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Client-Lawyer-PR Firm Communications: Privileged from discovery in a lawsuit?

Whether attorney-client privilege protects communications among a client, his lawyer, and a public relations consultant was the question before the California Court of Appeal (“Court”) in Behunin v. Superior Court (2017) 9 Cal.App 5th 833, 837.

After acknowledging that the attorney-client privilege may extend to communications with public relations consultants in some circumstances, the Court concluded that Behunin failed to prove communications among him, his lawyers, and a PR firm were “reasonably necessary for his lawyers’ representation of him in a lawsuit.” Thus, the communications were not protected by the attorney-client privilege, and the opposing party could compel their disclosure.

Below is a breakdown of how the Court reached its conclusion, with some TAKE-AWAYS for clients, lawyers, and PR firms.

BACKGROUND

Nicholas Behunin had filed a lawsuit against Charles R. Schwab and son Michael Schwab over an unsuccessful real estate investment deal. As part of a strategy to induce settlement, Behunin’s attorneys (Steiner) engaged a PR consultant (Levick) to create a website linking Schwab real estate investments to former Indonesian dictator Suharto. [The website can be seen at www.chuck-you.com, though it appears to have been changed since earlier versions (see e.g., Oct. 2014 version).]

Schwab responded by suing Behunin for libel, slander, and invasion of privacy. When Behunin filed an anti-SLAPP motion to have the Schwab case thrown out, Schwab sought discovery of communications among Behunin, his lawyers, and the PR firm concerning the creation of the website. Behunin objected, claiming the communications were protected from disclosure by the attorney-client privilege.

PRIMER:  HOW THIS ISSUE GETS TO THE COURT OF APPEAL

Behunin objected to producing the PR documents and filed a motion for a protective order based on the attorney-client privilege.

Schwab filed motions to compel the production of documents from Behunin and Steiner.

The trial court referred the motions to a discovery referee.

The discovery referee found the PR documents were not protected by the attorney-client privilege or work product doctrine, and thus, recommended denying the protective order and granting Schwab’s motions to compel.

Behunin and Steiner filed objections to the discovery referee’s recommendation with the court.

The trial court overruled the objections and adopted the referee’s recommendations as its own order.

Behunin filed a petition for writ of mandate with the Court of Appeal and requested an immediate stay of the trial court’s orders.

The Court of Appeal (“Court”) issued an order to show cause why it should not order the trial court to vacate (i.e., annul or set aside) its orders, and stayed (i.e., stop or put a hold on) all discovery proceedings pending its determination.

After the case was briefed and argued, the Court denied the petition for writ of mandate and vacated its order staying the discovery proceedings in the trial court.

THE COURT OF APPEAL ANALYSIS

The issues presented on appeal were:

(1)          whether communications among Behunin, Steiner (lawyers), and Levick (PR consultant) were confidential attorney-client privileged communications; and

(2)          whether the attorney-client privilege was waived.

The Court began by identifying and explaining the standard of review. First, it noted that a trial court’s ruling on a motion to compel discovery ordinarily is reviewed for abuse of discretion. However, where the issue concerns a legal privilege,[1] appellate courts will review the trial court’s decision under the substantial evidence standard of review.[2]

PRIMER:  APPELLATE COURT REVIEW STANDARDS

Important to any appellate analysis is what standard of review the appellate court applies. Does the Court of Appeal simply decide the issue independently, as if it was the trial court (i.e., de novo or independent review)? Or does the Court of Appeal give some level of deference to what the trial court found as facts and concluded after applying the facts to the applicable law? This is why the “DISCUSSION” section of appellate opinions almost always begins with “Standard of Review.”

The standard of review has a huge effect on (and hugely affects) the likelihood that an appellate court will alter a trial court’s decision. A trial court’s decision reviewed for abuse of discretion is rarely reversed on appeal. A trial court’s decision reviewed for substantial evidence stands a slightly better chance of being reversed. If you are a litigant trying to get a trial court decision reversed on appeal, you want the appellate court to independently review (or to apply a de novo review standard), whereby the appellate court essentially reviews the matter the same way the trial court did, though it is often limited to what is contained in “the record.”

As to the second question, the Court of Appeal explained that “whether a party has waived a privilege, however, is often a mixed question of law and fact.” Where there is a mixed question of law and fact, and the Court’s inquiry requires a critical consideration, in a factual context, of legal principles and their underlying values, the Court views the issues as predominantly legal, and will independently review the trial court’s ruling.[3]

The Court of Appeal explained the attorney-client privilege (Evid. Code § 954), as follows (italics added):

  1. a client, whether or not a party, has a privilege to refuse to disclose, and to prevent another from disclosing, a confidential communication between client and lawyer;
  2. the attorney-client privilege protects confidential communications between a client and his or her attorney made in the course of an attorney-client relationship; and
  3. the attorney-client privilege applies only to confidential communications made in the course of or for the purposes of facilitating the attorney-client relationship.

As to the third part, the Court of Appeal noted the definition of confidential communication between client and lawyer from Evidence Code § 952:

A “confidential communication between client and lawyer” means information transmitted between a client and his or her lawyer in the course of that relationship and in confidence by a means which, so far as the client is aware, discloses the information to no third persons other than those who are present to further the interest of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted, and includes a legal opinion formed and the advice given by the lawyer in the course of that relationship.

It then noted Evidence Code § 912, which concerns waiver of the privilege: “A disclosure in confidence of a communication that is protected by a privilege provided by Section 954 (lawyer-client privilege) … , when disclosure is reasonably necessary for the accomplishment of the purpose for which the lawyer … was consulted, is not a waiver of the privilege.”

The Court then focused its analysis on the real issue:

Whether the disclosure to Levick (PR consultant) of communications between Behunin and Steiner (Behunin’s lawyers) was reasonably necessary to achieve the ends for which Behunin consulted Steiner.

Ordinarily, once a party establishes the facts necessary to support a claim of privilege (i.e., a communication made in the course of attorney-client relationship), the communication is presumed to have been made in confidence. However, this presumption does not apply when an attorney-client communication is disclosed to a third party. When that occurs, the party claiming the privilege bears the burden of proving the disclosure was reasonably necessary to achieve the ends for which the client consulted the lawyer.

The Court then discussed why Behunin had not proved that the communications were “reasonably necessary” for Steiner’s representation of Behunin. Initially, whether communications among a client, attorney, and a public relations consultant are protected by the attorney-client privilege depends on whether the communications were confidential and whether disclosing them to the consultant was reasonably necessary to accomplish the purpose for which the client consulted the attorney.

The Court identified two ways that disclosure of a privileged communication to a third party may not destroy the privileged nature of a communication:

  1. where the third party has no interest of his or her own in the matter, but a litigant must disclose a confidential communication to the third party because the third party is an agent or assistant who will help to advance the litigant’s interests;[4]
  2. where the third party is not an agent of the client or attorney, but is a person with his or her own interests to advance in the matter, and those interests are in some way aligned with those of the client (also known as “common interest”)

The Court elaborated, noting the words “other than those who are present to further the interest of the client” means that a communication to a lawyer is confidential even when made in the presence of another person—such as a spouse, parent, business associate, or joint client—who is there to further the interest of the client in the consultation. “Those who are present to further the interest of the client” also applies to persons who may meet with the client and his attorney on a matter of joint concern.

Noting an absence of California case law applying the law of privilege in the context of public relations consultants, the Court reviewed several cases from other jurisdictions before turning to the evidentiary showing by Behunin.

The Court said Behunin provided little evidence explaining how or why communications among Levick, Steiner, and himself were reasonably necessary to assist Steiner in his ability to advise Behunin or to litigate his case. Similarly, Behunin presented no evidence showing why his or Steiner’s communications with Levick were reasonably necessary to develop a litigation strategy or to induce the Schwabs to settle.

Rather, the evidence showed that Steiner had little involvement with Levick, and that all Steiner did was act as a liaison in hiring the public relations firm. Steiner and Behunin merely stated, in conclusory fashion, that they engaged Levick to “develop and deploy” strategy, that they intended their communications with Levick to be confidential, and that the goal of the agreement with Levick was “to develop and deploy strategy and tactics of [Behunin’s] legal complaint” in the lawsuit.

Missing, said the Court, were “evidentiary facts showing or explaining why Steiner needed Levick’s assistance to accomplish the purpose for which Behunin retained him.”

The Court left open the possibility that “[t]here may be situations in which an attorney’s use of a public relations consultant to develop a litigation strategy or a plan for maneuvering a lawsuit into an optimal position for settlement would make communications between the attorney, the client, and the consultant reasonably necessary.” The Court also noted that “maximizing a client’s negotiating position and increasing the prospects for a favorable settlement are important parts of representing a client in litigation.”

But “[w]ithout some explanation of how the communications assisted the attorney in developing a plan for resolving the litigation, Behunin would not be able to show such communications were reasonably necessary to accomplish Steiner’s purpose in representing Behunin.”

The Court also reviewed cases in which communications with public relations consultants were privileged because the consultants were found to be “functional equivalents” of employees. The functional-equivalent cases, however, “require a detailed factual showing that the consultant was responsible for a key corporate job, had a close working relationship with the company’s principals on matters critical to the company’s position in litigation, and possessed information possessed by no one else at the company.” No such showing was presented by Behunin.

The Court said Behunin also had not presented evidence sufficient to protect the communications on the basis of common or aligned interests. Behunin and Levick apparently argued that they shared an interest in obtaining legal advice as to whether it was permissible to post content on the Internet, and that such advice clearly encompassed questions regarding both Behunin’s and Levick’s potential exposure to legal liability for such statements. However, the argument was not supported by evidence showing that Levick sought legal advice from Steiner or that there was any attorney-client relationship between Steiner and Levick.  In fact, Behunin’s own declaration said that Steiner hired Levick on Behunin’s behalf without knowing anything about the content of the website Levick was to create. The law allows “sharing of privileged information when it furthers the attorney-client relationship,” but not simply “when two or more parties might have overlapping interests.”  In other words, overlapping interests help, but are not sufficient without additional evidence showing (1) a party’s sharing its confidential information was reasonably necessary to advance the party’s case; or (2) that there was an attorney-client relationship between Steiner and Levick.

Accordingly, the Court of Appeal denied Behunin’s petition and did not disturb the trial court’s rulings ordering disclosure of communications involving the PR consultant.

TAKE-AWAYS FOR PRACTITIONERS AND PARTIES TO LITIGATION

1.  When hiring a PR firm, anticipate potential disclosure requests and challenges to attorney-client privilege.

a.  Consider limiting the creation of written communications by, to, and from the PR firm, just in case an attorney-client privilege is not found or is found to have been waived. (Note that here, Behunin and Steiner had to produce documents in which Levick participated, but did not have to produce communications solely between Steiner and Behunin.)

b.  Consider whether the PR firm should also retain the lawyers, so there is an attorney client relationship between the lawyers and PR firm as well. (Note that here, Behunin and Levick argued that they shared an interest in obtaining legal advice regarding whether it was permissible to post content on the Internet. However, the court said there was no evidence that the PR firm sought legal advice from the lawyer or that there was an attorney-client relationship between the lawyer and the PR firm.)

c.  Map out the process for determining whether the privilege applies and the process for determining if there was a waiver. Pay attention to the review standards, noting in particular, that the involvement of a third party (PR consultant) changes the burden of proof in litigating attorney-client privilege issues, and the party claiming the privilege will bear the burden of proving the privilege applies and was not waived.

d.  Consider getting appellate counsel involved early. On appeal, review of the trial court’s decision is likely to involve mixed questions of law and fact, to which the Court of Appeal will apply the independent review standard. It is critically important that the record be sufficiently developed, that all potential bases for privilege are covered (see No. 2 below), and that all arguments are supported by evidence in the trial court and are made part of the record on appeal (see No. 3 below).

[For more on standards of review, see California Court of Appeal – Civil Appellate Practices and Procedures for the Self-Represented in the Fourth Appellate District Division One, Chapter 5. Briefing the Case, beginning on page 5-5.]

2.  Parties and/or PR firms interested in preserving the attorney-client privilege must be prepared to provide evidence:

a.  explaining how or why communications among the PR consultant, lawyer, and client are reasonably necessary to assist the lawyer in his ability to advise the client or litigate his case;

b.  showing why the client’s or lawyer’s communications with the PR firm are reasonably necessary to develop a litigation strategy or settlement strategy or other litigation purpose;

c.  showing or explaining why the lawyer otherwise needs the PR firm’s assistance to accomplish the purpose for which client retained the lawyer; or

d.  showing (in detail) that the consultant was responsible for a key corporate job, had a close working relationship with the company’s principals on matters critical to the company’s position in litigation, and possessed information possessed by no one else at the company (consistent with the analysis in FTC v. GlaxoSmithKline (D.C.Cir. 2002) 352 U.S. App.D.C. 343 [294 F.3d 141, 148], Schaeffer v. Gregory Village Partners, L.P.(N.D.Cal. 2015) 78 F.Supp.3d 1198, 1204, and/or A.H. ex rel. Hadjih v. Evenflo Co., Inc. (D.Colo., May 31, 2012, No. 10-cv-02435-RBJ-KMT) 2012 WL 1957302, pp. *5, *3).[5]

3.  Parties and/or PR firms interested in protecting communications from disclosure also should consider the potential applicability of the work product doctrine. See California Code Civ. Proc., § 2018.030. Here, the court noted that Behunin failed to advance any arguments to support the application of the work-product doctrine, noting: “Although Behunin refers to the attorney work product doctrine in his petition and in his reply, he provides no legal argument or authorities to support the application of that doctrine to documents the court ordered produced. There is also no evidence in the record from which we might independently ascertain whether any of the communications to or from Behunin, Steiner, or Levick or any of the documents created by Levick would qualify as “[a] writing that reflects an attorney’s impressions, conclusions, opinions, or legal research or theories” and thus work product.”

_____________________________

[1] Confidential communication privileges allow a person to resist compulsory disclosure of certain communications.  These privileges exist not because of a fear that information provided will be inaccurate, but because there are public policy reasons why the information should not be disclosed.  For example, the lawyer-client privilege, marital communications privilege, physician-patient privilege, psychotherapist-patient privilege, clergy-penitent privilege, sexual assault counselor-victim privilege, and domestic violence counselor-victim privilege exist to foster free-flowing communication between persons in what the legislature has determined are socially beneficial relationships.

[2] The Court explained the substantial evidence standard as follows: “When the facts, or reasonable inferences from the facts, shown in support of or in opposition to the claim of privilege are in conflict, the determination of whether the evidence supports one conclusion or the other is for the trial court, and a reviewing court may not disturb such finding if there is any substantial evidence to support it.” Note that the word substantial can be confusing in this context.  It doesn’t mean, “There was a substantial amount of evidence supporting that point.”  In common parlance, it’s more like “There was some evidence supporting the point, and that evidence had substance to it.”  See more on Standard of Review here (see p. 5-5.)

[3] The Court of Appeal explained this that works in the context of the Behunin case. Mixed questions of law and fact concern the application of the rule to the facts and the consequent determination whether the rule is satisfied. As the historical facts are undisputed, the question is whether, given those historical facts, a party has waived the attorney-client privilege and attorney work product protection. That inquiry requires a critical consideration, in a factual context, of legal principles and their underlying values. Therefore, the question is predominately legal, and appellate courts independently review the trial court’s decision. (Note: “independent review” is the same as de novo review, and means the Court reviews the issues much in the same way the trial court did, without deference to the trial court’s findings and decision.)  See also, IDENTIFYING AND UNDERSTANDING STANDARDS OF REVIEW from the Georgetown Univ. Law Center.

[4] Examples:  when an attorney shares a confidential communication with a physician, appraiser, or other expert in order to obtain that expert’s assistance, so the attorney is better be able to advise his client; or where a translator or an accountant is employed to help clarify communications between an attorney and client.

[5] This assumes a California state court would find the “functional equivalent of an employee of the client” theory viable.

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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).

 

 

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]

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.)