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Federal Court: No Heightened Pleading Standard Under the Defend Trade Secrets Act

Nice post by Eric Ostroff on a case involving pleading requirements (Iqbal/Twombly) under the federal Defend Trade Secrets Act.

Protecting Trade Secrets

As more plaintiffs bring claims under the shiny new Defend Trade Secrets Act, we continue to learn about how courts are interpreting this statute. On Tuesday, the District of New Jersey answered an open question: whether the statute, in conjunction with Twombly/Iqbal, requires a heightened pleading standard for misappropriation. In Chubb INA Holdings, Inc. v. Chang, the DNJ declined to apply such a standard. A copy of the opinion can be downloaded below.

In this case, Chubb sued its former employee and its competitor Endurance, alleging that the former employee worked with Endurance to solicit a large number of employees from Chubb’s real estate and hospitality division. The goal was to hire enough Chubb employees to create a “turnkey” operation for Endurance. In the process, Chubb alleges, the former employees took Chubb’s confidential information. Chubb sued for, among other things, violations of the Defend Trade Secrets Act.

The…

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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.”

The “Top” Copyright and Trademark Articles Collection

Here’s a collection of links to “Top” articles discussing tips, benefits, traps, warnings, distinctions, myths, and explanations of copyrights and trademarks:

Top 10 Benefits of Trademark Registration

The Top Ten Mistakes Made by Trademark Owners

Top Ten Trademark Tips for Every Business

Missing the Mark: The Top 10 Trademark Mistakes in Advertising Campaigns

Top 7 Costly Mistakes to Avoid with Trademarks

Top Ten Most Important Trademark Cases

Top Ten Copyright Myths

The Top 10 of Copyright

Top Ten IP Concerns When Working With Independent Contractors

Top Ten (Actually Eleven) Copyright And Trademark Tips For Nonprofits

Top Ten Intellectual Property (IP) Law Traps

Top 10 Things Every Artist Needs to Know About Copyright and Trademark

 

[Matterhorn image courtesy of  Pixabay -under Creative Commons CC0]

Compilation of Most Cited IP Law Articles Posted in the Past 10 Years

Written Description, a Patent & IP blog, recently featured a great guest post by Ted Sichelman of the University of San Diego School of Law:

Most-Cited IP Law Articles Published in the Last 10 Years

What an amazing collection. Thank you Ted and Written Description!

 

Service Mark Canceled – Not Used in Commerce At Time of Application

On March 2, 2015, in Couture v. Playdom, Inc., No. 2014-1480, 2015 WL 859524, at *1 (Fed. Cir. Mar. 2, 2015), the Federal Circuit Court of Appeals affirmed the Trademark Trial and Appeal Board’s (TTAB) granting of a petition to cancel Couture’s PLAYDOM service mark, because no services under the mark were provided until well after the application to register was filed.

On May 30, 2008, Couture filed an application to register the service mark PLAYDOM.  As a specimen showing use of the mark, Couture submitted a screen capture of a website offering Entertainment Services in commerce.  As of May 30, 2008, however, the website included only a single page that said, “We are proud to offer writing and production services for motion picture film, television, and new media. Please feel free to contact us if you are interested.”  Significant to the court was the inclusion of “Website Under Construction” on the website screenshot specimen.

Cancellation was affirmed because no actual services under the PLAYDOM service mark were provided until 2010 — well after the 2008 application filing date.

The Federal Circuit’s opinion is noteworthy, as the court notes: “We have not previously had occasion to directly address whether the offering of a service, without the actual provision of a service, is sufficient to constitute use in commerce under Lanham Act…”

Here are the key take-aways:

  • To apply for a service mark registration under Lanham Act §1(a) (based on actual use, a not intent-to-use), a mark already must be used in commerce [as of the application filing date].
  • A mark for services is used in commerce only when (1) it is used or displayed in the sale or advertising of services and (2) the services are rendered.
  • In terms of demonstrating actual use in commerce, proof of advertising or publicizing a service that the applicant intends to perform in the future will not support registration.  Rather, advertising must relate to an existing service which has already been offered to the public.

9th Circuit Upholds Jury Finding of Trademark Priority Through Tacking

On November 22, 2013, the 9th Circuit Court of Appeal published an opinion discussing the priority in trademark use as affected by “tacking.” Hana Fin., Inc. v. Hana Bank, 11-56678, 2013 WL 6124588 (9th Cir. Nov. 22, 2013) – online here. The opinion is interesting because it covers claims of priority through “tacking” – an issue not often discussed in detail. Tacking allows a party to “tack” the date of the user’s first use of a mark onto a subsequent mark to establish priority where the two marks are so similar that consumers would generally regard them as being the same.

The dispute was between Hana Financial, Inc. (“HFI”) a California entity incorporated on August 15, 1994, and defendant Hana Bank (“Bank”), a Korean bank that adopted the name in 1991. The Bank had established “Hana Overseas Korean Club” in May of 1994, to extend its services to Korean ex-pats in the U.S. In July of 1994, the Bank published advertisements for the Club in several Korean language newspapers in major cities throughout the United States. HFI began using its trademark on April 1, 1995, and on July 16, 1996, obtained a federal trademark registration. In 2000, the Bank changed the Club’s name to the “Hana World Center.” The parties knew of each other’s existence during the entire time.

Fast forward to March of 2007 and HFI filed trademark infringement and other claims against the Bank. HFI contended that the Bank’s use of “Hana” within its “Hana Bank” mark infringed HFI’s “Hana Financial” mark in connection with financial services. The Bank responded by seeking cancellation of HFI’s trademark based on HFI’s alleged awareness of the Bank’s superior rights, and asserted equitable defenses of laches and unclean hands.

In 2008, the district court granted the Bank’s motion for summary judgment on trademark priority. The district court also granted HFI’s motion for summary judgment on the Bank’s cancellation counterclaim. Both parties appealed.

In October 2010, the 9th Circuit reversed the summary judgment on priority and remanded the trademark infringement claims for trial, finding that the Bank’s advertisements and other exhibits purportedly demonstrating priority were “relevant,” but were also subject to competing inferences or were not presented in admissible form. The 9th Circuit also affirmed summary judgment on the Bank’s cancellation counterclaim, noting that HFI’s alleged knowledge of the Bank’s mark was insufficient to establish the requisite element of fraudulent intent.

The trademark infringement claims were tried to a jury and the court also submitted the Bank’s laches and unclean hands defenses to the jury for an advisory verdict.

The jury found that the Bank had “used its mark…prior to April 1, 1995, and continuously since that date.” It also found, in its advisory capacity, that the Bank had proven its laches defense, but not its unclean hands defense. The court subsequently issued findings of fact and conclusions of law, determining, among other things, that HFI’s claims were barred by both laches and unclean hands.

On appeal, the 9th Circuit identified the tacking issue as follows: “the priority issue turns on whether it was permissible for the jury to find that the Bank could ‘tack’ its use of its present ‘Hana Bank’ mark to its use of the Club mark beginning in 1994.”

After an fairly comprehensive review of the law of tacking for purposes of determining trademark priority, the 9th Circuit held “the jury could reasonably conclude that throughout the time period at issue, the ordinary purchasers of these services had the continuous impression that the advertised services were being offered by the Bank and that there were no material differences between the marks. In other words, viewing the marks in context and in their entirety, the ordinary purchasers could perceive them as conveying the same idea or meaning or evoking the same mental reaction. Consequently, there was sufficient evidence to support the jury’s verdict on trademark priority.”

Bullet Points on use of tacking to establish trademark priority include:

●    Tacking allows a party to “tack” the date of the user’s first use of a mark onto a subsequent mark to establish priority where the two marks are so similar that consumers would generally regard them as being the same.

●    Tacking applies in “exceptionally narrow” circumstances.

●    Tacking typically “requires a highly fact-sensitive inquiry” generally reserved for the jury.

●    The jury was properly instructed on tacking as follows:

A party may claim priority in a mark based on the first use date of a similar but technically distinct mark where the previously used mark is the legal equivalent of the mark in question or indistinguishable therefrom such that consumers consider both as the same mark. This is called “tacking.” The marks must create the same, continuing commercial impression, and the later mark should not materially differ from or alter the character of the mark attempted to be tacked.

●    Tacking is permitted because without tacking, a trademark owner’s priority in his mark would be reduced each time he made the slightest alteration to the mark, which would discourage him from altering the mark in response to changing consumer preferences, evolving aesthetic developments, or new advertising and marketing styles.

●    Giving the trademark owner the same rights in the new mark as he has in the old helps to protect source-identifying trademarks from appropriation by competitors and thus furthers the trademark law’s objective of reducing the costs that customers incur in shopping and making purchasing decisions.

●    The fact that a mark contains a portion of an earlier mark is not sufficient to establish tacking; a tacking analysis must consider the marks “in their entirety to determine whether each conveys the same commercial impression [i.e., the meaning or idea it conveys or the mental reaction it evokes]” such that they “possess the same connotation in context.”

●    Commercial impression should be determined from the perspective of the ordinary purchaser of these kinds of goods or services.

●    In determining whether the marks have the same commercial impression, the visual or aural appearance may be instructive, but commercial impression should be resolved by considering a range of evidence, ideally including consumer survey evidence.

●    Whether consumers would consider the two marks as being essentially the same is a question of fact.

●    The marks must create the same, continuing commercial impression, and the later mark should not materially differ from or alter the character of the mark attempted to be tacked. In other words, the previously used mark must be the legal equivalent of the mark in question or indistinguishable therefrom, and the consumer should consider both as the same mark. This standard is considerably higher than the standard for likelihood of confusion.

Conversion Claim Distinct from Copyright Infringement

Conversion of a particular object on which a copyrightable work is imbedded is not the same as copyright infringement. It is therefore not preempted by federal copyright law, according to Civic Partners Stockton, LLC v. Youssefi, 218 Cal. App. 4th 1005, 1008, 160 Cal. Rptr. 3d 625, 628 (2013), reh’g denied (Sept. 4, 2013), review denied (Nov. 13, 2013). Also currently available here, and also on Google Scholar.

The case involved alleged conversion of copyrighted hotel renovation plans. Plaintiff Civic Partners Stockton, LLC was the initial developer engaged to renovate a hotel. It obtained a copy of the architectural plans from the architect, the copyright owner, for use in plaintiff’s credit application. That copy was then given to the Redevelopment Agency, who in turn gave it to the successor developer – the Youssefi defendants. The successor developer Youssefi used the copy of the architectural plans to prepare part of its own credit application for the same building project. Plaintiff Civic Partners Stockton, LLC filed suit against the successor developer, alleging conversion of the plans. The trial court granted the Youssefi defendants’ motion for judgment on the pleadings as to cause of action for conversion of the hotel plans, concluding that claim was preempted by federal copyright law. 17 USCA § 301.

The Court of Appeal, however, adopted plaintiff’s analogy, as follows:

Using the coffee cup analogy, an action can be for conversion of a plain cup, for conversion of a cup with a protected hotel logo on it, or for infringement of the copyright for the hotel logo. The fact that one may not be suing for conversion of a plain cup does not thereby mean the suit is for infringement of the copyright for the logo thereon. It may instead be for conversion of a cup whose value is enhanced by the presence of the logo.

Civic Partners Stockton, LLC v. Youssefi, 218 Cal. App. 4th at p. 1017.

The Court of Appeal concluded:

[P]laintiff is suing for conversion of a particular object on which the copyrighted work is embodied. As alleged in the fourth amended complaint, Thus, the copy of the plans was used as the architect intended, but by a different party. This does not state a claim for copyright violation but for conversion of a particular object containing a copyrightable work. (See 17 U.S.C. § 202.) We therefore conclude the trial court erred in granting judgment on the pleadings on the first cause of action of the fourth amended complaint on the basis of federal copyright preemption.

Civic Partners Stockton, LLC v. Youssefi, 218 Cal. App. 4th at p. 1017.

 

Fair Use Prevails in the 9th Circuit

In SOFA Entertainment v. Dodger Productions (9th Cir. Mar. 11, 2013), the Ninth Circuit not only affirmed summary judgment for the defendant on fair use, but also affirmed an attorneys’ fees and costs award for the defendant of $155,000. The issue was defendant’s use of a 7-second clip from a 1966 episode of the Ed Sullivan Show. The analysis was straightforward. The court went through each of the four fair use factors, finding each one favored the defendant: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

Notable observations include:

1. The court noted the clip was used as a “biographical anchor” and cited to decisions finding the use was as a “historical reference point.”
2. Because the use of the clip was transformative, it didn’t matter that Defendant’s use was for a commercial purpose.
3. Opining that SOFA actually sought to protect Sullivan’s personality, the court added, “Charisma, however, is not copyrightable.”
4. In the end, “society’s enjoyment of [defendant] Dodger’s creative endeavor is enhanced with its inclusion.”

On the attorneys’ fees award, the court said it agreed with the district court that “lawsuits of this nature…have a chilling effect on creativity.”