Rights Act and the Disabled Person Act (DPA) is not limited to restrictions on public accommodations. The Unruh Act regulates “all business establishments of every kind whatsoever.” Cal Civ. Code § 51(b). The DPA addresses “an accommodation, advantage, facility, and privilege of a place of public accommodation” and “other places to which the general public is invited.” Id. § 54.1(a)(1). Thus, the language of both statutes is broader than that of the ADA. The court reviewed the legislative history of both acts and determined that the nexus requirement is not required between the website and the physical store. Specifically, one court recently held that “business establishments” under the Unruh Act included an exclusively internet-based adoption agency. Butler v. Adoption Media, LLC, 486 F.Supp. 2d 1022, 1054 (N.D. Cal. 2007). In that case, the adoption agency discriminated against same-sex domestic couples in favor of married couples. The court found that no nexus was needed between the website and the physical place.

The DPA also is more expansive than the ADA. The DPA includes both physical and non-physical places and “other places where the public is invited.” There are no cases that hold that websites are included in “other places.” The court, however, holds that the there are no cases that exclude websites under this definition. In addition, the broad language of the DPA comfortably could include websites as places where the public is invited to. The court, therefore, found it was not necessary to find a nexus between the website and a physical store as the ADA requires.

This distinction may have important ramifications for web-based business in California. Under California law, it will be much easier for a plaintiff to prove harmed by a website for failing to provide full and equal enjoyment to its blind users. The plaintiff, in order to prevail, would simply need to show that they are injured in some way by not being able to access the website. The ADA, on the other hand, requires that there must be some nexus between the website and the physical store. Website owners should take note because this ruling will make it easier for claims to be brought against websites for disability discrimination, especially in California.

It’s Hammer Time at The USPTO

Published: October 16, 2007

by Scott M. Hervey
The IP Law Blog

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.

Disparage At Will, Just Don’t Infringe – The Message From The Ninth Circuit In Freecycle

Published: October 2, 2007


The IP Law Blog

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.

New U.S. Patent and Trademark Office Rules

Published: September 26, 2007

by Audrey A. Millemann
The IP Law Blog

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.

Ninth Circuit Holds Modified Terms of Use Unenforceable

Published: September 6, 2007

by Scott M. Hervey
The IP Law Blog

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.

“Making Available” is Copyright Infringement in File Sharing Case

Published: August 27, 2007

by Jeffrey Pietsch
The IP Law Blog

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.

Experts and Summary Judgment

Published: August 22, 2007

by Dale C. Campbell
The IP Law Blog

Intellectual property litigation relies heavily upon the use of expert testimony. The Ninth Circuit Court of Appeals recently analyzed the intersection of Federal Rules of Evidence, Rule 702 and the ruling in Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) (“Daubert”) concerning the admissibility of expert testimony and Federal Rules of Civil Procedure, Rule 56 for summary judgment. Stillwell v. Smith & Nephew, Inc., 482 F.3d 1187 (9th Cir. 2007). Admissibility of expert testimony must be carefully evaluated for reliability and helpfulness, but that is different than the analysis for whether a triable issue of fact is established.

In Stillwell, the plaintiff had both legs broken in a car accident. The fractures were stabilized with two reconstruction nails. The nails failed during the healing process, and plaintiff brought suit against the nail manufacturer alleging claims for strict liability, negligence, and breach of warranty.

Defendants sought summary judgment on the grounds that plaintiff could not establish causation. Plaintiff offered the testimony of a metallurgical expert who testified that the nails suffered from correctible design and manufacturing defects that shortened their life. The expert could not quantify the length by which the life of the nails was shortened. Plaintiff’s expert repeatedly testified that his expertise was in metallurgy as opposed to medicine or biomechanical engineering.

Defendants sought to exclude the testimony of plaintiff’s expert under Federal Rules of Evidence, Rule 702 and under the holdings in Daubert. Plaintiff’s expert had repeatedly acknowledged that his expertise was in metallurgy and not biomechanical engineering. The expert’s own testimony established that he did not have the expertise to testify regarding the design of the nail as a medical device; he could only analyze it with respect to its metallurgical qualities. The expert admitted he was not qualified to challenge the testimony of the medical doctors that the nails did not fail during the time in which plaintiff’s fractures should have healed and that other unforeseen and unexpected circumstances delayed plaintiff’s healing process. Defendants argued that plaintiff’s expert was not qualified to testify regarding the design, manufacture, or use of the nail as a medical device.

The district court, applying Daubert, concluded that the expert “acknowledged that he lacked the expertise to determine whether the nails served the biomechanical purpose for which they were designed.” The district court found that the question was not whether the nail would suffer fatigue failure, but rather whether the nail was designed to fail only after it succeeded in supporting the union of the fractured bone. The court excluded the expert’s testimony and granted summary judgment for defendants.

Plaintiff appealed on the sole ground that the court improperly excluded her expert’s testimony. An exclusion of testimony is an application of a rule of evidence that the Ninth Circuit reviews for abuse of discretion. (United States v. Prime, 431 F.3d 1147, 1152 (9th Cir. 2005).)

The Ninth Circuit agreed that the district court improperly excluded the expert’s testimony. Federal Rules of Evidence, Rule 702 permits testimony by experts qualified by “knowledge, skill, expertise, training, or education” to testify on matters that will “assist the trier of fact to understand the evidence or to determine a fact in issue.” Rule 702 embodies “the twin concerns of ‘reliability’ and ‘helpfulness.’” (United States v. Mitchell, 355 F.3d 215, 234 (3d Cir. 2004).) The question of reliability, however, is “not the correctness of the expert’s conclusion, but the soundness of his methodology.” (Daubert v. Merrill Dow Pharmacy, 43 F.3d 1311, 1318 (9th Cir. 1995).) The Ninth Circuit found that the district court focused on the helpfulness, rather than the reliability, of the expert’s testimony in excluding the testimony. The district court improperly blended the rules of admissibility under Federal Rules of Evidence, Rule 702, with the standard for summary judgment under Federal Rules of Civil Procedure, Rule 56. The Ninth Circuit found that a “[d]istrict court may not exclude expert testimony simply because the court can, at the time of summary judgment, determine that the testimony does not result in a triable issue of fact.” The appellate court noted that, in focusing on the eventual merit of plaintiff’s claims, the district court improperly required the expert testimony to establish not only alleged defects, but also causation.

Although plaintiff won the Rule 702 battle, she lost the war. The Ninth Circuit went on to say that this was a “rare case in which it is proper for [the appellate court] to exercise our discretion to consider a legal issue for the first time on appeal.” The court evaluated the evidence submitted with respect to causation and found that the underlying issue common to all of plaintiff’s claims was the existence of a defect in relation to the product’s intended purpose. The plaintiff’s evidence that the nail contained a design defect that shortened its life was not adequate to refute defendants’ evidence that the nail performed as intended and that the nail’s failure before the bone’s healing is a rare event.

The analysis in Stillwell highlights the different analysis concerning the admissibility of expert testimony as compared to the ultimate legal question. This distinction is an important one for trial attorneys in preparing to use any expert testimony, be it in summary judgment, trial, or motions for interim relief. The final decision in Stillwell left plaintiff with a hollow victory under the Rule 702, but losing on causation. Proper understanding of the difference between the “reliability” and the “helpfulness” dual prongs is critical to maximize the value of expert testimony.

Act Now! – Or Lose Your Trade Dress Infringement Claim

Published: August 8, 2007

by James Kachmar
The IP Law Blog

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.

Host A Website And Get Sued For Trademark Infringement- Possible Under California’s Model Trademark Law

Published: July 31, 2007

by Scott M. Hervey
The IP Law Blog

According to the Department of Commerce, losses to U.S. businesses from the counterfeiting of trademarked consumer products are estimated at $200 billion a year. A model trademark law proposed by the International Trademark Association and currently winding its way through the legislative process in California includes a provision which appears to be an attempt to slow this ever growing enterprise.

The proposed new trademark law provides that the owner of a state registered mark may bring an action for infringement against any persons that “knowingly facilitate, enable, or otherwise assist a person to manufacture, use, distribute, display, or sell any goods or services bearing any reproduction, counterfeit, copy, or colorable imitation of a mark registered under this chapter, without the consent of the registrant.” Under the new trademark law, a person is presumed to have acted knowingly if that person continues to engage in the complained of activity following delivery and receipt of a cease and desist demand letter containing certain language and information.

In the case of brick and mortar commerce, this provision appears to be entirely reasonable. If a landlord leasing retail space to a business receives a cease and desist letter from a mark owner, the landlord has the ability to visit the property and investigate the claim. Likewise, a swap meet operator receiving such a cease and desist letter can investigate the claim and, presumably after personally inspecting the complained of goods, would have the ability to determine whether the goods are infringing or legitimate. Given the ability to reasonably investigate any such infringement claims, it is reasonable that persons akin to landlords and swap meet operators bear some responsibility for merchandise sold on their premises. However, the question being posed now by Internet activists such as the Electronic Frontier Foundation is how such a provision will play out in cyberspace.

While companies such as Google, Yahoo and eBay have a large enough legal department to handle the predicted onslaught of cease and desist letters, smaller providers would be hard pressed to deal with the receipt a significant number of cease and desist letters in a cost efficient manner. Rather than face litigation and any possible adverse judgment, its likely that a smaller provider would rather terminate service to the alleged infringer.

Cease and desist letters sent under California’s proposed new trademark law appear somewhat related in function to the “takedown notices” under the Digital Millennium Copyright Act. The takedown provisions of the DMCA essentially compels an internet service provider to disable access to material allegedly infringing the complainant’s copyright or otherwise face the loss of immunity from claims of contributory infringement. Similarly, under the proposed trademark law, an ISP who receives a cease and desist demand could face a trademark infringement claim if it continues to provide access for the infringer or otherwise continues to facilitate the infringing activity.

What about if the alleged infringer is not engaged in any infringing activity, or the complaining party is compelled by a desire to hobble its competition? Under the DMCA, the alleged infringer may send the ISP a counter notice claiming non-infringement. If the ISP receives a proper counter notice the ISP is prevented from disabling access to the complained of material and maintains its immunity from contributory infringement. However, under the proposed trademark law if the alleged infringer insists that it is not engaged in any infringing activity the ISP is stuck between the proverbial rock and a hard place; the ISP is left to decide what it must do. If the ISP believes the alleged infringer, who may also be the ISP’s customer, but later turns out to be wrong, the ISP could face infringement liability. If the ISP terminates service to its customer and it is later determined that its customer was not engaging in any infringing activity, the ISP could possibly face a breach of contract claim. Even if the ISP has language in its contract which allows it to terminate the customer’s contract, firing a customer is not good for business.

Given the prospect of litigation or the fallout from firing a customer, ISPs and other service providers would rather terminate a contract then face litigation. An unscrupulous brand owner could take advantage of this by sending cease and desist letters to end truthful but unfavorable comparative advertising or other non-infringing uses of its marks. Unless the California legislature further amends its proposed trademark law to address the untenable position ISPs and service providers would be placed in, brand owner bullying is certain to occur.