TRADEMARKS
Two Circuits Conclude that Automatic Bankruptcy Stay Does Not Prevent Continuation of an Infringement Action of Trademarks
by Ulrika E. Mattsson
In the first decision, the U.S. Court of Appeals for the Sixth Circuit affirmed the district court decision, concluding that a defendant's bankruptcy filing does not prevent the district court from ruling on a contempt motion for violation of a temporary restraining order protecting plaintiff's trademarks. Dominic's Restaurant of Dayton, Inc. v. Mantia, Case Nos. 10-3376; -3377 (6th Circuit July 5, 2012) (Batchelder, C.J.; McKeague, J.; Quist, D.J., sitting by designation).
The defendants owned a restaurant not affiliated with Dominic's but used the plaintiffs' trademarks in connection with its restaurant services. Dominic's brought an infringement action claiming that the defendants used its trademarks in its operation and promotion of its restaurant services and subsequently obtained numerous injunctions, as well as contempt citations for violations of those injunctions.
During the course of this litigation, one of the defendants filed for bankruptcy and argued that the automatic stay prevented continuation of the infringement action against him. The district court disagreed and held that the automatic bankruptcy stay does not apply to the defendant's infringing use of plaintiff's trademarks. The district court explained that while the bankruptcy stay effectively stays the assessment of damages, it does not bar injunctive relief against the defendant. Mantia appealed.
The 6th Circuit affirmed, concluding that while the bankruptcy code stays judicial proceedings that were commenced against the debtor prior to a bankruptcy action, it does not apply to infringing use of trademarks and service marks. Were it obvious, application of automatic stay would permit the defendant to continue to commit trademark and service mark infringement, and the bankruptcy laws should not protect that.
In the second case, the U.S. Court of Appeals for the Seventh Circuit held that a trademark licensee can continue using licensed trademarks even after the license is rejected in bankruptcy. Sunbeam Products Inc. v. Chicago American Mfg. LLC, Case No. 11-3920 (7th Cir., July 3, 2011) (Easterbrook, C.J.).
Chicago American, a manufacturing company, licensed (from an entity known as Lakewood Engineering and Mfg.) the right to produce branded fans. Lakewood was in financial distress, and, three months into the contract, several of its creditors filed an involuntary bankruptcy petition against it. The appointed trustee rejected the license and sold the Lakewood assets to a third party, Sunbeam, which sued to stop the licensee from continuing to produce the branded fans and use Lakewood's trademarks.
The 7th Circuit held that Chicago American was entitled to continue using the trademarks, even though the license had been rejected, explaining that since a licensor's simple breach outside of bankruptcy typically would not cause the licensee to lose the use of the licensed property under non-bankruptcy law, there is no reason why the non-debtor licensee should lose that right in a licensor bankruptcy. Sunbeam appealed.
On appeal, the 7th Circuit rejected the rule of Lubrizol Enterprises v. Richmond Metal Finishers, (4th Cir., 1985) which holds that when an intellectual property license is rejected in bankruptcy, the licensee loses the ability to use licensed copyrights, trademarks and patents. The court noted that no other circuit has adopted the Lubrizol rule and explained, as the rationale for its decision, that bankruptcy law is only designed to eliminate certain rights under some contracts. Here the trustee used § 365 (a) to reject the contract—the equivalent of a breach that ended the debtor's obligations but did not affect the rights of the licensee.
Practice Note: The 7th Circuit's decision means that trademark licensees are not subject to losing their rights just because the licensor files for bankruptcy and the license is rejected by the trustee. This decision will budget intellectual property licensees against loss of license rights when the licensor is in bankruptcy proceedings.
TRADEMARKS / LIKELIHOOD OF CONFUSION
Confusing Similarity Goes to the Dogs
by Elisabeth (Bess) Malis
In an appeal from the U.S. Patent and Trademark Office Trademark Trial and Appeal Board (TTAB), the U.S. Court of Appeals for the Federal Circuit affirmed the TTAB's decision to deny federal registration of the trademark WAGGIN' STRIPS based on a likelihood of confusion with a pre-existing registration for the mark BEGGIN' STRIPS. Midwestern Pet Foods v. Societe Des Produits Nestle, Case No. 11-1482 (Fed. Cir., July 9, 2012) (Bryson, J.) (Dyk, J., concurring-in-part and dissenting-in-part).
Nestle adopted the mark BEGGIN' STRIPS for pet treats in 1988. The mark was registered with the U.S. Patent and Trademark Office (USPTO) in 1989. In November 2003, appellant Midwestern Pet Foods, Inc. (Midwestern) filed an intent to use application for the mark WAGGIN' STRIPS for pet food and edible pet treats. Nestle opposed the application before the TTAB arguing, in part, likelihood of confusion between the marks. The TTAB upheld Nestle's claim of likelihood of confusion principally based on similarity of the marks, identical goods, and similar channels of trade and purchasers. Midwestern appealed.
The Federal Circuit held that the TTAB's finding of a likelihood of confusion between the marks was supported by substantial evidence. The marks were used in connection with identical goods, pet food, which are inexpensive items catering to ordinary consumers who would exercise no more than ordinary care when selecting a product. The Court also supported the TTAB's finding that the marks contained similarities in format, structure and syntax; the marks both share the term "STRIPS" and the first words "beg" and "wag" both convey behavior exhibited by dogs in connection with food. Finally, Nestle offered substantial evidence of national sales and advertising that demonstrated the mark engendered a "high degree of recognition," (though falling short of "fame") and was entitled to a broad level of protection. Although Nestle did not introduce consumer survey evidence in support of likelihood of confusion, the Court held that such evidence was not required. The Federal Circuit went on to affirm the TTAB holding that the WAGGIN' STRIPS mark was confusingly similar to Nestle's mark BEGGIN' STRIPS.
Concurring in part and dissenting in part, Circuit Judge Dyk agreed with the majority's holding regarding the likelihood of confusion issue, but disagreed that Nestle was not obligated under federal discovery rules to disclose in discovery the evidence it introduced at trial.
COPYRIGHTS / BANKRUPTCY
Copyright Owners Waive Right to Jury Trial by Filing Claims in Bankruptcy Court
by Rita J. Yoon
By seeking non-dischargeability in bankruptcy of damages owed by a copyright infringer, the U.S. Court of Appeals for the Eighth Circuit held that copyright owners submitted to the bankruptcy court's equitable power and waived their Seventh Amendment right to a jury trial on their damages claims. Pearson Education, Inc. et al. v. Joel Thomas Almgren, Case No. 11-2723 (8th Cir., July 13, 2012) (Gruender, J.).
Almgren sold unlicensed copies of solution manuals for textbooks published by Pearson Education, Cengage Learning and The McGraw-Hill Companies on the internet. Without sending a cease and desist letter, the publishers sued Almgren for copyright infringement. Almgren subsequently filed for Chapter 7 bankruptcy. The publishers sought non-dischargeability in the bankruptcy court of any copyright damages owed by Almgren. The publishers also made a jury demand and sought $90,000 in attorneys' fees.
The bankruptcy court struck the publishers' jury demand and denied their motion for attorneys' fees. The bankruptcy court found that Almgren willfully infringed, but only awarded the statutory minimum of $14,250 in damages that were not dischargeable in bankruptcy. The publishers appealed to the district court, which affirmed.
On appeal to the 8th Circuit, the court held that the bankruptcy court did not err in striking the publishers' jury demand on the amount of statutory damages. By filing a claim against Almgren's bankruptcy estate, the publishers submitted to the bankruptcy court's equitable power. Incidental questions that arise in the course of administering the bankrupt estate, including facts that ordinarily would be triable by a jury, fall within the bankruptcy court's equitable power over restructuring of the debtor-creditor relationship. The publishers thus waived their right to a jury's determination of the amount of damages when they filed their non-dischargeability claim against Almgren in bankruptcy court.
The 8th Circuit also affirmed the bankruptcy court's denial of attorneys' fees because the publishers could have avoided litigation by way of a cease and desist letter. While copyright owners are "free to make an example of a defendant by litigating their claims against him fully" and "are under no obligation to employ a minimum-impact cease-and-desist strategy," they "are never guaranteed that the attorneys' fees generated by their strategy of choice will be compensated." The 8th Circuit concluded that the determination of attorneys' fees falls within the broad discretion of the bankruptcy court.
COPYRIGHTS / STATUTORY INTERPRETATION
Statutory Provision on Royalty Judges Violates Appointments Clause
by Alesha M. Dominique
The U.S. Court of Appeals for the District of Columbia Circuit ruled that the position of Copyright Royalty Judges (CRJs) violates the Appointments Clause of the U.S. Constitution, but remedied the violation by invalidating and severing restrictions on the Librarian of Congress's ability to remove the CRJs. Intercollegiate Broadcasting System Inc. v. Copyright Royalty Board, Case No. 11-1083 (D.C. Cir., July 6, 2012) (Williams, J.).
Intercollegiate Broadcasting System Inc. (Intercollegiate) is an association of noncommercial webcasters that transmit digitally recorded music over the internet to high school and college campuses. Such webcasting constitutes a digital performance under the Copyright Act and therefore entitles the owner of a song's copyright to royalty payments. The Copyright Act, 17 U.S.C. §§112 and 114, provides a statutory license for webcasting which allows CRJs to establish reasonable licensing terms if the parties cannot themselves agree to licensing terms. Intercollegiate appealed the final determination of the CRJs that set forth royalty rates and terms applicable to internet-based webcasting of digitally recorded music.
Intercollegiate argued that, as structured, the Copyright Royalty Board violates the Appointments Clause, Art. II, §2, cl. 2, on two grounds: that the CRJs exercise of significant ratemaking authority without any effective means of control, such as unrestricted removability, qualified them as "principal" officers who must be appointed by the President with Senate confirmation; and that even if the CRJs were "inferior" officers, the Librarian of Congress is not a "Head of Department" in whom Congress may vest appointment power.
As to rulemaking authority, the Court agreed that the CRJs significant ratemaking authority coupled with the Librarian of Congress's restricted ability to remove the CRJs, qualified them as principal officers. Specifically, the Court found that the CRJs exercised significant authority given that their ratemaking decisions have considerable consequences, as the CRJs set the terms of exchange for not only traditional media such as CDs, cassettes and vinyl, but also on digital music downloaded through iTunes and Amazon.com. The Court reasoned that such rates can mean life or death for firms and industries.
The Court further found that the fact that the CRJs could be removed by the Librarian only for misconduct or neglect of duty, further supported the finding the CRJs are principal officers. To correct the violation, the Court invalidated and severed the restrictions on the Librarian's ability to remove the CRJs. With unfettered removal power, the Court was confident that the CRJs would be inferior, rather than principal, officers.
As to Intercollegiate's "Head of Department" argument, the Court disagreed. The Court explained that the Librarian is a Head of Department because, among other reasons, the powers of the Library and the Board to promulgate copyright regulations, to apply statutes to affected parties, and to set rates and terms case by case are ones generally associated with executive agencies, and in such a role the Library is undoubtedly a component of the executive branch.
RIGHTS OF PUBLICITY / IMPLIED CONSENT
Walking the Red Carpet May Negate Rights of Publicity Claims
by Sarah Bro
In an unpublished, non-precedential opinion, the U.S. Court of Appeals for the Ninth Circuit concluded that a display of sample images for which a company provides copyright licenses to end users did not violate a celebrity's rights of publicity when the celebrity gave implied consent to have her photograph taken on the "red carpets" of various events. Shirley Jones v. Corbis Corporation, Case No. 11-56082 (9th Cir., July 16, 2012 (Fletcher, J.; Wardlew, J.; Bybee, J.).
Corbis maintains an online library of digital images and sells sublicenses for the images on behalf of the original copyright owners, such as photographers and news wire services. Corbis' image library is searchable by keywords, and it displays low-resolution sample images of the copyrighted photographs that match applicable keywords.
Shirley Jones, the star of the Partridge Family television series, filed a class action complaint against Corbis alleging that its display of sample images associated with her name violated her common law and statutory rights of publicity. Specifically, Jones claimed that Corbis appropriated her image to its advantage to sell its product, namely, copyright licenses for the images of Jones and other "California residents" named in the class action complaint.
The district court explained that, under California law, to sustain a common law or statutory action for commercial misappropriation, a plaintiff must prove that the defendant appropriated his or her likeness without consent. Jones argued that she did not consent to Corbis' use of the sample images to solicit sales of licenses for the copyrighted images. In granting Corbis' summary judgment motion, the district court focused on the fact that Jones did not dispute that she consented to having photographers at red carpet events photograph her likeness and distribute the images, and that such practices are the custom in the entertainment industry. Jones appealed.
On appeal, the 9th Circuit affirmed the district court's ruling that consent is determined from a plaintiff's manifested action or inaction, and not her subjective belief as to her consent. Accordingly, Jones' implied consent when appearing at red carpet events where she was knowingly photographed allowed for the use and distribution of her likeness.
Practice Note: Although this decision likely will be helpful to image defendants in rights of publicity actions, it may not have the same impact on similar actions involving paparazzi photographs or where images used to promote products or services and which are taken or used without the consent of the image subject.
TRADE SECRETS / SUMMARY JUDGMENT
Let the Jury Decide Trade Secret Misappropriation Claim
by Adam Auchter Allgood
The U.S. Court of Appeals for the Federal Circuit, in reinstating trade misappropriation claims regarding infrared imaging technology, concluded that, in granting summary judgment and dismissing the trade secret misappropriation claims as time-barred, the district court erred by improperly resolving issues of material fact and drawing inferences in favor of the moving party. Raytheon v. Indigo Sys., Case Nos. 11-1245; -1246 (Fed. Cir., Aug. 1, 2012) (Linn, J.).
Indigo Systems, an infrared imaging technology company founded in 1996 by three prior Raytheon employees, had a consulting services agreement with defense contractor Raytheon that terminated in 2000. In 1997, Raytheon became concerned that Indigo was poaching Raytheon personnel in order to gain access to Raytheon trade secrets. In order to address this concern, the companies entered into an agreement whereby Indigo agreed to prohibit future employees from using any intellectual property obtained from former employers.
In March 2004 Raytheon acquired an Indigo infrared camera which it disassembled in August 2004 and found possible evidence of patent infringement and trade secret misappropriation. In February 2007, Raytheon found a correlation between the areas of expertise of its former employees now working at Indigo and Indigo's intervening technological advancements. In March 2007, Raytheon sued Indigo in federal district court in Texas alleging that Indigo was able to win contracts over Raytheon and other competitors based on stolen trade secrets and Raytheon's patented technology.
Indigo filed for summary judgment asserting that Raytheon's trade secret misappropriation claims were outside the three-year statute of limitations under both Texas and California law. Raytheon responded the statute of limitations was tolled either through fraudulent concealment or, under the discovery rule, until Raytheon either knew or should have known of the misappropriation. The district court agreed with Indigo and granted summary judgment finding that "Raytheon ha[d] developed an acute suspicion before March 2004 that Indigo was infringing its intellectual property rights." The parties subsequently settled the patent infringement claim, and Raytheon appealed the dismissal of its trade secret misappropriation claim.
On appeal, the Federal Circuit, applying the law of the Fifth Circuit, reviewed the trade secret misappropriation claims de novo. It first determined that there was no meaningful difference between Texas and California law with respect to the length of the statute of limitations or the tolling of that statute. It also recognized that whether or not the discovery rule applies is a question of fact in both states. The Court then noted that the only way that Raytheon could have discovered the misappropriation was by disassembling Indigo's camera. Therefore, the district court would have needed to find that Raytheon should have acquired and disassembled the camera prior to March 2004. However, the district court could not reach that conclusion without resolving factual questions against the non-moving party Raytheon at summary judgment.
Raytheon asserted that they bought the Indigo camera as part of their routine practice of examining competitive products, not out of any suspicion, and supported that position with testimony. The Federal Circuit concluded that this evidence, along with the fact that the camera was not disassembled until August, led to a reasonable inference in Raytheon's favor. In both California and Texas, on motion for summary judgment, the burden is on the defendant to negate the discovery rule by proving as a matter of law that no issue of material fact exists concerning when the plaintiff discovered or should have discovered its cause of action.
The district court also stated that, as a matter of law, Raytheon was on permanent inquiry notice since 2000 and had a constant duty to investigate all acts of competition by Indigo given its prior suspicions and the migration of former employees. The Federal Circuit disagreed and concluded that this determination was improper in the face of competent summary judgment evidence to the contrary.
Since the issue of whether the discovery rule applies is a question of fact, the Federal Circuit stated that it was for the jury to decide when Raytheon should have discovered the facts supporting its trade secret misappropriation claim.
TRADE SECRETS / CFAA
"Authorization" Under the Computer Fraud and Abuse Act
by Rose Whelan
Considering for the first time the scope of the Computer Fraud and Abuse Act (CFAA), with respect to employees obtaining and using confidential and proprietary information from their employers' computer systems for their own gain, the U.S. Court of Appeals for the Fourth Circuit adopted a narrow reading of the "authorization" language used in the statute as going to use, not access. WEC Carolina Energy Solutions v. Miller, Case No. 11-1201 (4th Cir., July 26, 2012) (Floyd, J.).
WEC alleges that before resigning from his position at WEC Carolina Energy Solutions (WEC), Mike Miller and his assistant Emily Kelley downloaded WEC's proprietary information to a personal computer and emailed proprietary information to Miller's personal email address. WEC claims that Miller later used that information in a presentation to a potential WEC customer on behalf of a WEC's competitor, Arc Energy Services (Arc). That customer ultimately chose Arc and WEC brought suit alleging a variety of state law claims and a violation of the CFAA.
Congress initially enacted the CFAA to combat hacking. The statute imposes both criminal and civil liability on a person who, among other things, accesses a computer without authorization or exceeds authorized access. Specifically, WEC contended that Miller and Kelley violated the CFAA because under WECs policies they were not permitted to download confidential and proprietary information to a personal computer. WEC alleged that by doing so Miller and Kelley breached their fiduciary duties to WEC and either lost all authorization to access the confidential information or exceeded their authorization. The district court dismissed WEC's CFAA allegations for failure to state a claim. WEC appealed.
Before providing its own analysis, the 4th Circuit reviewed a circuit split on the issue between the U.S Court of Appeals for the Seventh Circuit and the U.S. Court of Appeals for the Ninth Circuit. The 7th Circuit has previously based liability under the CFAA based on a theory that when an employee accesses information on a computer to further interests that are adverse to his employer, he violates his duty of loyalty, thereby terminating his agency relationship and losing any authority he has to access the computer. In contrast the 9th Circuit interprets "without authorization" and "exceeds authorized access" literally and narrowly, limiting the terms application to situations in which an individual accesses information on a computer without permission.
The 4th Circuit rejected the 7th Circuit's analysis and adopted an interpretation similar to that of the 9th Circuit. The 4th Circuit first noted that when interpreting statutes, such as the CFAA, which involve both criminal and civil liability, the rule of lenity requires strict construction of such statues to avoid interpretations not clearly warranted by the text.
The 4th Circuit went on to determine the proper meaning of "without authorization" and "exceeds authorized access" and held that neither definition extends to improper use of information validity accessed. The court opined that such an interpretation would impose liability far beyond what Congress intended. For example, employees who violated company policy against downloading company materials so that they could work at home would be vulnerable to criminal and civil liability.
The court also rejected any interpretation that grounds CFAA liability on a cessation-of-agency theory. The court held that this rule would also extend liability beyond what Congress intended, potentially imposing criminal sanctions under this theory on employees who merely checked the latest Facebook posting or sporting events scores.
Based on these holdings, the 4th Circuit affirmed the district court's dismissal of WEC's CFAA claim, because defendants' access to confidential information was authorized and only their use of the confidential information, which is not proscribed by the statute, was contrary to WEC's authorization.
TRADE SECRETS
Trade Secret Misappropriations Accusations Are Not Proof of a Habit
by Brett Bachtell
Finding that evidence of a prior accusation of trade secret theft was more prejudicial than probative, the U.S. Court of Appeals for the Sixth Circuit excluded, from a criminal trial, evidence of prior accusations of trade secret theft against two engineers. U.S. v. Qin, et al., Case No. 12-1015, (7th Cir., July 20, 2012) (Donald, C. J.).
In 2010, Yu Qin and his wife Shanshan Du were indicted for possessing stolen trade secrets. From 1985 to 2005, Qin was an electrical engineer at Controlled Power Company (CPC) and, at the time of his termination in 2005 held the position of vice president of engineering and research and development. Du also worked at CPC until some time in 2000. After leaving CPC in 2000, Du started working at General Motors (GM) as an engineer in its Advanced Technology Vehicles Group. During their respective employments at CPC and GM, both Qin and Du agreed to protect the confidential information of their respective employers.
In January 2005, Du's supervisor at GM offered Du a severance package in return for her resignation. Du accepted the offer in March 2005 and certified that she had returned all GM records and materials in her possession. She also acknowledged her employment obligation not to disclose confidential information. In the summer of that same year, CPC's vice president of operations became suspicious that Qin was engaging in additional outside activities. After some research, it was discovered that since 2000 Qin owned and operated a business known as Millennium Technologies International (MTI) that operated in direct competition with CPC. After CPC confronted Qin about his operation of MTI, CPC employees discovered a bag containing a large quantity of electrical components belonging to CPC and a hard drive that contained thousands of confidential files and intellectual property copied from GM by Du prior to the end of her employment.
The United States government charged Qin and his wife with conspiring to obtain trade secrets from GM pertaining to motor controls for hybrid vehicles. None of the charges against Qin and his wife related to Qin's possession of confidential information belonging to CPC. CPC initiated a separate civil lawsuit asserting several causes of action, none of which related to the theft of CPC trade secrets.
Prior to trial the government provided Qin and Du's counsel with notice of its intent to offer at the GM trade secret trial evidence that Qin appropriated resources of CPC for the benefit of MTI. Qin and Du filed a motion to exclude the evidence, arguing that introducing those allegations in a criminal trial would be would be more prejudicial than probative, particularly as to Du, to whom CPC did not attribute any of the underlying conduct forming the basis of CPC's civil complaint. After the district court granted Qin and Du's motion to exclude the evidence, an interlocutory appeal followed.
In reviewing the admissibility of prior bad acts, the 6th Circuit employs a three-step process for determining the admissibility of the evidence: 1) whether there is sufficient evidence that the other act in question actually occurred, 2) whether the evidence of the other act is probative of a material issue other than character, 3) if the evidence is probative of a material issue other than character, whether the probative value of the evidence is substantially outweighed by its potential prejudicial effect. Reviewing the first factor, the 6th Circuit reasoned that while the government contends its proof would be straightforward, Qin would have every incentive to refute the government's allegations with proof of his own. Accordingly, given the parties' positions, the 6th Circuit found the evidence could reasonably support a finding on both sides of the issue. However, for the purposes of the appeal, they assumed without deciding that there was sufficient evidence to support a jury finding that Qin appropriated CPC resources for the benefit of MTI.
Moving to the second step, the 6th Circuit reviewed whether the evidence was probative of a material issue other than character. The government purported to offer the evidence to show Qin and Du's specific intent, participation in a common scheme or plan, and absence of mistake or accident. Accepting the government's stated purpose, the 6th Circuit turned to the central issue, whether evidence of Qin's alleged misappropriation of CPC information is probative of Qin and Du's specific intent to steal trade secrets from GM. The 6th Circuit determined that it might be possible to generalize Qin's conduct in a way as to make it sound similar to the conduct that forms the subject of the indictment (i.e., that Qin stealing from CPC is substantially similar to Qin and Du stealing from GM), but that the two situations were fundamentally different. The 6th Circuit therefore affirmed the district court's determination that the acts were not substantially similar, and that in addition to lacking probative value, the evidence would be highly prejudicial to Qin and Du and should be excluded.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
