Category Archives: Litigation

Google & Trademark Genericide – Be Sure to Ask the Right Question

Genericide.  

It sounds like something you might put on your lawn to kill weeds. But in the world of brands and marketing, genericide is a killer of trademarks. It is what happens when a trademark becomes the common (generic) word for a product or service itself and is no longer protectable under trademark law.

Countless articles tell the stories of how trademarks lost their ability to distinguish the source of goods because they became generic. Examples include CELLOPHANE, LANOLIN, ESCALATOR, THERMOS, and ASPIRIN. See INTA’s Practical Tips on Avoiding Genericide.  

Genericide is one reason companies police how others use their trademarks. It is also a reason that companies create branding and trademark usage guidelines, like these for Intel, Apple, and Symantec. See also, A Guide to Proper Trademark Use.

Some guidelines, like those of Symantec, go beyond what to do, and explain why:

Proper usage aids consumers who depend upon Symantec’s goods and services and helps prevent Symantec Trademarks from losing their distinctiveness and becoming generic.

They may even explain what not to do:

Trademarks are adjectives and should be followed by the generic term they modify, such as “software” or “product”. Never use a trademark as a noun, a verb, or in the possessive form.

With all of this focus on how marks lose their distinctiveness by becoming generic, you may be thinking:

What is the deal with GOOGLE?

People seldom say, “Try searching for [whatever] using the Google search engine.” People instinctively shorten things and say, “Try googling it.” But shouldn’t that lead to Google becoming generic and incapable of serving as a trademark?

Not necessarily, said the Ninth Circuit Court of Appeal in Elliott v. Google, Inc., No. 15-15809, 2017 U.S. App. LEXIS 8583 (9th Cir. May 16, 2017). There is more to it. You have to ask the right question, and that is the TAKE-AWAY at the end of this article.

Initially, explained the court, the mere fact that the public sometimes uses a trademark as the name for a unique product does not immediately render the mark generic. Rather, a trademark only becomes generic when the “primary significance of the registered mark to the relevant public” is as the name for a particular type of good or service irrespective of its source.

Courts make that determination by applying the “who-are-you/what-are-you” test:

If the relevant public primarily understands a mark as describing “who” a particular good or service is, or where it comes from, then the mark is still valid. But if the relevant public primarily understands a mark as describing “what” the particular good or service is, then the mark has become generic. In sum, we ask whether “the primary significance of the term in the minds of the consuming public is [now] the product [and not] the producer.”

In Elliott v. Google, seeking show that Google had become generic, Elliott focused on how google often is used as a verb. [Well-known dictionaries define google as a verb.] The Ninth Circuit court, however, found Elliott’s claim to be flawed for two reasons: (1) a claim of genericide must always relate to a particular type of good or service; and (2) use as a verb does not automatically constitute generic use.

Genericide Must Relate to a Particular Type of Good or Service

Relation to a particular type of good or service, the court said, is infused throughout several sections of the Lanham Act (federal trademark law). A mark can be canceled if it “becomes the generic name for the goods or services . . . for which it is registered.” “If the registered mark becomes the generic name for less than all of the goods or services for which it is registered, a petition to cancel the registration for only those goods or services may be filed.” The relevant question under the primary significance test is “whether the registered mark has become the generic name of [certain] goods or services.”  15 U.S.C. § 1064(3).

The court then added that such a relation requirement is necessary to maintain the viability of arbitrary marks as a protectable trademark category. In other words:

If there were no requirement that a claim of genericide relate to a particular type of good, then a mark like IVORY, which is “arbitrary as applied to soap,” could be cancelled outright because it is “generic when used to describe a product made from the tusks of elephants.”

Trademark law recognizes that a term may be unprotectable with regard to one type of good, and protectable with regard to another type of good. Thus, the court said the very existence of arbitrary marks as a valid trademark category supports the conclusion that a claim of genericide must relate to a particular type of good or service.

Use as a Verb Does Not Automatically Constitute Generic Use

Moving to the second point, the court said a trademark may be used as a verb, or even as a noun, without becoming generic. In connection with Lanham Act amendments, the court noted the following from a Senate Report:

A trademark can serve a dual function—that of [naming] a product while at the same time indicating its source. Admittedly, if a product is unique, it is more likely that the trademark adopted and used to identify that product will be used as if it were the identifying name of that product. But this is not conclusive of whether the mark is generic.

In this way, the court said Congress has “instructed us that a speaker might use a trademark as a noun and still use the term in a source-identifying trademark sense.” That was the case in Coca-Cola Co. v. Overland, Inc., 692 F.2d 1250 (9th Cir. 1982), where Coca-Cola had sued a restaurant (Overland) for trademark infringement, and Overland countered that COKE was generic, claiming that customers ordered “coke” only in a generic (“soda”) sense. The court rejected that argument, noting that the mere fact customers ordered “a coke,” i.e., used the mark as a noun, failed to show “what . . . customers [were] thinking,” or whether they had a particular source in mind.

To accept Elliott’s argument, the court said, would require “evidence regarding the customers’ inner thought processes.” The court explained further in a footnote:

We acknowledge that if a trademark is used as an adjective, it will typically be easier to prove that the trademark is performing a source-identifying function. If a speaker asks for “a Kleenex tissue,” it is quite clear that the speaker has a particular brand in mind. But we will not assume that a speaker has no brand in mind simply because he or she uses the trademark as a noun and asks for “a Kleenex.” Instead, the party bearing the burden of proof must offer evidence to support a finding of generic use.

Relating it to Google, the court said that just as a customer might use the noun “coke” with no particular cola beverage in mind, or with a Coca-Cola beverage in mind, an internet user might use the verb “google” with no particular search engine in mind, or with the Google search engine in mind.

While Elliott had amassed a mountain of evidence ranging from expert surveys to dictionaries, it all focused on the public using “google” as a verb, and did not show evidence of “google” being a generic name for internet search engines.

Elliott also argued there is no efficient alternative for the word “google” as a name for “the act” of searching the internet regardless of the search engine used. But the court convincingly disposed of that argument:

Elliott must show that there is no way to describe “internet search engines” without calling them “googles.” Because not a single competitor calls its search engine “a google,” and because members of the consuming public recognize and refer to different “internet search engines,” Elliott has not shown that there is no available substitute for the word “google” as a generic term.

THE TAKE-AWAY

Ultimately, Elliott lost by focusing on the wrong question. Elliott focused on whether the relevant public primarily uses the word “google” as a verb, when the real question was:

…whether the primary significance of the word “google” to the relevant public is as a generic name for internet search engines or as a mark identifying the Google search engine in particular. 

BONUS TIP FOR IP LITIGATORS

The opinion includes analysis of several consumer surveys offered by Elliott. The court noted that consumer surveys may be used to support a claim of genericide “so long as they are conducted according to accepted principles.”

Two of Elliott’s consumer surveys, however, were excluded because they were not conducted according to accepted principles:

Specifically, these surveys were designed and conducted by Elliott’s counsel, who is not qualified to design or interpret surveys… [and, even] if the surveys were admitted, Elliott’s counsel would need to withdraw in order to offer testimony on the survey results.

For the latter point, the court cited Ariz. R. Sup. Ct. 42, E.R. 3.7 (“A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness . . . .”); see also Model Rules of Professional Conduct 3.7.

In California, see Rule of Professional Conduct 5-210 Member as Witness; but also see proposed California Rule 3.7 Lawyer as Witness (On March 30, 2017, the State Bar submitted the proposed rules to the California Supreme Court).

 

 

A Business May Not Assign (an ITU Application), if the Assign(or) Has No Business

There’s an old saying: “A business with no sign is a sign of no business.”

In a recent dismissal order, the Northern District of California provided insight into the requirements for assigning an Intent-to-Use (ITU) trademark application when the assignment occurs before proof of actual use of the mark is filed with the USPTO.

Some use of a mark, sufficient to accrue some goodwill, is required before an Intent-to-Use trademark application may be assigned to another. 

This is a very important concept, because it can arise in many contexts, including:

  • two companies develop a similar new product both seek to use the same mark, and they resolve the conflict with an assignment of a pending ITU application;
  • assignments between related companies;
  • an individual files an application in his or her personal name instead of or before forming a corporate or other entity (discussed below); and
  • M&A transactions involving IP portfolios that include pending applications.

Background

Common law trademark rights arise from actual use of a mark on goods or in connection with services.  USPTO registration of a mark (providing nationwide rights) can occur only after a mark is used in interstate commerce.

If a mark is already in use when a trademark application is filed, the first use date is stated in the application, and the mark, specimen, description, and classes are reviewed by the trademark examiner.  Upon approval, the mark is published to see if anyone objects.  Barring a successful objection, the USTPO issues a registration certificate.

U.S. law also allows a trademark application to be filed based on Intent-to-Use (ITU), effectively allowing a mark to be reserved.  However, the USPTO will register a mark only after the ITU applicant shows actual use of the mark by filing an “allegation of use” — either an Amendment to Allege Use (before publication of the mark) or a Statement of Use (after publication).  If the mark ultimately is registered, the filing date of the ITU application becomes the constructive first use date. This gives the ITU applicant priority over others who started using the mark after the ITU application filing date (even though the ITU applicant had not actually used the mark in commerce at that time).  See why this matters here.

Assignments of ITU Trademark Applications

An ITU trademark application may be assigned to another before a registration issues if the requirements of 15 U.S.C. § 1060(a)(1) are met.  The requirements differ, however, depending on whether the assignment occurs before or after the ITU applicant files an allegation of use.

If the assignment occurs after the applicant has filed an allegation of use, the ITU application must be assigned in writing together with the goodwill of the business in which the mark is used, just as if the assignment occurred after the mark already had been registered.

If the assignment occurs before the applicant files an allegation of use, the law will allow an assignment only “to a successor to the business of the applicant, or portion thereof, to which the mark pertains, if that business is ongoing and existing.”

Stated another way, an ITU application may not be assigned before an allegation of use is filed, unless the ITU application is transferred with at least part of the applicant’s “ongoing and existing” business to which the mark pertains.  This prevents the trafficking or profiting from the sale of ITU applications, i.e., the buying and selling of “inchoate” marks which as of yet, have no real existence.

What does it mean to assign an ITU application “to a successor to the business of the applicant, or portion thereof, to which the mark pertains, if that business is ongoing and existing”? 

The Northern District of California recently addressed this in an order granting a motion to dismiss in Sebastian Brown Productions LLC v. Muzooka Inc. (N.D. Cal., Mar. 14, 2016, No. 15-CV-01720-LHK) 2016 WL 949004, at *8.

Plaintiff Sebastian Brown Productions (SBP) operates a digital media storefront MuZook at muzook.com.  SBP’s sole owner, Miller, in his individual capacity, had applied for the MUZOOK trademark under an ITU application.  A few weeks after filing, Miller assigned the ITU trademark application to SBP, “together with that part of [Miller’s] business to which the Marks pertain, which business is ongoing and existing, the goodwill of the business symbolized by the Marks, and all registrations and applications therefor.”

In 2014, SBP sued competitor Muzooka, Inc.  While the facts are more complex than stated here, in order to prevail, SBP needed to establish constructive-use priority over Muzooka, Inc., based on the date Miller filed the MUZOOK ITU application.

Since Miller had assigned the MUZOOK ITU application to SBP before filing an allegation of use, the dispute focused on whether SBP was truly a successor to an “ongoing and existing” business to which the MUZOOK mark pertained, for purposes of § 1060(a)(1). Turning to precedent from the Trademark Trial and Appeal Board, the court discussed various cases applying this language, and distilled a few principles:

  • the “ongoing and existing” business exception to § 1060(a)(1) did not alter the requirement that the trademark assignment include the good will of the business in which the mark is used; and
  • an assignment of an “ongoing and existing” business involves more than the assignment of goodwill alone.  Hence, an assignment is void if it transfers only the intent-to-use application and goodwill, without any of the applicant’s ongoing and existing business.

Ultimately, the court determined that some use of a mark, sufficient to accrue some goodwill, is required before an ITU application may be assigned.  It is not enough to simply restate the language of § 1060(a)(1) in an assignment — there must be some goodwill or ongoing and existing business to transfer.

“Goodwill” generally has been described as “the advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers,” which accrues only through use of the mark.  As the court noted in citing Pfizer, Inc. v. Hamerschlag, 2001 WL 1182865, at *4 (TTAB Sept. 27, 2001) (non-precedential):  “Unwittingly or not, a party who has no business except obtaining a trademark on the basis of intent to use and who prior to starting a business assigns that application to another falls squarely into the trademark trafficking activity that [§ 1060(a)(1)] is intended to preclude.”

Although Miller used sufficient language to transfer an ITU trademark application before the filing of an allegation of use, Miller had nothing to transfer — no goodwill or ongoing and existing business.  SBP did not allege that Miller had provided any services under the MUZOOK mark; invested money in the development of the MUZOOK mark; publicly displayed the MUZOOK mark; had any business assets; or engaged in any business activities. There was nothing alleging that Miller had used the MUZOOK mark, prior to the assignment, in a manner that established goodwill or any ongoing and existing business. Thus, since no allegations could establish transfer of goodwill or an ongoing and existing business as required by § 1060(a)(1), SBP could not establish the constructive-use date needed to demonstrate priority over Mazooka, Inc., and the case was dismissed.

While this assignment issue is important in many contexts, counsel and DIY trademark applicants should use caution when assigning an individual’s ITU trademark application to his/her business entity before an Amendment to Allege Use or a Statement of Use has been filed with the USPTO.

10-22-2016 Addition:   For further application and analysis of these concepts, see Sorry, Apple, Assignment of ITU Applications Isn’t MAGIC by Wes Anderson at DuetsBlog (http://www.duetsblog.com/2016/10/articles/advertising/sorry-apple-assignment-of-itu-applications-isnt-magic/)

Sedlik’s Multiplier & Actual Damages for Copyright Infringement

Sedlik’s Multiplier – an acceptable use of a multiplier as part of calculating fair market value to account for factors such as exclusivity or rarity when determining actual damages under the Copyright Act.

Using an electron microscope, in the mid-1990s, photographer Andrew Paul Leonard created colorized stem cell images from cell samples he obtained from doctors, scientists, and researchers.  Leonard built a profitable business licensing rare stem cell images, and received a range of fees for different types of licenses.  One appeared on the cover of TIME.

Defendant Stemtech sells nutritional supplements through thousands of distributors. Stemtech contacted Leonard about licensing his stem cell images, because as Stemtech employees explained, “using these images was important to Stemtech’s business.”  Stemtech declined to license Leonard’s image for website use because “the price was too high,” but chose to license an image for use twice in its internal magazine.

Leonard sued Stemtech for copyright infringement in Delaware federal district court when he discovered that Stemtech had vastly exceeded the scope of the license.  Because Leonard had not registered his copyright sufficiently in advance to seek statutory damages, he had to prove actual damages under the Copyright statute.  See 17 U.S.C. §504 Remedies for infringement: Damages and profits.  At trial, the jury awarded Leonard $1.6 million in actual damages.

Stemtech appealed to the Third Circuit Court of Appeals, arguing among other things, that the award of actual damages was grossly excessive and that the district court improperly allowed the testimony of Leonard’s damages expert, Jeff Sedlik.  The Third Circuit rejected Stemtech’s arguments, and sent the case back to the district court to determine whether interest should be added as well.  See Leonard v. Stemtech, __ F.3d ___, 2016 WL 4446560, at *1 (3d Cir. Aug. 24, 2016).

[There is some good discussion of secondary infringement, including application of and distinctions between contributory infringement liability and vicarious liability.]

This post focuses on the Third Circuit’s discussion of methods for calculating actual damages under the Copyright Act, its review the District Court’s decision to permit Leonard’s damages expert to testify, and its evaluation of whether the $1.6 million dollar award was grossly excessive.

Methods for Calculating Actual Damages under the Copyright Act [§ 504(b)]

The Copyright Act allows a copyright owner to recover actual damages resulting from infringement.  It usually involves determining the loss in fair market value of the copyright, measured by the profits lost due to the infringement or by the value of the use of the copyrighted work to the infringer.  The primary measure is the injury to the market value of the copyrighted work at the time of the infringement.  Case law describes two permissible methods for determining damages:

(1) calculating the fair market value of the licensing fees the owner was entitled to charge for such use;

or

(2) calculating damages based on the plaintiff’s own past licensing fees.

The District Court’s Decision to Permit Leonard’s Damages Expert to Testify

Leonard hired a photography expert, Jeff Sedlik, to provide testimony regarding Leonard’s actual damages.  Stemtech filed a motion to exclude Sedlik’s testimony (a Daubert motion).  The district court, denied Stemtech’s motion because:  (1) Sedlik’s method for calculating actual damages using fair market value, as opposed to past licensing history, was reliable; (2) there was a sufficient factual basis for his calculation; and (3) there was a fit between the facts of the case and Sedlik’s damages calculation.

The Third Circuit agreed.  Sedlik had adopted a recognized method – the fair market value approach.  Stemtech’s disagreements with Sedlik’s calculation methodology and assumptions about which images and uses were similar to those of Leonard, went to the weight the jury may give Sedlik’s expert testimony, but were not reasons to keep the information from the jury.

Excessiveness of the $1.6 Million Damage Award by the Jury

The Third Circuit noted that courts will respect a jury verdict unless it is so grossly excessive that it shocks the judicial conscience, or it relies on an impermissible basis.

The Third Circuit examined Sedlik’s expert damages opinion, breaking it down as follows:

  • Sedlik surveyed four stock photo agencies to obtain image licensing rates for uses similar to the infringing uses.  These fees factored in the image size, form of media, size of audience, geographical scope, placement, number of appearances, and length of the license.
  • Sedlik averaged the quotes provided by the agencies and arrived at benchmark license fees for each usage, in the range of $1,277.10 to $2,569.46. Sedlik then assigned an applicable fee to each of the 92 unauthorized usages, and calculated the sum of those fees to arrive a fair market value of $215,767.65 in total.
  • Sedlik then adjusted the benchmark amount to account for scarcity—the rarity of stem cell images—and exclusivity—that is, how Stemtech’s extensive use would be akin to an exclusive license that would eliminate or reduce licensing revenue from other sources and/or decrease the value of Leonard’s work.
  • This adjustment to the benchmark took the form of a “premium” or multiplier of three to five times the benchmark for scarcity, and a multiplier of 3.75 to 8.75 times the benchmark for exclusivity of Leonard’s images during the infringement period.  That yielded an actual damages range of $1.4 million to nearly $3 million.

Stemtech argued that Sedlik’s use of multipliers effectively resulted in a jury award that included punitive damages.  Since punitive damages are not an available remedy under the Copyright Act (i.e., an impermissible basis), Stemtech argued, the jury’s award was excessive.

In rejecting Stemtech’s argument, the Third Circuit distinguished Sedlik’s multiplier from case law finding multipliers to be impermissibly punitive.

The Third Circuit first recognized case law rejecting punitive multipliers because “[t]he value of what was illegally taken is not determined by multiplying it,” and where a multiplier amounts to a “fee for unauthorized usage” over and above what “would otherwise represent a fair and reasonable licensing fee for the infringed material.”

Sedlik’s multiplier, the court held, was different.  It was not related to unauthorized use of the images (it was not an “infringer’s penalty”).  Rather, it was part of calculating fair market value.  The sum calculated from the stock photo agency rates did not represent a full calculation of the fair market value of Leonard’s images because the stock agency rates yielded a benchmark that did not account for scarcity and exclusivity.  Sedlik’s multipliers reflected a premium that, according to Sedlik, the market would find acceptable given the scarcity and exclusivity of the images as compared to the images for which he had secured rates for comparative purposes.  The fair market value calculation was complete only after those additional factors (scarcity and exclusivity) were applied.

Because “Stemtech presented no evidence or methodology to cast doubt on the use of multipliers to account for factors relevant to a final fair market value,” neither the district court nor the jury had any basis to discount Sedlik’s testimony.  And without evidence that the scarcity and exclusivity multipliers were punitive as opposed to being valid factors for calculating fair market value, the Third Circuit could not say the jury’s verdict was based on an improper consideration.

Nor could the Third Circuit conclude that the jury’s verdict was grossly excessive.  Unrebutted expert testimony provided a basis for a fair market value that included a benchmark for similar but less unique images, and a range for a premium reflecting the rarity of Leonard’s image and its unusually widespread use in Stemtech’s materials. Sedlik provided a multiplier of three to five times the benchmark for scarcity and 3.75 to 8.75 times for exclusivity, and jury returned a verdict of $1.6 million, which was at the lower end of Sedlik’s range.

Accordingly, because the jury’s damages award was tethered to the record, and Stemtech presented no alternative calculations, the damages award could not be reversed as excessive.

THE TAKE-AWAYS

A damages expert may use multiplier as part of calculating fair market value to account for factors such as exclusivity or rarity, as long as it is not essentially a “fee for unauthorized usage.”

Whether the stock agency rates were truly comparable to Leonard’s images, whether the stock photos were actually licensed by paid customers at those rates, whether taking an average of selected licensing rates was reliable, whether issues like scarcity and exclusivity (or either of them) were already taken into account in the stock photo rates, or whether the market would find premiums for scarcity and exclusivity acceptable – those were all issues Stemtech was free explore when cross-examining Sedlik, or with Stemtech’s own expert (if it had one).  Yet, Sedlik’s testimony went largely unrebutted.  Stemtech did not cross-examine Sedlik about his use of these premiums and Stemtech did not present its own expert to rebut Sedlik’s opinions.

Stemtech instead relied heavily on its ability to exclude Sedlik’s expert damages testimony.  As a back-up, it sought to convince the court (and jury) that license fees Leonard actually charged his clients over fifteen years and the fees that Leonard quoted Stemtech were the only viable measures of Leonard’s actual damages.

According to the Third Circuit, however, Stemtech had cited “no authority requiring the use of this method as opposed to the fair market value approach, and case law on this subject supports using the fair market value.”

Ultimately, Stemtech made three key decisions:  (1) to rely on its ability to have the Sedlik expert opinions excluded, (2) to rely on Leonard’s past licensing history as the only method of calculating Leonard’s actual damages, and (3) to proceed without its own damages expert to counter Sedlik’s methodology and opinions.

Combined, these decisions amounted to an all-or-nothing damages strategy, which proved perilous when the jury chose “all.”

Copyright Defense Win Reversed – Proving Authorization to Copy is Defendant’s Burden

In a recent copyright infringement case about making and distributing copies of a painting, the Seventh Circuit Court of Appeals in  Ali v. Final Call, Inc. (7th Cir., Aug. 10, 2016, No. 15-2963) held that the district court misstated the elements of a prima facie copyright infringement claim and erroneously shifted to plaintiff the burden of proving that copies made and distributed by the defendant were unauthorized.  The opinion identifies some important pitfalls for copyright litigators, and offers some preventative guidance for those who make copies of or distribute the creative works of others.  [See THE TAKE-AWAYS below.]

Here are the basic facts:

Plaintiff Ali is an artist.  In 1983, Ali painted a portrait of Minister Louis Farrakhan (“Minister Farrakhan painting”), for which Farrakhan paid Ali $5,000.  Ali registered his copyright in the painting in 1997.  Defendant The Final Call (a newspaper for the Nation of Islam) sells various posters and prints.  The Final Call sold lithographs titled Allah’s Star of Guidance that featured a reproduction of Ali’s Minister Farrakhan painting.

Ali sued The Final Call for copyright infringement, alleging he never authorized The Final Call to create or distribute the Star of Guidance prints or lithographs.  The Final Call argued that Ali’s commission with Louis Farrakhan included permission to make copies, which in turn, authorized creation and distribution of the Star of Guidance lithographs.

The parties waived a jury, and the case was tried to the court.  The district court identified the key issue as “whether in agreeing to the commission with Minister Farrakhan back in 1983, Ali agreed to give the right to create and distribute the Star of Guidance prints.” It found that Ali had authorized the creation and distribution of the Star of Guidance prints/lithographs, based primarily on a letter Ali had sent in 2008 that said, in part, “The commission awarded by the minister for his oil and litho entitled The Star of Guidance…” Noted the district court, “That very plainly says in Mr. Ali’s own letter that the commission with Minister Farrakhan included lithographs and prints.”  Ali tried to explain that the letter was taken out of context, but the court discounted his explanations.

On appeal, Ali argued that the district court had misstated the elements of a prima facie copyright infringement claim and erroneously shifted to him the burden of proving that the copies were unauthorized.  The Seventh Circuit agreed, and reversed the district court’s judgment.

In summary, the Seventh Circuit Court of Appeal reasoned as follows:

To establish a prima facie case of copyright infringement, Ali only had to prove two things: (1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.  The district court, however, also required Ali to prove that the copying was unauthorized.  That was error, because the defendant (The Final Call) has the burden of proving affirmative defenses like authorization (e.g., license).  Therefore, unless The Final Call could prove an affirmative defense (e.g., authorization to make and distribute copies), it was liable for copyright infringement.

[For more on establishing a prima facie case and burdens of proof, see Allocation of the Burdens of Proof – Burden of Producing Evidence.]

The Final Call did assert affirmative defenses of implied license (authorization) and laches [albeit late, as discussed in THE TAKE-AWAYS below].  However, believing that it was plaintiff’s burden to show that the copies were unauthorized, The Final Call decided to withdraw its affirmative defenses at the pretrial conference.  Because defenses had been waived, the Seventh Circuit held the district court had improperly relied on a waived implied license defense and an unasserted first-sale defense when the district court ruled in favor of The Final Call at trial.

Even if the defenses could properly be considered, the Seventh Circuit found that The Final Call failed to carry the burden of proving the elements of either defense at trial.

An implied license defense requires the defendant to prove that:  (1) a person (the licensee) requested the creation of a work, (2) the creator (the licensor) made that particular work and delivered it to the licensee who requested it, and (3) the licensor intended that the licensee-requestor copy and distribute his work.  The Final Call did not prove an implied license because (1) Farrakhan commissioned the portrait, not The Final Call, (2) Ali made the work Farrakhan requested and delivered it to Farrakhan, not The Final Call, and (3) no evidence showed that Ali intended for The Final Call to copy and distribute his work.  And even assuming Farrakhan may have had an implied license, no evidence showed that Farrakhan ever attempted to transfer a license to The Final Call.

Under the first sale doctrine, “once a given copy has been sold, its owner may do with it as he pleases (provided that he does not create another copy or a derivative work).”   The Final Call’s evidence, however, failed to prove that the lithographs at issue were from a batch of authorized copies.

THE TAKE-AWAYS

While there are many sub-issues throughout the Seventh Circuit’s opinion, here are some important take-aways from Ali v. Final Call, Inc.:

As the first take-away, the burdens should now be clear:

To establish a prima facie case of copyright infringement, the plaintiff must prove two things: (1) ownership of a valid copyright (registered) in the work, and (2) copying of constituent elements of the work that are original.

If the plaintiff presents a prima facie case, the defendant has the burden to prove the elements of its affirmative defenses, such as the first sale doctrine, or authorization to make or sell another’s work, whether by express or implied license (or otherwise).

Another take-away concerns jury instructions.  While this was a court trial and didn’t involve a jury, lawyers and judges sometimes consult jury instructions as fairly solid statements of current law.  Interestingly here, the Seventh Circuit traced the district court’s error, in part, to the Seventh Circuit’s pattern jury instructions.  Instruction No. 12.2.1 states:

To succeed on his claim, Plaintiff must prove the following things:

1. [Describe the work] is the subject of a valid copyright;

2. Plaintiff owns the copyright; and

3. Defendant copied protected expression in Plaintiff’s copyrighted work.

I will explain what these terms mean…

Instruction No. 12.5.1 COPYING, appears to explain what “copied protected expression” means, and includes this bracketed language:

[In determining whether Plaintiff has proved copying, you may consider evidence that … Defendant had authority from Plaintiff to copy Plaintiff’s work.]

That bracketed language in Instruction No. 12.5.1 COPYING created confusion for the district court as to whether plaintiff Ali had to disprove authorization as part of his burden of proving there was “copying,” or whether authorization was solely an affirmative defense that The Final Call had the burden of proving.

[It is worth noting that the comments for use of Instruction No. 12.5.1 COPYING state, “This instruction should be used only when the plaintiff seeks to prove copying inferentially.  If the plaintiff offers only direct evidence of copying, then this instruction is unnecessary.”  Here, Ali and The Final Call had stipulated that the “Star of Guidance” contained the protected expression from the “Minister Farrakhan painting.”  In other words, Ali was not seeking to prove copying by inference.]

Nevertheless, the Ali v. Final Call opinion should prompt an evaluation of pattern jury instructions for copyright cases in all of the federal circuits.  For instance, one conceivably could make the same mistake based on certain portions of the Ninth Circuit’s Jury Instructions.  Instruction No. 17.0 includes “without authority” within its statement on LIABILITY FOR INFRINGEMENT, as follows:

One who [reproduces] [distributes] [performs] [displays] [uses] [prepares derivative works from] a copyrighted work without authority from the copyright owner during the term of the copyright infringes the copyright.

Similarly, in Instruction 17.4 COPYRIGHT INFRINGEMENT—ELEMENTS—OWNERSHIP AND COPYING, the first sentence references “without the owner’s permission”:

Anyone who copies original elements of a copyrighted work during the term of the copyright without the owner’s permission infringes the copyright.

The Ninth Circuit jury instructions, however, do have separate and distinct instructions for the defenses of implied license [No. 17.24 COPYRIGHT—AFFIRMATIVE DEFENSE – IMPLIED LICENSE] and the first sale doctrine [No. 17.25 COPYRIGHT—AFFIRMATIVE DEFENSE—FIRST SALE], which should make it clear that those are affirmative defenses that the defendant has the burden of proving.

Other take-aways from this case concern the importance of the pretrial conference and pretrial order.

As explained in DeliverMed Holdings, LLC v. Schaltenbrand (7th Cir. 2013) 734 F.3d 616, 628, the parties rely on the pretrial conference to inform them precisely what is in controversy, the pretrial order is treated as superseding the pleadings and establishes the issues to be considered at trial.  In order to preserve the pretrial order’s usefulness in focusing the parties’ efforts, a claim or theory not raised in the pretrial order should not be considered by the fact-finder (i.e., the judge in a bench trial or the jury in a jury trial).

The U.S. Supreme Court also has emphasized the importance of the pretrial order. As stated in Rockwell Intern. Corp. v. U.S. (2007) 549 U.S. 457, 474, “[C]laims, issues, defenses, or theories of damages not included in the pretrial order are waived even if they appeared in the complaint and, conversely, the inclusion of a claim in the pretrial order is deemed to amend any previous pleadings which did not include that claim.”  Thus, even an entirely new claim or defense in a pretrial order will be deemed to amend the previous pleadings to state the new claim or defense.

Here, The Final Call did not assert any affirmative defenses in response to the original Complaint or the First Amended Complaint.  And when plaintiff Ali filed a Second Amended Complaint, The Final Call did not file an answer asserting the defenses of implied license and laches until many months later.  By then, The Final Call’s answer was untimely, fact discovery had long-since closed, and Ali had filed a summary judgment motion that was fully briefed for decision by the court.  That prompted Ali to file a motion to strike The Final Call’s newly asserted affirmative defenses as untimely and prejudicial.

The district court never ruled on Ali’s motion to strike, however, because The Final Call withdrew the affirmative defenses (implied license and laches) at the pretrial conference.   The Final Call argued that it was Ali’s burden to prove the copies were unauthorized.  And it did not seem to matter, because at the Pretrial Conference, the district court judge said, “[I]f it turns out that lack of authorization is the plaintiff’s burden, then…the defendant can certainly — regardless of whether the defendant has waived irrevocably the ability to assert affirmative defenses, he can certainly make that argument against one of the elements of your claim.”

When the Seventh Circuit ultimately determined that the defendant has the burden of proving defenses such as implied license and the first sale doctrine, The Final Call’s withdrawal of its affirmative defenses at the pretrial conference turned out to be the “nail in the coffin.”

Nevertheless, the Seventh Circuit’s opinion went on to analyze and explain how The Final Call had not proved the elements of implied license or first sale.  That analysis (in the final paragraphs of the opinion) highlights another key take-away:

By not clarifying whether it has the burden of proving a particular defense early in a case, a defendant may miss out on the opportunity to discover facts, and to identify, prepare, and call witnesses at trial that can establish facts supporting each element of its affirmative defenses.

As a final take-away from Ali v. Final Call, those who make or distribute copies of other’s works should be prepared to prove their right to do so by creating and maintaining records that show authorization or other defenses – even if it was many years ago.  As the Seventh Circuit noted, “if there is evidence of a license, it is most likely to be in the possession of the purported licensee.”

 

 

Trademark Refresher:  What is a Family of Marks?

A family of marks is a group of marks (e.g., MCNUGGETS, MCSKILLET, MCCAFE, MCGRIDDLES) having a recognizable formative common characteristic (e.g., MC), wherein the marks are composed and used in such a way that the public associates not only the individual marks, but the common characteristic of the family, with the trademark owner (e.g., McDonalds Corp).

Simply using a series of similar marks, however, does not of itself establish the existence of a family of marks.  Courts and the USPTO consider the use, advertisement, and distinctiveness of the marks, as well as how the common feature contributes to the purchasing public’s recognition of the marks as being of common origin.  To demonstrate such recognition, an owner must show that the marks comprising the family have been advertised or used in everyday sales activities in such a way so as to create common exposure and recognition of common ownership based on the common feature.

As parenthetically indicated above, a well-known example is the McDonald’s Corporation family of “MC” marks, which include MCNUGGETS, MCSKILLET, MCCAFE, MCGRIDDLES and so on.  McDonald’s has successfully opposed attempts by others to register “MC” marks over the years and it actively pursues perceived infringers of its family of “MC” marks.  See McDonald’s Corp. v. McSweet, LLC, 112 USPQ2d 1268 (TTAB 2014) (59-page TTAB decision sustaining McDonald’s opposition to MCSWEET for pickled gourmet vegetables based on dilution and likelihood of confusion with the “MC” family of marks).

PRACTICE TIPS

A trademark owner does not need to own trademark rights in the formative common feature itself (e.g., “MC”) in order to establish rights to a family based on the common feature.  J & J Snack Foods Corp. v. McDonald’s Corp., 932 F.2d 1460, 1463 (Fed. Cir. 1991).

The common feature, however, must be distinctive and not generic or “merely descriptive” of the goods or services.  Note that a descriptive term is not “merely descriptive” if it has acquired distinctiveness (aka “secondary meaning”) through extensive use and advertising.  Thus, a descriptive term can serve as a common feature for a mark family if there is a strong showing of secondary meaning (acquired distinctiveness) in the descriptive common feature.  See, e.g., Spraying Systems Co. v. Delavan, Inc., 975 F.2d 387, 395 (7th Cir. 1992) (refusing to recognize a family of “–JET” marks for agricultural spray nozzles); see also, Miller’s Ale House, Inc. v. Boynton Carolina Ale House, LLC, 745 F. Supp. 2d 1359 (S.D. Fla. 2010) (“To the extent Miller’s is claiming trademark rights in a family of marks with “ALE HOUSE” as a common surname, a determination that the “ALE HOUSE” surname is generic would be fatal to the entire mark.”)

Finally, for a good resource on arguing family of marks in the context of USPTO trademark registration or Trademark Trial and Appeal Board proceedings, go here.

(photo: Thank you William A. Ling for permission to use his zebra-family photo.)

Repaired, But Not Worth As Much!

My insurance company paid to have it repaired, but now it is not worth nearly as much!

That’s the subject of Baldwin v. AAA Northern California, Nevada & Utah Ins. Exch. (2016) — Cal.App.4th —, 2016 WL 3398446 (filed 6/13/16, modified and certified for publication on 7/6/16)

Plaintiff Baldwin had an almost-new Toyota Tundra  (pickup).  Baldwin’s parked pickup suffered structural damage when it was hit following a collision between two other cars (driven by Hollandsworth and Sebastian).  Baldwin had his own insurance with AAA.  Hollandsworth was also insured by AAA – for property damage caused by his negligence.

AAA refused to consider Baldwin’s pickup a “total loss,” and instead had the pickup repaired for $8,196.06.  Following repairs, the pickup’s future resale value was decreased by more than $17,100 (aka “diminution in value” “diminished value” “lower resale value”).

Baldwin sued the drivers Hollandsworth and Sebastian for negligence, and sued AAA for breach of contract and bad faith.  The appeal involves the Baldwin’s claims against AAA.

Baldwin contended that AAA was obligated either to pay him the entire pre-accident value of the pickup or to repair the pickup to its original pre-accident condition.  Baldwin alleged that the repaired pickup did not match its pre-accident condition “with respect to safety, reliability, mechanics, cosmetics and performance” and with respect to future resale value (decreased $17,000).

AAA filed a demurrer, contending that diminished resale value of Baldwin’s pickup was specifically excluded under the AAA auto insurance policy. The trial court agreed, and ordered a final judgment of dismissal with prejudice for AAA.

As to breach of contract, the Court of Appeal said the policy language was clear and explicit, stating that AAA “may pay the loss in money or repair … damaged … property.” The policy’s use of the term “may” suggests AAA had the discretion to choose between the two options.  This suggestion was supported by the statement (in the same section of the policy), under “LIMITS OF LIABILITY,” that AAA’s coverage responsibility for car damage would “not exceed” “the lesser of” those two options, namely, paying “the actual cash value of the … damaged property” or “the amount necessary to repair … the property with similar kind and quality.”

As to Baldwin’s claim that it was not possible to restore his almost-new pickup to its pre-accident condition, the Court of Appeal said that Baldwin had not alleged any flaws, unrepaired damage or performance issues with the pickup.  He only alleged lower future resale value.  Baldwin’s general allegation that the pickup was not restored to its pre-accident condition “with respect to safety, reliability, mechanics, cosmetics and performance” was too conclusory.  “Facts alleging a breach…must be pleaded with specificity.”

The Court of Appeal noted the similarity to Ray v. Farmers Ins. Exchange (1988) 200 Cal.App.3d 1411, where the policy gave the insurer the right to elect repair of the insured’s vehicle to a similar condition if cost to repair would be less than the actual cash value of the vehicle at the time of the loss.  The court held that the insurer’s election to make repairs was conclusive if the repairs put the vehicle “substantially in its pre-accident condition.”  It specifically rejected the notion that repairing the vehicle meant “to both its pre-accident condition and market value.” Rather, the policy language gave the insurer the right to elect the most economical method of paying claims.

Further, citing Carson v. Mercury Ins. Co. (2012) 210 Cal.App.4th 409, the court in Baldwin noted that repairing a car to its pre-accident condition did not mean restoring it to its condition “when it left the factory or showroom floor,” reasoning that “no repair can ever restore a vehicle to its pristine factory condition,” and applying such a standard would mean “no vehicle could be adequately repaired.”

Because the AAA policy defined its repair obligation as not including “diminution in value,” the Court of Appeal agreed that Baldwin failed to allege breach of contract against AAA.

Baldwin also argued it was against public policy to give “AAA an incentive to attempt superficial repairs to cars sustaining structural damage, returning unsafe cars to the roads, rather than declare them a total loss and pay out their actual (greater) pre-accident cash value.”  The Court of Appeal, however, noted two countervailing incentives:  (1) that the insurer would be financially responsible under the same policy for any damages resulting from future accidents of an insufficiently repaired vehicle (Baldwin did not contend that AAA canceled his policy after the accident); and (2) insurers would be liable for tort damages if, in bad faith, they directed cosmetic or superficial repairs to an insured vehicle.

While acknowledging that public policy concerns would come into play if an insurer “refused to acknowledge the vehicle was nonrepairable but nevertheless proceeded with a purely cosmetic restoration,” the court noted that Baldwin did not contend that the resulting repairs were purely cosmetic or that the pickup returned to him actually was unsafe.  Nor did he allege that his pickup type or vehicles generally are incapable of being restored to a safe condition once having sustained structural damage.  Absent those types of allegations, it was clear that Baldwin’s claim rested solely on the insurer’s failure to take into account the vehicle’s depreciation in value when opting to repair the vehicle, which the court said is not against public policy.

The court also upheld the demurrer to Baldwin’s claim for breach of the implied covenant of good faith and fair dealing, because Baldwin alleged that AAA performed as promised under the insurance policy by directing the repair of his pickup following the accident and providing him a rental car.  Absent allegations that AAA unreasonably delayed repairs, or that the pickup was returned to him defective in some specific way other than diminished resale value, Baldwin had failed to state a cause of action against AAA for breach of the implied covenant under his insurance policy.

As to Baldwin’s claim under the other driver Hollandworth’s AAA policy, the Court of Appeal held that Baldwin stood in the shoes of a third party claimant.  And under Moradi–Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, a third party claimant—an individual who is injured by the alleged negligence of an insured party—does not have a private right of action against the insurer for unfair settlement practices.

Finally, the Court of Appeal addressed whether Baldwin should have been allowed to amend his Complaint.  The Court of Appeal noted that a plaintiff “must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading.” Since Baldwin argued only that he would add allegations that the express terms of the insurance policy are ambiguous “considering the implied terms and representation to the public that the insurance policy covers ‘losses’ to the insured’s property,” the Court of Appeal found that denial of his request to amend the Complaint was proper.

There are plenty of take-aways on this one, and I am sure I’ll miss some, so please add your own in the comments.  But here are some:

  • This appeal addresses only Baldwin’s claims against AAA under its insurance policies, and not whether the other drivers are liable to Baldwin for the diminished value of his pickup.
  • Future plaintiffs should consider having an independent car expert and/or appraiser investigate the mechanical, structural, and cosmetic condition of the repaired car, and have a lawyer assess whether the Complaint should include specific allegations of flaws, unrepaired damage, and/or performance issues. (Sample Google Search)
  • Future plaintiffs should assess whether to include specific allegations to support public policy arguments, including whether the insurer later refused to insure the repaired vehicle after a structural repair, and other facts relating to public safety.
  • Drivers, especially those with new or almost-new cars, should review their auto policies and consult their agents regarding their coverage and policy language relating to the insurer’s ability to elect to repair, and language that may exclude compensation for diminished value after repair.

It Just Got Easier To Get Sanctions Under California Code of Civil Procedure Section 128.5 – San Diegans for Open Government v. City of San Diego.

Nice analysis from James D. Crosby of a recent CA Opinion addressing the standard for sanctions under CCP Section 128.5 for frivolous claims or unnecessary delay tactics in litigation.

See:  It Just Got Easier To Get Sanctions Under California Code of Civil Procedure Section 128.5 – San Diegans for Open Government v. City of San Diego.