Notice Requirements for Employers Under The Defense of Trade Secrets Act

Trade secrets have historically been protected by a patchwork of various state statutes. With the passage of the Defense of Trade Secrets Act (DTSA) on May 11, 2016, trade secrets now have uniform protection under federal law by a powerful set of enforcement tools that can be used in federal court nationwide. The DTSA also grants whistleblower immunity to those who disclose trade secrets to the government for the purpose of reporting suspected illegal conduct.

The DTSA imposes an obligation on employers to notify all employees and contractors that they are entitled to whistleblower immunity. This notice must be provided in every contract with an employee or contractor that governs the use of a trade secret or other confidential information. Applicable contracts may include employment applications containing contractual language, employment agreements, restrictive covenants, non-disclosure agreements, compensation agreements, separation agreements, BYOD agreements that contain confidentiality language, and confidentiality stipulations (entered in lieu of protective orders in court).

If an employer fails to provide the required notice, the DTSA precludes awards for exemplary damages or attorney’s fees in any action against an employee to whom notice was not provided. In view of the many eight- and nine-figure verdicts rendered in recent trade secret cases, this penalty can be substantial.

The DTSA does not articulate specifically what must be included in the notice. While more detail is better than less, anything short of a full verbatim recitation of all of the immunity provisions in the DTSA creates the risk that such notice will be challenged as insufficient. Accordingly, the only way for an employer to eliminate this risk entirely is to provide the complete text of the immunity provisions in the DTSA with every contract that governs the use of a trade secret or other confidential information.

In an apparent recognition of the difficulty of including all of the of the immunity provisions within the text of every such contract, the DTSA provides that employers will be considered in compliance with the notice requirement if they simply provide a “cross-reference” in such contracts to something it calls a “policy document.” According to the DTSA, this policy document must: (1) be provided to the employee or contractor (presumably concurrently with the execution of the contract or agreement); and (2) set forth the employer’s whistleblower policy.

While an employer’s option of only referencing a policy document relieves the burden of including lengthy notice provisions in every agreement, it sheds no light on the what must be included in that document. Ideally, a detailed policy document should identify which individuals are protected, what conduct is protected, and should provide instructions on how to report possible violations of law to appropriate authorities. But, as with providing such notice in contracts themselves, anything less than a complete recitation of the immunity provisions of the DTSA carries risk. Thus, the safest course for an employer to take in crafting its policy document would be to include the entirety of the immunity provisions of the DTSA.

Recommendations

There are several things employers can do to ensure compliance with the DTSA notice requirements, and to minimize the risk of losing the ability to recover exemplary damages and attorney’s fees in future trade secret litigation:

  • Review and update all agreements with employees and contractors which reference confidentiality to ensure that appropriate language is included in all of such agreements going forward.
  • Create a DTSA policy document to be given to every employee and contractor with every contract which references confidentiality.
  • Require all suppliers, vendors, and any other contractors whose employees have access to trade secrets or confidential information to provide appropriate notice to their employees.
  • Verify compliance with the DTSA notice requirements by having counsel review all standard contracts and company policy documents to make sure they contain the required language.

The Rise of Federal Trade Secret Protection

It is done. President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”), the nation’s first federal trade secret protection act with civil remedies. The DTSA is effective May 12, 2016 for any misappropriation (as defined in the statute) “for any act which occurs on or after the date of the enactment of this Act.”

The DTSA does not preempt states’ trade secret laws; those state laws remain in effect. Accordingly, there is no requirement that a party even allege a DTSA claim when pursuing a trade secret action. Strategic consideration must be given to bringing a DTSA claim and the impact on jurisdiction. A plaintiff that prefers litigating in state court may wish to forego adding a DTSA cause of action to the lawsuit because doing so would create a federal question. If a state court lawsuit alleges a DTSA claim, the defendant may remove the case to federal court.

Remedies under the DTSA include damages for the loss caused by the misappropriation, damages for unjust enrichment, and injunctive relief for any actual or threatened misappropriation. If a plaintiff can establish that the trade secret was “willfully and maliciously appropriated,” the court can award exemplary damages of up to two times the amount of actual damages. For bringing a claim, reasonable attorney’s fees may also be awarded to the prevailing party, as well as to a defendant if the claim of misappropriation is made in bad faith.

Once an afterthought, trade secrets were the last of the four major types of IP—patent, copyright, trademark, and trade secret—recognized by the courts, and the basic elements of the tort of trade secret misappropriation have been recognized since only the late 1800s and early 1900s.¹ However, as we reported here, the number of trade theft continues to rise, and by one metric, doubled between 1995 and 2004. Until now, trade secrets were the only major type of intellectual property not backed by U.S. federal civil remedies to compensate owners for theft.

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¹ Catherine L. Fisk, Working Knowledge: Trade Secrets, Restrictive Covenants in Employment, and the Rise of Corporate Intellectual Property, 1800–1920, 52 HASTINGS L.J. 441, 441 (2000)

A Lasting Impression: Federal Circuit Credits Own Precedent More Than Recent Supreme Court Authority

In Lexmark International, Inc. v. Impression Products, Inc.,1 the Federal Circuit declined to follow the Supreme Court’s recent decisions in Quanta Computer, Inc. v. LG Electronics, Inc.2 and Kirtsaeng v. John Wiley & Sons, Inc.,3 but instead affirmed its long-standing precedent allowing limits on the post-sale use or resale of patented goods and held foreign sales of patented goods do not exhaust the patentee’s rights in the United States.

These questions arose in a dispute between Lexmark, the manufacturer of printers and ink cartridges, and Impression Products, the operator of a refurbished ink cartridge business. Lexmark manufacturers and sells two types of ink cartridges, a full-priced model that includes no use restrictions and a discounted model that limits the consumer’s right to refill and reuse the cartridge. Impression collects the used cartridges—both full-priced and discounted models—and modifies the hardware, allowing them to be reused, then imports and resells them in the United States.

1. Post-Sale Use Limits

In the first portion of its opinion, the Federal Circuit held a patentee’s single-use or no-resale restrictions were permissible limitations on the otherwise presumptive “patent exhaustion” doctrine.4 Specifically, the Court allowed the sales, so long as they were “made under a clearly communicated, otherwise-lawful restriction[.]”5 The Federal Circuit relied heavily on its decision in Mallinckrodt, Inc. v. Medipart, Inc.,6 which paved the way for patentee “single use” restrictions, in part because of the Patent Act’s explicitly grant of a “right to exclude.”7

In reaching its conclusion, the Federal Circuit also declined to follow the Supreme Court’s decision in Quanta.8 The Court noted that Quanta only addressed the sale of patented goods by a manufacturing licensee, not sales by the patentee, “[a]nd the patentee’s authorization to the licensee to make (the first) sales was not subject to any conditions, much less conditions to be embodied in those sales.”9 As such, it did not address a situation where, as here, the sale as made subject to a use restriction. Accordingly, Quanta did not hold an “authorized sale” exhausted patent rights because it, in fact, did not involve any limitations on the buyer’s use. The Quanta decision also implicitly rejected petitioner and amici’s requests that Mallinckrodt be overturned.10

Ultimately, the Federal Circuit rejected the notion that any sale, even when rights are expressly restricted, qualifies as an “authorized sale of a patented item terminat[ing] all patent rights to that item.”11

2. Foreign Sales and U.S. Patent Rights

Next, the Federal Circuit moved to square its decades-old decision in Jazz Photo v. ITC12 with the Supreme Court’s recent decision in Kirtsaeng, and decide if Lexmark’s foreign sales—made without an explicit reservation of U.S. patent rights—granted authorization to import and sell those goods in the United States.13 At the outset, the Court was clear to acknowledge that Jazz Photo held U.S. patent rights are exhausted by a first sale, but only when that initial sale is in the United States.14 Thus, the present situation—where disputed products were sold outside the United States, modified, then imported and sold in the U.S.—was not covered.

The focus then turned to reconciling Kirtsaeng, with the Federal Circuit first noting how patent rights are necessarily different from those granted by copyright.15 The Patent Act, for example, specifically grants a patentee the exclusive right to make, use, sell, or import goods covered by the patent, while no such exclusive right exists the copyright. Therefore, Kirtsaeng was limited because it relied, quite explicitly, on the text of the Copyright Act.16 Although the Copyright Act allows certain actions “without the authority of the copyright owner,” a patent grants its owner broad rights “to exclude.” Accordingly, the Federal Circuit strictly construed the decision, determining “Kirtsaeng is not controlling in this case.”17

Ultimately, patent exhaustion is territorial because “what the statute expressly provides to a U.S. patentee is the reward available from the right to exclude ‘in the United States.’”18 In support of this textual anchor, the Court explained how “American markets differ substantially from markets in many other countries” and, thus, foreign sales of patented goods are inherently different from their domestic counterparts.19 The unauthorized importation of patented articles sold abroad therefore constitutes infringement, because foreign sales do not amount to authority for “the buyer to import the article and sell and use it in the United States.”

3. Implications

Initially, it will behoove all patentees looking to implement post-sale restrictions to use explicit language, but the limitations will only apply to their domestic sales. Next, patentees are urged to keep globalization considerations in mind, but only in so far as foreign customers may be looking to import patented goods purchased abroad. In this regard, other factors may strongly influence the discussion, such as where the first sale actually occurred (i.e. was it domestic or abroad). Finally, caution is warranted for those engaged in foreign transactions because, despite the comprehensive analysis, the Federal Circuit did not address the question of whether U.S. rights may be exhausted by a licensed foreign sale as there was no such licensee before the Court.

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1 Nos. 14-1617, 14-1619, 2016 U.S. App. LEXIS 2452 (Fed. Cir. Feb. 12, 2016)
2 553 U.S. 617 (2008)
3 133 S. Ct. 1351 (2013)
4 Lexmark Int’l, Inc., 2016 U.S. App. LEXIS 3452, at *31-32.
5 Id. at *32.
6 976 F.2d 700 (Fed. Cir. 1992)
7 Lexmark Int’l, Inc., 2016 U.S. App. LEXIS 3452, at *31-40.
8 Id. at *36-40.
9 Id. at *37 (citing Quanta Comp., Inc., 553 U.S. at 636-37) (emphasis in original).
10 Id. at *40.
11 Id. at *41-42.
12 264 F.3d 1094 (Fed. Cir. 2001)
13 Lexmark Int’l, Inc., 2016 U.S. App. LEXIS 3452, at *80-82.
14 Id. at *82-85.
15 Id. at *86-89.
16 Id. at *89 (quoting Kirtsaeng, 133 S. Ct. at 1370) (noting the Supreme Court “stressed that it was determining ‘the best reading of [15 U.S.C.] § 109(a).”) (emphasis in original).
17 Id. at *98.
18 Id. at *98 (quoting 35 U.S.C. §§ 154(a)(1), 271(a)).
19 Id. at *100-03.

Fox’s Empire Secures First-Amendment Win against Trademark Infringement Claims

Last month, in Twentieth Century Fox Television v. Empire Distribution, Inc., 2016 U.S. Dist. LEXIS 13013 (C.D. Cal. Feb. 1, 2016), the United States District Court for the Central District of California ruled that Twentieth Century Fox Television’s use of the word “Empire” in connection with its hit television series of the same name is protected by the First Amendment. In a rebuke of similarly-named Empire Distribution, Inc.’s claim that the Fox series infringed upon and diluted the company’s trademarks, the court found that the show’s title deserved protection as an artistic expression.

Empire, the Fox television series that premiered in 2015, tells the story of Lucious Lyon and his family, all of whom fight for control over Lyon’s music and entertainment company, “Empire Enterprises,” upon learning that the mogul has been diagnosed with a fatal disease. Empire Distribution, meanwhile, is a record label, music distributor and publishing company founded in 2010. Similar to the fictional Empire Enterprises, Empire Distribution is a large producer and distributor of urban, hip hop, rap and R&B music. Empire Distribution also uses the trademark “Empire.”

In response to a cease and desist letter from Empire Distribution claiming it had rights to the Empire name and that the debut of the Empire series caused confusion over the affiliation between Empire Distribution and Fox’s Empire series, Fox filed suit to “protect its intellectual property rights” in the show. Empire Distribution counterclaimed for trademark infringement, trademark dilution, unfair competition and false advertising.

U.S. District Judge Perce Anderson analyzed Empire Distribution’s claims under the two-part test for balancing Lanham Act claims with First Amendment rights first established by the Second Circuit in Rogers v. Grimaldi, 875 F.2d 994 (2nd Cir. 1989) (the “Rogers test”), later adopted by the Ninth Circuit in Mattel, Inc. v. MCA Records, Inc., 296 F.3d 894 (9th Cir. 2002). Under the Rogers test, which is reserved for expressive works, an artistic work’s use of a trademark that would otherwise violate the Lanham Act is not actionable unless the mark has no artistic relevance to the underlying work whatsoever, or, if it has some artistic relevance, unless it explicitly misleads as to the source or the content of the work.

The first prong of the Rogers test requires showing that the use of a mark has artistic relevance to the underlying work. The court held that the word “Empire” was “clearly relevant to Fox’s work,” as the Empire series “tells the story of characters struggling for literal control over an entertainment company called ‘Empire Enterprises’ and figurative control over the vast ‘empire’ that Lucious Lyon has built. Additionally, the Empire series is set in New York, the Empire State.” Because the word “Empire” had genuine relevance to the Empire series and was not arbitrarily chosen to exploit Empire Distribution’s fame, the court held that the mark satisfied the first Rogers prong.

The second prong of the Rogers test requires a “junior user” – such as Fox – to show that its work does not explicitly mislead as to the source or content of the work. Here, again, the court sided with Fox, stating that it found no evidence of an “explicit indication, overt claim, or explicit misstatement” as to the source of the work. In reaching this determination, the court noted that “consumer confusion” as to the source of the work was irrelevant.

Accordingly, the court granted summary judgment in favor of Fox and ruled that Empire Distribution take nothing by way of its claims. The court’s ruling highlights the importance of First Amendment protections in the United States, particularly as Judge Anderson refused to consider ample evidence of consumer confusion in making his ruling. For example, when Empire Distribution recording artist Shaggy tweeted the record company’s logo, numerous fans immediately mistakenly interpreted it as a reference to the Empire series, retweeting the logo along with the hashtag “#teamcookie” (a reference to a character on the television series). The court’s focus on the behavior of the user, as opposed to the impact of the use, can serve as an important defense in many trademark infringement cases to come.

For Whom the Bell Tolls: The End of Rule 84 (and Form 18 Patent Pleading Standards)

December 1, 2015 marked the end of Rule 84 of the Federal Rules of Civil Procedure and the use of Forms, including various litigation documents, such as summonses, complaints, and answers in civil actions. Rule 84 was enacted in 1937 and simply stated, “The forms contained in the Appendix of Forms are intended to indicate, subject to the provisions of these rules, the simplicity and brevity of statement which the rules contemplate.” Rule 84 was amended in 1946 and 2007 to its current language, “The forms in the Appendix suffice under these rules and illustrate the simplicity and brevity that these rules contemplate.” But all good things must eventually come to an end. On April 29, 2015, the Supreme Court signed an order abrogating Rule 84, effective December 1, 2015.

Rule 84 and its Forms assisted many parties to bring suit under a simplified pleading as exemplified in Form 18. Using Form 18, a patent holder wishing to file a suit for direct patent infringement only needed to identify the infringing party, the infringed patent, the infringing device, and provide statements of jurisdiction and patent notice. Many have argued against the sufficiency of Form 18 based on the standard set out in Bell Atl. Corp. V. Twombly[1] and Ashcroft v. Iqbal.[2] Under Twombly and Iqbal, the Supreme Court held that to “survive a motion to dismiss a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”[3] Further, “a claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”[4]

Nevertheless, the sufficiency of Form 18 has been upheld by the Court of Appeals for the Federal Circuit in K-Tech Telecommunications, Inc. v. Time Warner Cable, Inc.[5] and In re Bill of Lading Transmission and Processing System Patent Litigation.[6] Specifically, the Federal Circuit stated in those cases that “a proper use of a form contained in the Appendix of Forms effectively immunizes a claimant from attack regarding the sufficiency of the pleading,”[7] and “to the extent the parties argue that Twombly and its progeny conflict with the Forms create differing pleadings requirements, the Forms control.”[8] This double standard has allowed a patent holder to file a “bare bones” complaint through the use of Form 18 and use discovery to fill in the details. While most “bet the company” litigation probably would not rely on a bare bones infringement complaint, the simplified pleadings benefitted smaller companies or solo inventors who did not have the same resources as larger companies. The abrogation of Rule 84 may make it more difficult and expensive for a small company / solo inventor to bring a suit against an infringer, perhaps even making it impossible.

With the abrogation of Rule 84 and subsequently Form 18, the default patent pleading standard will be the standard set out in Twombly and Iqbal. However, the amount and type of factual matter needed to allow the court to draw the “reasonable inference” or “plausibility” for liability remains unclear. Prior to K-Tech and Bill of Lading, the district courts already varied in their pleading standards.  For example, the District Court for the Central District of California in Medsquire LLC v. Spring Medical Systems Inc., et al.[9] dismissed a Form 18 complaint for failing to recite any facts as to how the accused device infringed the patent. The court stated, “a complaint must contain sufficient factual matter to make its allegations plausible.” Furthermore, the court in Medsquire alluded to a different standard required for pleadings drafted by attorneys as opposed to pleadings drafted by pro se plaintiffs.[10] In contrast, the District Court for the Eastern District of Texas in Traffic Information, LLC v. Yahoo! Inc.[11] held that “Twombly and Iqbal have not affected the adequacy of complying with Form 18.” Yet, even after K-Tech and Bill of Lading, the District Court for the Eastern District of Virginia in Macronix International Co. Ltd. v. Spansion Inc.[12] dismissed a complaint for failing to meet the Twombly and Iqbal standards. The Macronix Court stated:

[B]efore filing a complaint, counsel must ascertain exactly what claims should alleged to be infringed and how they are infringed. That can be done with brevity and clarity if counsel know at the outset their theories of infringement and what can, and cannot, be said about allegedly infringing conduct.  That, in turn, may well, indeed likely will, require expert assistance. And, it will mean taking great care when crafting a succinct, but sufficient, patent complaint. But, that is not asking too much. Indeed, it is high time that counsel in patent cases do all of that work before filing a complaint.[13]

Additionally, the Federal Circuit in K-Tech alluded to a “sliding scale” standard based on the complexity of the case. Specifically, the K-Tech Court stated, “[t]he adequacy of the facts pled depends on the breadth and complexity of both the asserted patent and the accused product or system and on the nature of the defendant’s business activities.”[14] This opens the door for the Courts to implement their own standards. For example, the standard could vary depending on the technology field, claim type (e.g. composition, device, or method), or number of infringed claims. Some Courts could require infringement charts or other detailed analysis of the alleged infringement.

The patent pleading standards under Twombly and Iqbal in the aftermath of Rule 84’s abrogation will undoubtedly take years, if not decades, to develop. Until then, it would be prudent to do a little more homework before filing your patent infringement complaint, especially if you are filing in districts where the heightened pleading standards of Twombly and Iqbal have been applied to patent infringement complaints.


[1] Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).
[2] Ashcroft v. Iqbal, 556 U.S. 662 (2009).
[3] Id. at 663.
[4] Id.
[5]K-Tech Telecommunications, Inc. v. Time Warner Cable, Inc., 714 F.3d 1277 (Fed. Cir. 2013).
[6] In re Bill of Lading Transmission and Processing System Patent Litigation, 681 F.3d 1323 (Fed. Cir. 2012).
[7] K-Tech, 714 F.3d at 1283.
[8] In re Bill of Lading, 681 F.3d at 1334.
[9] Medsquire LLC v. Spring Medical Systems Inc., et al., Case No. 2:11-cv-04504-JHN-PLA, Order granting Motion to dismiss, (C.D. Cal. August 31, 2011).
[10] Id. at 5. The Court stated, “McZeal dealt with a narrow circumstance, which is not at issue here: a lawsuit brought by a pro se plaintiff, who the Federal Circuit held to ‘less stringent standards than formal pleadings drafted by lawyers.’”
[11] Traffic Info., LLC v. Yahoo! Inc., Case No. 2:09-CV-246-TJW-CE, Magistrate Judge Report and Recommendation (E.D. Tex. Apr. 13, 2010).
[12] Macronix International Co. Ltd. v. Spansion Inc., 4 F. Supp. 3d 797 (E.D. Va. Mar. 10, 2014).
[13] Id. at 803.
[14] K-Tech, 714 F.3dat 1287.

9th Circuit Reverses Itself: Clear Labeling and Proper Design of a Website May Avoid Initial Interest Confusion

On October 21, 2015, on a granted petition for panel rehearing, an opinion was filed in the case of Multi-Time Machine, Inc. v. Amazon.com, Inc., et al., No. 13-55575, D.C. No. 2:11-cv-09076-DDP-MAN. The panel granted a petition for rehearing, withdrew its prior July 6, 2015 opinion and filed a superseding opinion in an appeal from the lower court’s summary judgment in a trademark infringement action under the Lanham Act against the defendant, Amazon.com (“Amazon”).

On Amazon’s motion for summary judgment, the District Court granted summary judgment in favor of Amazon on the grounds that Multi-Time Machine, Inc. (“Multi-Time”) did not put forth sufficient evidence from which a jury could determine that there was a likelihood of confusion. Multi-Time appealed. The Ninth Circuit reversed the District Court’s grant of summary judgment, holding that Multi-Time presented sufficient evidence for a jury to determine that Amazon’s search function causes a likelihood of confusion under the “initial interest confusion” test.

Military-style watch manufacturer Multi-Time owns the trademark “MTM Special Ops” and does not sell watches on Amazon.com. When Amazon consumers searched for “MTM Special Ops” on Amazon.com, the search results included several of Multi-Time’s  competitors’ watches bearing the competitors’ labels and marks but without an explicit warning that Amazon does not sell Multi-Time watches.

The District Court focused on particular factors in Sleekcraft to reach its conclusion and up on appeal, the Ninth Circuit seemed to as well. The Ninth Circuit determined that Multi-Time’s trademark, “MTM Special Ops,” is suggestive and conceptually strong because it does not merely describe its military-style watches, but is potentially suggestive of them. Additionally, the Court determined that the “similarity of the goods” factor weighs in favor of infringement because Amazon sells military-style watches and even displays them in response to a search for Multi-Time’s trademark. The Court held that a jury could infer that the search results page, coupled with Amazon’s failure to warn the customer that it does not carry Multi-Time products, gives rise to an initial interest confusion. Therefore, because there was sufficient evidence to demonstrate likelihood of confusion, the Court reversed the District Court’s grant of summary judgment and remanded the case for a jury trial.

On rehearing, the panel of the Ninth Circuit reversed itself and held that the District Court was correct in ruling that there is no likelihood of confusion, but did so for different reasons. In so holding, the Ninth Circuit seemed to dispense with the Sleekcraft factors or a vast majority of the Sleekcraft factors, stating that it “is not particularly apt,” because it was developed for a different problem, “i.e., for analyzing whether two competing brands’ marks are sufficiently similar to cause consumer confusion.”

Here, Multi-Time argued that the design of Amazon’s search results page created a likelihood of initial interest confusion; that is, the issue focuses on a different type of confusion, not caused by a competitor’s mark, but by the design of a webpage that is displaying the competing marks and offering the competing products for sale. Setting aside the multifactor confusion test, the Ninth Circuit focused on the conduct of Amazon.com, as a non-competitor, clear labeling, and the arrangement and design of its webpage stating “the confusion is not caused by the design of the competitor’s mark, but by the design of the webpage that is displaying the competing mark and offering the competing products for sale.”

The panel went on to indicate that this “case can be resolved simply by an evaluation of the webpage at issue and the relevant consumer,” that is “(1) who is the relevant reasonable consumer?; and (2) what would he reasonably believe based on what he saw on the screen?”

First, the Ninth Circuit found that the goods in this case are expensive and that the relevant consumer is a reasonably prudent consumer accustomed to shopping online. In turning to the second question, the panel focused on labeling, stating that “clear labeling can eliminate the likelihood of initial interest confusion in cases involving Internet search terms,” however, instead of focusing on labeling that Amazon did not sell Multi-Time products in the prior appeal, the panel focused on the products themselves and whether they were clearly labeled.

Here, the panel stated, “the products at issue are clearly labeled by Amazon to avoid any likelihood of initial interest confusion by a reasonably prudent consumer accustomed to online shopping.” The Court further stated that products are labeled in bright, bold letters and includes a photograph of the item. Multi-Time argued that the use of “MTM special ops” three times within the page (produced as a result of the customer’s search term) could confuse customers, but the panel found that it would be unlikely, stating, “none of the watches produced are labeled with “MTM” or the phrase, “Special Ops.” Thus, the Court reasoned, the undisputed facts show that it is highly unlikely that a reasonably prudent consumer accustomed to shopping online would be confused as to the source of the goods offered for sale on Amazon’s web page.

Ninth Circuit: An Exclusive Licensing Agent Has Standing to Bring an Infringement Action under the Copyright Act

In a recent decision, Minden Pictures, Inc. v. John Wiley & Sons, Inc., D.C. No. 3:12-CV-04601-EMC, 9th Cir. Case No. 14-15267, the Ninth Circuit Court of Appeals held that a licensing agent for several individual photographers has standing to bring an action under the Copyright Act against a textbook publisher for unauthorized use of copyrighted photographs. The Ninth Circuit found that the licensing agent held an “exclusive license” to reproduce and authorize production of the photographs even though the individual photographers retained the right to personal and limited commercial use of the photographs under the Agency Agreements. The Ninth Circuit held that the divisibility principle embodied in the Copyright Act allows for the licensing agent to have an “exclusive license” with respect to certain uses of the photographs and therefore it has standing to sue infringers.

Minden Pictures, Inc. (“Minden”) is a licensing agent for several individual photographers. Minden grants licenses to end-users such as textbook publishers. The Agency Agreements between Minden and the individual photographers provide that Minden is the sole and exclusive agent and representative with respect to licensing any of the subject images, and they grant Minden the unrestricted, exclusive right to distribute, license, and/or exploit the images without seeking special permission to do so. The Agency Agreements, however, allow the individual photographers to make some commercial and personal use of the photographs. The individual photographers are allowed to use the images for personal promotion, advertising, and editorial use in books and magazines. The Agency Agreements prohibit the individual photographers from hiring a licensing agent other than Minden with respect to the subject photographs. The Agency Agreements also provide that “all images shall at all times remain the sole and exclusive property of the photographer, including the copyright.”

Minden discovered that one of the licensees, an educational publisher named John Wiley & Sons (“Wiley”), was substantially exceeding the scope of the license with respect to the photographs by printing hundreds of thousands of textbooks in violation of the license agreement, which limits printing to only 20,000 copies. Minden filed a copyright infringement action in the U.S. District Court for the Northern District of California. Wiley moved for summary judgment on the grounds that Minden lack standing to sue under the Copyright Act, and the District Court agreed. Minden appealed to the Ninth Circuit.

The Ninth Circuit reversed, holding that the Agency Agreements conveyed a sufficient property interest in the photographs to permit it to bring an infringement action under the Copyright Act. First, the Court identified the relevant statutory language in the Copyright Act respect to standing: “[t]he legal or beneficial owner of an exclusive right under a copyright is entitled…to institute an action for judgment of that particular right committed while he or she is the owner of it.” These exclusive rights include the right to reproduce, distribute, or display the work, prepare derivative works, perform the work in public, and record and perform the work by means of an audio transmission. The Court noted that current Ninth Circuit case law holds that a party granted an assignment or an exclusive license with respect to these exclusive rights has statutory standing to sue for copyright infringement, but a party granted a mere “non[-]exclusive license” does not have standing.

The Court then identified several of the exclusive rights that were conveyed to Minden under the Agency Agreements: Minden received the right to authorize third parties to reproduce, distribute, and display the photographs. Of course, Wiley’s argument is that these rights were not exclusive because the individual photographers also retained similar rights to the photographs. The Court then explained the divisibility principle inherent in the Copyright Act, which permits an owner to transfer a right or a subdivision of a right—for example, if an author wished to sell publication rights of the hardcover edition to one person and publication rights to create a movie based on the novel to another person. The Court reasoned that the divisibility principle permits the individual photographers to divide the exclusive rights between themselves and Minden as their exclusive licensing agent. The rights have been divided in such a way that the individual photographers retain the right to issue licenses of the photographs, but that Minden receives the exclusive right to act as a licensing agent for licensing the photographs. The Court held that Minden’s exclusive right to act as a licensing agent constitutes an exclusive license and therefore entitles it to sue infringers under the Copyright Act.

Doctrinally, the Court relied on the divisibility principle, but it also articulated several practicality arguments in support of its holding. First, the Court noted that it would be inconsistent with common sense to hold that Minden did not have standing as the individual photographers’ exclusive licensing agent. If the individual photographers never hired a licensing agent and instead handled the licensing on their own, they would have standing to sue for infringement—thus, there should be no reason why having hired Minden to manage licensing of the photographs they would not be allowed to also have Minden protect and defend the licensed photographs.

Second, if Minden were to be precluded from suing, the individual photographers would be significantly disadvantaged by having to file individual actions or joined actions under Rule 20. In the former case, the potential recovery would not justify the litigation expense; and in the latter case, the complexities of coordinating all of the individual named plaintiffs would make litigation burdensome.

Therefore, the Court held that Minden, as the exclusive licensing agent, has standing to sue for infringement under the Copyright Act.

Beastie Boys’ Attorney’s Fee Award Will Likely Prompt Copyright Owners to Bring Their Copyright Claims to Court

On June 15, 2015, a New York federal court ordered Monster Energy to pay the Beastie Boys $667,849.14 in attorney’s fees. This award comes after the Beastie Boys obtained a $1.7 million damages award in 2014 after Monster Energy ran a promotional video on its website that incorporated portions of five Beastie Boys songs without the Beastie Boys’ permission. Monster Energy unsuccessfully argued that they had obtained a license from DJ Z-Trip to use the Beastie Boys remix. Z-Trip had previously entered into an agreement with the Beastie Boys to create a remix of some of their songs to promote the group’s then-upcoming album. However, the court found that Monster Energy never obtained authorization from the actual rights holders to the musical compositions or the sound recordings. The jury found Monster Energy’s actions to be willful copyright infringement as well as false endorsement under the Lanham Act and awarded $1.7 million in damages. On the heels of this damage award, the Beastie Boys petitioned the court for $2,385,175.50 in attorney’s fees. Though the attorney’s fee award was eventually whittled down to $667,849.14, due in part to the fact that (1) fees were not recoverable on the Lanham Act claims, (2) certain legal work on certain issues were not recoverable by Monster, and (3) the Beastie Boys’ bills were abnormally high since the case was primarily staffed using senior attorneys, the court noted that the fee award was still substantial and when coupled with the damages award, properly compensated the Beastie Boys under the Copyright Act.

As a result of this substantial attorney’s fee award, it is likely that other copyright owners may seek damages and attorney’s fees in court for the appropriation of their work. Rather than try to procure a monetary settlement or seek redress through ADR procedures, copyright owners may opt to pursue their claims in court in order to obtain an appropriate damage award and a substantial fee award. Thus, this decision may motivate copyright owners to seek redress under the Copyright Act in court since they have some assurances that their attorney’s fees or a substantial portion of those fees are recoverable.

Ninth Circuit: Amazon’s Customer-Generated Search Function Could Create Trademark Infringement Liability

In a recent decision—Multi-Time Machine, Inc. v. Amazon.com, Inc., et al., D.C. No. 2:11-cv-09076-DDP-MAN—the Ninth Circuit Court of Appeals held that Amazon’s consumer-generated product search function could create trademark infringement liability absent a clear label eliminating likely confusion. The Ninth Circuit found that a consumer’s search for Multi-Time Machine, Inc.’s (“Multi-Time”) products on Amazon.com returned search results for competing products and Amazon failed to warn consumers that it did not actually sell Multi-Time products.

Multi-Time, a high-end military-style watch manufacturer, which owns the trademark “MTM Special Ops,” does not sell any of its watches on Amazon.com, and it prohibits any of its authorized distributors from doing so. When Amazon consumers search for “MTM Special Ops” on Amazon.com, the search results in several of its competitors’ watches without an explicit warning that Amazon does not sell Multi-Time watches. Unlike Amazon, similar retail websites, such as Buy.com and Overstock.com, explicitly state in the search results that none of the products match the search query if the retailer does not offer that product. Moreover, at the top of Amazon’s search results page, “MTM Special Ops” is written in the query field, directly below the search line, and again immediately after the words “Related Searches.”

A search for “MTM Special Ops” on Amazon.com results in Multi-Time’s competitors’ watches, in part, due to Amazon’s behavior-based search technology, which tracks customer searches, views, and purchases, and returns future search results based on past behavior. For example, if enough customers search for product “X” and ultimately view and purchase product “Y,” eventually searches for X will return search results for Y.

Multi-Time filed suit against Amazon in the U.S. District Court for the Central District of California, alleging trademark infringement in violation of the Lanham Act. On Amazon’s motion, the District Court granted summary judgment in favor of Amazon on the grounds that Multi-Time did not put forth sufficient evidence from which a jury could determine that there was a likelihood of confusion. Multi-Time appealed.

The Ninth Circuit reversed the District Court’s grant of summary judgment, holding that Multi-Time presented sufficient evidence for a jury to determine that Amazon’s search function causes a likelihood of confusion under the “initial interest confusion” test.

First, the Ninth Circuit pointed out that the “confusion” at issue in this case does not necessarily fall within the category of confusion at the point-of-sale; but instead, also includes “initial interest confusion.” This occurs when a consumer is not necessarily confused at the time of purchase, but something earlier in the shopping process creates an initial interest in a competitor’s products and thereby “impermissibly capitalizes on the goodwill associated with a mark and is therefore actionable trademark infringement.” The Court held that a jury could infer that the search results page, coupled with Amazon’s failure to warn the customer that it does not carry Multi-Time products, gives rise to an initial interest confusion. For example, the Court pointed out that a jury could infer that customers might believe that a competitor has acquired Multi-Time or is somehow affiliated with Multi-Time.

Second, the Court analyzed the relevant Sleetkraft factors, most of which weighed in favor of Multi-Time. The Court determined that Multi-Time’s trademark, “MTM Special Ops,” is suggestive and conceptually strong because it does not merely describe its military-style watches, but is potentially suggestive of them. Additionally, the Court determined that the “similarity of the goods” factor weighs in favor of infringement because Amazon sells military-style watches and even displays them in response to a search for Multi-Time’s trademark.

The Court also determined that the “defendant’s intent” factor weighed in favor of infringement because Amazon received complaints from vendors and customers regarding similar search result problems. Amazon did nothing to address the complaints and did not disclose how the behavior-based search operated—therefore, the Court held that a jury could infer that Amazon intended to confuse its customers. Finally, the Court entertained Multi-Time’s evidence of actual confusion in the form of several instances in which customers searched for “MTM Special Ops” and thereafter purchased a competitor’s watch on the same day.

Therefore, because there was sufficient evidence to demonstrate likelihood of confusion, the Court reversed the District Court’s grant of summary judgment and remanded the case for a jury trial.

Circuit Judge Barry G. Silverman dissented from the majority because he believed the majority applied the wrong test to determine likelihood of confusion. Judge Silverman, citing to Ninth Circuit precedent, pointed out that the Court should have applied the test specifically developed for trademark infringement claims based on keyword advertising, which boils down to two factors: “(1) who is the relevant reasonable consumer?; and (2) what would he reasonably believe based on what he saw on the screen?” Judge Silverman determined that the relevant consumer in this context is a person accustomed to shopping online, and the consumer would not be confused by the search results because each product result is clearly identified by the product manufacturer. Therefore, it is unnecessary for Amazon to explicitly state that it does not sell Multi-Time watches.

This Ninth Circuit opinion clarifies that an online retailer’s consumer-generated product search function can create trademark liability if it does not adequately dispel any potential confusing inferences that might be derived from it.

Trade Dress and the Functionality Doctrine

The Fourth Circuit in McAirlaids Inc. v. Kimberly-Clark Corp., held this year that ownership of a utility patent does not necessarily preclude a claim in trade dress rights, particularly where the patent does not specifically cover the asserted trade dress.

This decision is of importance as it reviewed the Supreme Court’s holding in TrafFix Devices, Inc. v. Marketing Displays, Inc., stating that the presence of a utility patent is strong evidence of functionality, thus defeating a trade dress claim.

McAirlaids filed suit in the Western District of Virginia against Kimberly-Clark for trade dress infringement and unfair competition after Kimberly-Clark started using a similar pattern on one of its products.

The Fourth Circuit reversed the district court’s decision granting summary judgment after it found that McAirlaids had presented sufficient evidence to create genuine factual question as to whether its selection of pattern was purely an aesthetic choice among other options the company had considered.

The Circuit Court held that the existence of a utility patent is only one of several factors that the district court should have considered in evaluating the functionality of the dot pattern. Unlike TrafFix, where the dual-spring mechanism at issue was not registered as a trade dress, in the present case the pinpoint dot pattern allegedly infringed was subject to trade dress federal registration, thus shifting the burden to defendant to show functionality by preponderance of evidence.  Another distinguishable element is that the utility patent held by McAirlaids does not mention the specific dot pattern as a protected feature.

This latest decision on the subject shows that the crossroads of trademarks and patents are as interesting as ever, and that many different factors may ultimately determine the fate of a trade dress.