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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Has eBay become so powerful that it can successfully claim to be the only “Bay” on the Internet? That’s what it argued in a recent Ninth Circuit Court of Appeals trademark infringement case. In that case, Perfumebay.com, Inc. v. eBay, Inc., – – – F.3d – – – (9th Cir. November 5, 2007), the court upheld a federal district court decision from the Central District of California which ruled that the term “PerfumeBay” and “perfumebay.com” infringed the mark of Internet giant eBay.

When reviewing possible trademark infringement, courts analyze factors which have become known as the Sleekcraft factors. These factors include (1) strength of the mark, (2) proximity or relatedness of the goods, (3) the similarity of the marks, (4) evidence of actual confusion, (5) the marketing channels used, (6) the degree of care customers are likely to exercise in purchasing the goods, (7) the defendant’s intent in selecting the mark, and (8) the likelihood of expanding into other markets. Where the use of the mark is primarily on the Internet, however, the three key factors are the similarity of the marks, the relatedness of the goods and services, and the parties’ simultaneous use of the Internet as a marketing channel.

The court found that the marks were similar because Perfumebay includes the term eBay in its entirety, and found infringement because both used the Internet simultaneously and both sites sold perfume. The similarity of the marks was more pronounced when Perfumebay’s mark was used as “PerfumeBay.” Significantly, even when Perfumebay used separate words for advertising, Perfume Bay, the domain name www.perfumebay.com still contained eBay’s mark in its entirety because domain names cannot have spaces. Even though Perfumebay typically used a stylized starfish between “Perfume” and “Bay” in its logo, that did not help in the similarity analysis. And while the marks are pronounced differently, have different meanings, and Perfumebay uses a dissimilar look in its logo, the court stated that the way the marks are utilized in the marketplace is determinative. “Internet users do not utilize verbal communication as a basis for the services that they seek. The likelihood of confusion, therefore, does not arise in a vacuum, but rather from the manner in which ‘perfumebay’ is used on the internet.”

Perfumebay’s founder testified that she “envisioned a bay filled with ships importing perfumes from all parts of the world and this bay would be the place where perfume lovers could go to locate the selection of fragrances.” In the court’s view, however, the fact “that the term may convey different impressions to different individuals is irrelevant to a likelihood of confusion analysis.” Again, the court fell back to the fact that the mark “eBay” was found in its entirety within “perfumebay.”

eBay could not convince the court that it should be the only “Bay” on the Internet, however. It was only successful in persuading the court that it is the only permissible “eBay” on the Net. eBay’s Vice President for Litigation was “concerned about any use of bay which is likely to lead consumers into thinking that the web site is sponsored, affiliated, endorsed by [eBay], or one where they’re basically frontally assaulting the brand by treating bay as a generic reference to online commerce. He was also concerned that the use of a generic word plus ‘bay’ would lessen the distinctiveness of eBay’s trademark.” The court didn’t go that far, thankfully, and enjoined only the use of “perfumebay” as a single word. Thus, use of the term “Bay” without the “e” was permitted.

However, that still would seem to prohibit any use of a domain name with the letters “ebay” in them. For example, www.littlebay.com advertises vacation rentals in the Florida Keys. Under Perfumebay.com, eBay could challenge Little Bay’s website as infringing its mark. After all, the domain name contains the mark “ebay” in its entirety, they both advertise on the Internet, and eBay also sells travel packages for Florida vacations. The site www.bluebay.com is another example. BlueBay also sells travel packages, advertises on the Internet, and the domain name contains the conjoined letters “ebay” in their entirety.

A significant factor in the court’s analysis was the strength of the eBay mark. Even though use of the generic term “Bay” without the familiar “e” was at least implied to be infringing, the court refrained from enjoining its use. The Ninth Circuit seemed clear that it would have upheld that injunction also, stating that “the district court did not clearly err in declining to enjoin” such use.

Perfumebay has vowed to continue fighting this decision, and it has filed for an emergency stay of the injunction. It has also indicated that it plans to seek review by the U.S. Supreme Court. Perhaps the Supreme Court will grant review and provide further guidance on trademark infringement in the use of domain names. Until then, there is only one authorized “eBay” on the web, and Little Bay, Blue Bay, and anyone else who uses the conjoined letters “ebay” in a domain name have reason to be nervous.