Delaware Decision Highlights Dilemma for Startups to Protect Their Trade Secrets When They Seek Investment Financing

Counsel advising businesses must often deal with conflicting goals; that is especially true for startups.  Such business want to protect their intellectual property (including trade secrets) but still be able to disclose enough to attract investment capital. A recent Delaware decision highlights the tension in these goals.

 All businesses want to protect their intellectual property, including their trade secrets and other confidential information.  On the other hand, since intellectual property is often a startup’s chief asset, startups need to share their information with investors to convince them of the value of what they have developed.  The standard response is to use a non-disclosure agreement.  But those have their limits – investors often insist on flexibility to invest in other companies, including competitors.

 A recent Delaware Chancery case, Alarm.com Holding, Inc. v. ABS Capital Partners Inc. (2018), highlights this tension.  The court dismissed a trade secret complaint by a technology company against an investment company because the only basis for the claim of misappropriation of trade secrets was the move to the competing firm – which had been expressly agreed was allowed.

 

Counsel advising startups and drafting NDA’s need to be aware of this tension. Startups often lack the negotiation leverage to require more stringent terms in their NDA.  But at minimum they need to be aware of what non-disclosure agreements permit and whether they can tolerate the risk that such would create for their trade secrets. 

 

Review Website Cannot Be Ordered to Take Down Defamatory Posting

Businesses are often faced with negative and harmful information, especially on the internet, and counsel is often tasked with acting to remove or neutralize it.  A recent California decision makes that more difficult, and indicates that using litigation might not be effective in removing offensive content.

 What happens when harsh criticism crosses the line into defamation?  A company can sue the poster for defamation and seek money damages, but those are often hard to collect. Can the company obtain an order requiring the website to take down the offending content?  The California Supreme Court’s decision in Hassell v. Bird (2018) indicates that in many cases, the answer is no.  That court held that although a posting to the popular review website Yelp by an individual had been determined to be defamatory, the federal Communications Decency Act bars any order directed at Yelp requiring it to take down the offending post.  

 This makes controlling negative content about a company or a business more difficult – websites that allow third-party posters are immune not only from suit but even a takedown order.  Many websites will still voluntarily take down offensive content, but the legal ability to force the issue has become harder.  Counsel tasked with dealing with such issues should be aware that litigation, and even threats of litigation, are not likely to be effective in removing offensive content.

Google Arbitration Clause for Ad Services Binding on Later Trademark Claims

Arbitration clauses are standard provisions in many contracts, and counsel advising companies about such contracts are generally not surprised by their inclusion.  But a recent federal decision indicates that such clauses may have broader application – including covering intellectual property disputes that do not directly relate to the subject of the contract. 

 Arbitration clauses are common in many contracts, including service contracts with large companies.  They are usually understood to cover disputes over whether the services were properly provided or payments timely made.  But what if a party that signed such an agreement later has a claim that the service is being abused by someone else to infringe its intellectual property rights? 

 A recent decision of a federal court in Connecticut, Edible International, LLC v. Google, LLC (D.Conn. 2018) held that the same arbitration clause would require arbitration of a later trademark infringement claim involving the services.

 Counsel advising businesses signing service agreements, particularly with large providers like Google, need to be aware that service agreements they sign today may affect intellectual property enforcement efforts tomorrow.  They may still conclude that it is worthwhile to do so – the service may be important or valuable to the company.  But at a minimum businesses should understand what they are agreeing to.

Adidas Case Informs Importance of Building a Strong Case of Irreparable Harm in Trademark Cases

            The Ninth Circuit’s recent decision in Adidas America, Inc. v. Skechers USA Inc. (2018) reversed a district court’s preliminary injunction concerning Skechers’ use of a design similar to Adidas’ registered three-stripe trademark for sneakers.[1]  Interestingly, the Ninth Circuit accepted the district court’s finding that Adidas was likely to succeed in showing infringement (including a likelihood of confusion), but  reversed the district court’s finding of a likelihood of irreparable harm. This conclusion is simply remarkable given that, until 2006, federal courts generally presumed irreparable harm upon a showing of likelihood of success on a trademark infringement case. 

            The Adidas decision provides important guidance for counsel seeking a preliminary injunction (and by extension, a permanent injunction) as to how to present a convincing case of irreparable harm in a trademark case.  This is especially so in a case (like Adidas) which involves “post-sale confusion.”

[1] The court did affirm a preliminary injunction on a second claim brought by Adidas, for infringement of a different Adidas design for which Adidas has trade dress rights.

Federal Circuit Further Clarifies Patent Venue in Three Decisions

Patent litigation can be very burdensome for companies big and small − and a major issue in these cases is where the case will be litigated. 

 Last year, in T.C. Heartland LLC v. Kraft Foods Group Brands LLC, 137 S.Ct. 1514 (2017), the Supreme Court overturned 20 years of Federal Circuit precedent, narrowing the legal construction of part of the patent-venue statute, 28 U.S.C. § 1400(b).  But that decision left open a number of issues.

 This past month, the Federal Circuit issued three opinions resolving open issues in determining venue: (1) the patent-venue statute does not apply to foreign corporations; they may be sued anywhere in the United States; (2) the burden of showing venue is proper is on the plaintiff; and (3) in a multi-district state, venue is proper in only one district, generally where the defendant has its headquarters.

 Taken together, for domestic corporations, the available districts to be sued have been further narrowed.  As we pointed out in a prior post concerning patent venue, this can shift the negotiating leverage towards parties accused of infringement (putative defendants), since would-be plaintiffs now have less options of where to sue.

Apple v. Samsung Verdict Affirms Importance of Design Patents but Leaves the Law of Damages Murky

The second Apple v. Samsung damages trial ended in a remarkable result:  $533 Million verdict for infringement of Apple’s design patents, but only $5.3 Million for infringement of Apple’s utility patents.  The big (and obvious) takeaway:  design patents are no longer the weak sister of the IP world.  Long considered obscure and of marginal importance, the verdict shows that they can be a powerful and invaluable business tool.

Yet the verdict has other lessons for those involved in IP.  The original verdict against Samsung was for $399 Million.  Samsung appealed that all the way up to the Supreme Court – and was victorious there – only to return a second time to trial and be hit with a  verdict a third higher!  Samsung may have had good reason to appeal anyway, but the result highlights the need for caution and strategic thinking – Samsung may well now regret appealing and winning.

The verdict leaves the law of design patent damages murky.  In contrast to utility patents, for design patents the Patent Act allows the plaintiff to recover the infringing defendant’s profits gained from sale of any “article of manufacture” on which the design is used.  35 U.S.C. 289.    What if the design patent covers only a component of a total item that was sold?  The Supreme Court sided with Samsung and held that the profits might only be for a component portion.  But it failed to provide any standards as to how to determine what the “article of manufacture” is in any particular case, leaving it to the lower courts to work out.  The jury apparently decided that Samsung was on the hook for the entire profits.

Determining the “profits” to be awarded in a design patent case remains unpredictable, especially since in some cases it will be left up to the jury to determine how much of the item’s profits are awardable.  This tilts the playing field in any settlement negotiation in favor of design patent owners and away from accused infringers.

LVMH’s Kenzo Sued by Levi Strauss Raises Issues of When There Is Confusion

A recent trademark suit brought by Levi Strauss against Paris luxury house Kenzo raises interesting questions of trademark infringement and when use of a product design may infringe upon another’s design trademark.

On March 20, 2018 Paris luxury house Kenzo, owned by LVMH, introduced a new line of jeans, shorts, and overalls named the Kenzo Britney Spear line.  This line bears a pocket-tab with the word KENZO.  Shortly thereafter, Kenzo was sued for trademark infringement by the famous jeans maker Levi Strauss. Levi Strauss’ core claim is that it owns trademark rights in a pocket-tab design, and Kenzo is infringing those rights by selling apparel items that have a very similar tab. 

Supreme Court IPR Decisions Present Strategic Challenges to Patent Owners and Accused Infringers

The Supreme Court issued two significant decisions on the same day, both of which concern Inter Partes Reviews (IPRs), the administrative procedure to challenge patent validity.  Since their creation, IPRs have been a potent tool for those accused of patent infringement to challenge patent validity while avoiding the expense and burden of district court litigation. 

 In Oil States Energy Services v. Greene’s Energy Group, the Court rejected a constitutional challenge to the IPR regime, finding that because patents are public rights, Congress may allow them to be reviewed and invalidated by a non-court proceeding. 

 In SAS Institute v. Iancu, the Court held that once an IPR is instituted, the PTO must issue a decision as to all patent claims that are challenged – it cannot decide to pass on some claims and avoid others. 

 Both cases will have an important impact on patent litigation practice.

 Oil States means that IPRs will continue to be a significant, and often effective, tool in patent disputes. 

 SAS Institute will impact how parties petitioning for IPRs should structure their petitions.  Before SAS Institute, a part could petition for review of all claims in a patent, and rely on the PTAB to initiate the procedure only on the most promising claims.  But the decision in SAS Institute requires careful strategic thinking to determine whether to challenge all or just some of the claims in a patent.

Trademark Use Enjoys Broad First Amendment Protection

A recent Second Circuit decision, Wandering Dago, Inc. v. Destito (2018) confirms that trademark owners enjoy broad First Amendment rights in their trademarks, and that government actors may not discriminate against them based on the message and viewpoint conveyed by the mark. 

This is a further extension of the Supreme Court’s decision last year in Matal v. Tam (2017), which held that the Lanham Act’s bar on registration of disparaging marks in unconstitutional.

Wandering Dago is an incorporated business operating a food truck in and near Albany, New York.  Its owners purposely chose as part of its brand what many regard as an ethnic slur, as they themselves are of Italian heritage and wish to weaken the derogatory force of the term, as well as convey a blue-collar image. 

The Defendants are the New York state authority (and its director) charged with administering certain spaces in and near state buildings in Albany and elsewhere.  Among other things, the defendants let certain space near state office buildings to various food vendors so that they can supply lunch to officer workers and tourists.  Defendants denied Wandering Dago’s application for a permit because of the ethnic slur nature of its brand.

But the Second Circuit held that under Matal, such a denial constitutes viewpoint discrimination and is barred by the First Amendment.  It also rejected the argument that the permission to provide food truck services would render Wandering Dago’s mark as “government speech,” subject to a more lenient standard. 

Wandering Dago affirms that corporate messages are entitled to strong First Amendment protection.While most companies do not choose trademarks that are offensive, many companies do adopt slogans and other promotional messages that are sometimes controversial.The Wandering Dago decision affirms that such commercial messages are still protected by the First Amendment and thus the government cannot discriminate against use of such messages

Lindsay Lohan Right of Publicity Decision Expands and Limits Celebrity Rights

A recent New York Court of Appeals decision, Lohan v.  Take-Two Interactive Software, Inc. (NY 2018) at the same time expands and limits the right of publicity, which protects the rights of individuals (often celebrities) in the use of their name, likeness, and persona to promote commercial goods. 

Celebrity Lindsay Lohan claimed that her right of publicity was infringed when video game maker Take-Two Interactive released an action-adventure video game name Grand Theft Auto V.  The game includes a scene where a fictional character named “Lacey Jonas” is encountered, a celebrity whom the player helps escape paparazzi who are pursuing her.

New York’s highest court held that an avatar (i.e., a graphical representation of a person) in a video game could constitute a “portrait” of the person and thus theoretically infringe on the person’s right of publicity.  But that court went on to uphold the dismissal of Lohan’s claim, because the video character was not recognizable as her – it was merely a representation of a “modern beach-going young woman” and thus did not infringe her rights.

Lohan provides valuable guidance for companies who use characters in their products or advertisements to avoid right-of-publicity claims.  That a character (or digital avatar) is not directly represented to be a celebrity will not by itself be a basis to avoid liability.  Rather, a company needs to be careful to ensure that the character is not identifiable as a particular person.  

Chanel Suit: When Can Another Marketer Use Chanel’s Brand?

On March 14, 2018, Chanel filed suit against What Goes Around Comes Around (WGACA), a group of related companies that sell pre-used “vintage” luxury-brand bags and other accessories on its website and in five bricks and mortar stores located in expensive shopping districts around the country. 

What is unusual about the suit is that Chanel is not claiming that WGACA’s items are not authentic.  Rather, Chanel is asserting that WGACA uses the CHANEL brand, promotional materials, and promotional photos in a way that misleads consumers to believe that there is an association between it and WGACA, when in fact Chanel refused to enter into such an association.

Similar cases have been brought before. What makes this case notable is that many of the activities which Chanel complains of involve social media and other 21st century means of promotion.  The case could be a landmark in drawing the line between permissible and impermissible uses of a brand by third parties.

Disney Case Teaches Importance of Clear Contract-Forming Language to Create Contractual Restrictions

Many companies that market products or content protected by intellectual property rights rely on “shrink-wrap” or “box top” licenses to impose licensing restrictions on their customers.  But that strategy only works if the customer is indeed bound by the terms – meaning that he or she will be deemed to have accepted the terms as a matter of contract formation.  A recent decision of a California federal court highlights the need to use language in such licenses that clearly inform the user that they are agreeing to contractual terms when using the product (by opening a box or entering a website). 

Disney Enterprises, Inc. v. Redbox Automated Retail LLC (C.D.Cal. 2018) denied Disney’s motion for a preliminary injunction based on contract and copyright claims.  A key part of the decision was the court’s finding that no contract had been created between the parties when the defendant opened a Disney “combo pack” that included codes used to download Disney movies.  The box top language was not sufficiently clear that the user opening the box was agreeing to contractual terms and restrictions.

Unlike prior cases involving “box top” licenses, Disney’s combo pack did not make clear that by opening the box, the user was entering into a contract by which it accepted restrictions on use and resale of the contents.  The combo pack merely stated that “[c]odes are not for sale and transfer” in medium print.  In very small print, they stated “Terms and Conditions apply.”  That was not enough to alert the user that he or she was agreeing to contractual terms.

The lesson: if you want contractual terms to be binding, you must make clear that the user is entering into a contract

Photograph Case Decision Points Out Limits of Copyright Claims and to a Defense Strategy

 

There has been an explosion of copyright cases involving infringement of photographs, many involving small claims to one or a few photographs with little commercial value.  How does one defend against such a case?  A recent decision of a New York federal court points to an effective defense strategy.

Typically a case involves a professional photographer (or photograph licensing organization) alleging that it owns the copyright in a photograph that was then taken by a website or other user without paying a royalty fee.  Some attorneys have even turned this into a cottage industry, leveraging the burden of litigation to extract large settlements.  But the recent decision in Fameflynet, Inc. v. The Shoshana Collections, LLC (S.D.N.Y. 2018) may limit the effectiveness of such suits – and points to a strategy to defend them.

Fameflynet involved a typical claim − copying a celebrity photograph on the defendant’s website.  The court found the infringement to be willful.  But in awarding damages, it reasoned that the presumptive damages were only treble the license fee for the photograph − $75.  And since the Copyright Act requires a minimum of statutory damages of $750 for willful infringement, that is what plaintiff was awarded.

The court also awarded about $17,000 in attorney’s fees – much less than the $68,000 sought.  Apart from finding plaintiff’s hourly rates excessive, the court found many hours billed unnecessary, because the same firm had used form pleadings from prior similar cases.

The fairly nominal award points the way to an effective strategy in dealing with such cases:  ascertain the license fee and proffer an offer of judgment under Rule 68 for treble the fee or $750, whichever is greater.  Such an approach might have saved the defendant substantial fees, both its own and the plaintiff’s.

News-Indexing Site Case Limits Fair Use

Copyright protection has long been limited by the fair use doctrine, which allows unlicensed use of others’ content for certain “fair” purposes. 

Many recent decisions have focused on whether a use is “transformative” to determine whether it is fair – meaning it creates something new and different.  But a recent Second Circuit decision involving large quantities of video content rejected a fair use defense even though finding the use transformative.  Companies considering use of others’ content would be well advised to consider the ramifications of the decision.

In the digital world, often there are often huge quantities of copyrighted information that users may wish to sift through to find content they are interested in.  Secondary businesses have arisen that compile and index the content and then allow users to search and locate what they need or are interested in.  Three years ago, in Authors Guild v. Google, Inc., 804 F.3d 202 (2d Cir. 2015), the Second Circuit found such a commercial indexing scheme to constitute “fair use” of the underlying content. 

But recently, in Fox News Network, LLC v. TVEyes, Inc. (2d Cir. 2018), the Second Circuit found another such scheme as not being protected as fair use.  The contrast between the two cases informs users of copyrighted content as to where to draw the line between fair and not fair use.

Steve Madden Handbag Design Dispute Highlights Requirements and Limits of Different Forms of Intellectual Property

A recent lawsuit brought by Steve Madden against Cult Gaia concerning copying of a handbag design highlights the requirements and limits of different forms of intellectual property. 

While neither company is in the luxury goods space, the legal issues at the base of the suit are the same and important for luxury goods companies to consider.

The Dispute

Last summer, Cult Gaia introduced what became a hot item, a bamboo “Ark Bag,” which was heavily promoted on Instagram and other social media.  Shortly thereafter Steve Madden began marketing a very similar design bag.

Cult Gaia’s lawyers cried foul over the alleged copying, and threatened legal action.  Deciding to take matters in its own hands Steve Madden filed an action in federal court, seeking a declaration that Cult Gaia had no rights to infringe. 

Meanwhile, the United States Patent and Trademark Office denied Cult Gaia’s application to register the design as the company’s “trade dress.”  That rejection was in October; Cult Gaia has six months to respond.

A major argument raised by Steve Madden is that the Ark Bag itself closely resembles vintage Japanese bag designs that have been marketed for years. 

How then can Cult Gaia complain of copying when its own work is alleged to be a copy?  That seemingly simple moral argument, however, is not necessarily consistent with the law.

New York Federal Court Holds Embedding Photos May Infringe Copyright

A New York federal court in Goldman v. Breitbart News has held that the common internet practice of “embedding,” also referred to as “in-linking” infringes the copyright of content that is embedded. 

A very common practice for a website involves including a link to another site where content (articles, photographs) is stored, and then displayed on the website.  The content it is never stored on the linking site but rather on the linked-to website. 

In 2007, the Ninth Circuit Court of Appeals held in Perfect 10 v. Google that this practice does not infringe on the exclusive “display” right in the Copyright Act. But in February a federal court in New York rejected the Ninth Circuit’s view and held that embedding infringes on the right of display. 

Plaintiff Justin Goldman, a photographer, took a photo of quarterback Tom Brady and posted it to his Snapchat page.  The photo then spread around the internet, and was eventually posted to Twitter.  The defendants – who include Breitbart News, Time, Gannett and the Boston Globe – wrote articles about Brady (and his involvement in the Boston Celtics recruiting Kevin Durant), and then embedded the Twitter post, displaying the photograph of Brady with the articles.   Goldman sued for copyright infringement, asserting that this practice infringed on his exclusive right to “display” the photos.

            This decision has the potential for a major impact on many websites and blogs, which often link to content on other sites.  These sites now must consider whether they need a license to use linked-to content.  A further thing to consider is whether sites that allow uploading need to amend their Terms of Use to permit linking of some kind. 

California Case Sheds Light on Liability Issues from Use of Internet Bots to Gather Data

A recent California decision, Ticketmaster LLC v. Prestige Entmt Inc. (C.D.Cal 2018) pitted a website owner, Ticketmaster, against a company that used internet bots and other technical tricks to make massive purchases of tickets and then resell them for profit, something Ticketmaster strenuously wished to avoid.  On a motion to dismiss the complaint, the district court dismissed some claims by Ticketmaster but kept others. 

The decision teaches important lessons for companies whose websites contain large amounts of data or transactions to the public, but wish to keep competitors from extracting this data in mass amounts or engaging in mass transactions:

  • Adopt rigorous Terms of Use that prohibit bots, mass data extraction, or whatever other concerns one might have with competitors.
  • Include a license in the Terms of Use to all content and condition the license on adherence to the Terms of Use.
  •  Make rigorous use of technical measures (CAPTCHA, for example) to limit access to mass users, and prohibit circumvention in the Terms of Use.
  • Include liquidated damages provisions in the Terms of Use – but make sure they are reasonable both in the threshold where they kick in, and how they are calculated.
  • Most obviously, make sure that users must affirmatively agree to the Terms of Use – and record their assent to the Terms.

Fourth Circuit DMCA Case Teaches How to Ensure Immunity For Third Party Postings

A recent Fourth Circuit decision, BMG Rights Mgmt LLC v. Cox Communications Inc. (4th Cir. 2018) affirmed summary judgment that an internet service provider, an ISP, was not entitled to claim Digital Millenium Copyright Act (DMCA) immunity from copyright infringement for third-party postings through its service, opening up the company to massive copyright liability. 

A central part of the DMCA, a part of U.S. copyright law, is the exemption from direct and indirect liability of internet service providers and other intermediaries on the internet.

In Cox, the ISP had failed to implement a reasonable policy to remove repeat infringers, a condition of DMCA immunity, and so lost its immunity.

The Cox decision teaches several important lessons to companies who wish to use the DMCA to avoid copyright liability. 

Court Allows Forever 21’s Second Amended Complaint Against Gucci to Proceed

In a prior post, we discussed Forever 21’s lawsuit against Gucci in federal court in Los Angeles, seeking to cancel Gucci’s registrations for its Blue-Red-Blue and Green-Red-Green striped marks, and for a declaration that its clothing and accessory products that incorporate similar striping are not infringing. 

As we noted there, the suit raises many issues of trademark law around Gucci’s rights in these designs. Among the issues of Gucci’s rights in the designs include whether the designs function as trademarks; whether they have achieved sufficient recognition and association with Gucci exclusively; and whether the designs are “aesthetically functional,” meaning that there is a competitive need to permit their use by others. 

The issues of infringement raised by the case include whether Gucci will be able to establish consumer confusion, either at the point of sale or in the post sale context, whether Forever 21’s house mark dispels confusion, and whether there is a claim for trademark dilution.  The complexity of the issues stems from the fact that trademark rights are not the right to exclude others from use of a word or symbol, but the right to prevent consumer confusion or deception. 

Second Circuit Decision Extends Non-Compete Law to IP Licensing Agreements

Licensing is a critical component in the economic exploitation of intellectual property —  allowing the IP owner to leverage a licensee’s resources to exploit the IP for mutual benefit. Intellectual property licenses often contain terms that restrict the licensee’s use of the protected technology or design outside the terms of the license.  These terms are usually not thought to present any special legal problems.

But a recent Second Circuit decision should change that thinking.  Crye Precision LLC v. Duro Textiles, 689 Fed.Appx. 104 (2d Cir. 2017), extends the common-law restrictions on non-compete provisions to a new area:  intellectual property licenses.  Crye appears to break new ground in applying this law to restrictions in an intellectual property license.  Counsel who draft licensing agreements need to consider whether restrictions often found in such agreements would be enforceable under the non-compete principles.