Intellectual Property: Trade Secrets, Trademarks, Copyrights & Patents PDF

CHAPTER 24 - Intellectual Property T he protection of intellectual property has been a cornerstone of U.S. law since the ratification of the Constitution. Specifically, Article I, Section 8 of the U.S. Constitution authorizes Congress to protect intellectual property “by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Today, intellectual property has become more essential to business than ever before. A study published in the Harvard Business Review, for example, found that intellectual property represents approximately 70 percent of an average firm’s value.1 Broadly speaking, intellectual property protections not only help business firms create value; such protections also help firms capture that value. So, have you ever created any intellectual property? This chapter explains the legal concepts of intellectual property that are most relevant to business owners and managers, who must know how to make informed decisions on how best to protect their own intellectual property and how to avoid infringing upon the intellectual property rights of others. In this chapter, we discuss Legal protections for trade secrets and other business information. Statutory and common law requirements for the protection of trademarks, service marks, and trade dress. Requirements for protection under federal copyright laws, consequences of infringement, and application of the fair use test. Protections for inventors through patent law and the statutory requirements for obtaining a patent. TRADE SECRETS AND THE PROTECTION OF BUSINESS INFORMATION LO 24-1 Define what a trade secret is and identify the elements of misappropriation of trade secrets. Among the most valuable assets of any business firm are its secret processes, formulas, methods, procedures, and lists that allow the firm to have a competitive advantage in its trade. Business firms from a wide variety of industries rely on trade secret laws to protect some or all of their valuable creative ideas. Examples of technical and business information material that can be protected by trade secret law include customer lists, designs, instructional methods, manufacturing processes, product formulas and recipes, and document-tracking processes. It’s also worth noting that many types of trade secrets, business information, and business methods may not be protectable by patent or copyright laws. Most patent applicants, for example, generally rely on trade secret law to protect their inventions while their patent applications are in progress. Trade secret law is based on the common law. Courts apply several factors to determine whether certain material or information constitutes a protectable trade secret: The extent to which the information is known outside the business of the claimant (the firm claiming that the information is a trade secret). Measures taken by the claimant to guard the confidentiality of the information. The value of the information to competitors. The amount invested (in terms of time and money) in developing the information. The efforts taken to maintain trade secret confidentiality among the claimant’s employees, potential investors, and third-party vendors (such as auditing firms). TRADE SECRET PROTECTIONS Trade secret protections are provided by state statutes and state common law principles. The Uniform Trade Secrets Act (UTSA)2 defines trade secrets as information or articles that are to be kept secret because of their particular value. Broadly speaking, the UTSA defines a trade secret as a formula, pattern, compilation, program, device, method, technique, or process that meets the following criteria: Derives independent economic value, actual or potential, from not being generally known to and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Economic value must be identified by the owner, and secrecy must be kept. Misappropriation Most state statutes use the following definition of misappropriation from the UTSA: (1) the acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means or (2) any disclosure or use of a trade secret of another without express or implied consent. In short, misappropriation is defined broadly to include not only improper acquisition of a trade secret, but also any disclosure of a trade secret without consent. Although misappropriation of a trade secret can be the result of industrial or foreign espionage, as Case 24.1 illustrates, many trade secret cases involve people who have taken their former employer’s trade secrets for use in a new start-up business or by a new employer. CASE 24.1 IBM v. Johnson, 629 F. Supp. 2d 321 (S.D.N.Y. 2009) FACT SUMMARY Until his resignation in May of 2009, David L. Johnson had worked for IBM for more than 27 years, and during his tenure at IBM, he directed IBM’s mergers, acquisitions, and divestitures strategy, and, according to IBM, he had access to IBM’s most sensitive and confidential strategic information. In late 2008, before Johnson had resigned from IBM, a recruiter contacted Johnson concerning an employment opportunity at Dell. After several rounds of negotiations, Johnson agreed to join Dell as Senior Vice President of Strategy. In that capacity, Johnson agreed to help Dell set a strategic vision, mission, and goals based upon its existing resources and internal capabilities. As a result, IBM commenced an action in federal court requesting a preliminary injunction to prevent Johnson from working for Dell. SYNOPSIS OF DECISION AND OPINION The District Court for the Southern District of New York denied IBM’s request for a preliminary injunction, holding that Johnson did not have access to any actual trade secrets of IBM. WORDS OF THE COURT: Trade Secret “According to IBM, Mr. Johnson is aware of IBM’s past, present, and future business strategies as well as the acquisitions, transactions, and divestitures that IBM is considering…. In addition, IBM contends that Mr. Johnson is aware of its assessment of its clients’ needs, its competitors’ strategies, its opportunities, and its strategies for carrying out its business objectives. Mr. Johnson knows in which areas, companies, and technologies IBM will invest, at what times, and with what expected rates of return. Mr. Johnson, in short, has inside strategic business information about IBM, and disclosure of that information would harm the Company. “The Court nevertheless believes that IBM has overstated its case. Mr. Johnson does not have the sort of information that is considered quintessential trade secret information—detailed technical know-how, formulae, designs, or procedures…. What is more, IBM’s submissions regarding Mr. Johnson’s knowledge of its technological information is long on generalities and rather short on details. This makes it extraordinarily difficult to determine whether and, if so, how much of, the information that Mr. Johnson possesses is public and readily available to its competition.” Trade secret owners have recourse only against acts of misappropriation (i.e., improper acquisition or disclosure). Discovery of protected information through independent research or reverse engineering (taking a product apart to see how it works) is not misappropriation. Criminal Sanctions While the UTSA does not provide for any criminal penalties, because misappropriation is considered a private wrong or “tort,” the Economic Espionage Act is a federal statute enacted by Congress in 1996 providing criminal penalties for domestic and foreign theft of U.S. trade secrets. In addition, many states have enacted a separate set of statutes that make certain forms of trade secret misappropriation a criminal offense. For example, prosecutors in California filed charges against several executives and employees of Avant! Corporation, a firm that designed software related to semiconductor chips. The prosecutor was alerted to the case after a competitor of Avant! sued the firm in an action brought under California’s Trade Secret Act, alleging that Avant! employees stole computer code from one of Avant!’s primary competitors.3 Ultimately, Avant! accepted a plea bargain from the prosecutor that forced the company and seven individuals to pay $35 million in fines and resulted in incarceration for five of the defendants. Exclusive Rights for Unlimited Duration Perhaps the most significant advantages of trade secret protection over other forms of intellectual property (such as patents) are twofold: (1) no formal registration is required and (2) protection for trade secrets does not expire after a fixed period of time. A trade secret owner thus has the right to keep others from misappropriating and using the trade secret for the duration of the firm’s existence! Nevertheless, although trade secret protection endures so long as the requirements for protection continue to be met, the protection is lost if the owner of the trade secret fails to take reasonable steps to keep the information secret. For example, Tyler and Cameron discover a new idea for a social network website. They share their new idea with Mark at a party. Tyler and Cameron may have lost their trade secret protection for their idea because they failed to take appropriate steps to keep their method secret. TRADEMARKS, SERVICE MARKS, AND TRADE DRESS LO 24-2 Classify trademarks based on their level of distinctiveness and give examples of trademarks, service marks, and trade dress. Take out your smartphone and see how many registered trademarks you can find. You may see Apple’s registered trademark for the iPhone or Samsung’s registered trademark for the Galaxy S. As you begin to check your social media, you may see logos, words, and shapes that allow consumers to distinguish Facebook from Instagram and Snap from Tumblr in an instant. Want to listen to some music? You can choose between Pandora and Spotify with no difficulty because you recognize their trademarks. In other words, trademarks are a daily part of a consumer’s life. A trademark is a nonfunctional distinctive word, name, shape, symbol, phrase, or a combination of words and symbols that helps consumers to distinguish one product from another.4 One court put it concisely: Generally speaking, a [trademark is a] distinctive mark of authenticity, through which the products of particular manufacturers or … commodities of particular merchants may be distinguished from those of others. Koppers Co., Inc. v. Krupp-Koppers, 517 F. Supp. 836, 840 (W.D. Pa. 1981). For example, the name and logo of Coca-Cola comprise one of the most famous trademarks in the world. Consumers have confidence in the product, and the Coca-Cola trademark distinguishes the product from competing soda pops. Other world-famous marks include McDonald’s golden arches and Nike’s swoosh. While trademarks are typically associated with products, service marks are used to identify business services. Examples of famous service marks include Hilton Hotels (accommodation) and Greyhound Lines (transportation). Most caselaw and legal texts refer to both trademarks and service marks simply as a mark. Owners of a mark are called holders. The key requirement for creating a protectable trademark is its distinctiveness—the mark’s ability to indicate the product’s source. In addition to caselaw, the Lanham Act5 is the federal statute that protects an owner’s registered trademark from use without the owner’s permission. Trade Dress Businesses are increasingly eager to extend trademark protection beyond words and symbols in order to gain protection for a product’s shape or the color combination of its packaging. These beyond-the-mark features are called trade dress. Traditionally, courts have allowed trade dress protection for both product design features and product packaging, including textures, shapes, and color combinations, for businesses such as restaurants.6 More recently, the U.S. Patent and Trademark Office (USPTO) has granted protection to trade dress characteristics so long as the mark holder proves that the trade dress provides an exclusive link to the source of the product in the consumer’s mind. Notable examples include the shade of red used in Christian Louboutin red- bottomed shoes and the brown color (called Pullman brown) that UPS uses on its vehicles and uniforms. Product Design A recent trend in strategic business planning is to trademark product design as a form of trade dress. Protecting product design through trademark laws is challenging because the applicant must overcome any notion that the design purpose was to allow the product to function properly rather than as a distinctive trademark. For example, Figure 24.1 contains a sketch of a seemingly generic row of rectangles. In its trademark application, the holder describes these rectangles as “a configuration of a chocolate bar that consists of 12 equally-sized recessed rectangular panels arranged in a four panel by three panel format with each panel having its own raised border within a large rectangle.” The configuration is the product design of the famous Hershey chocolate bar, and the USPTO granted the mark to Hershey Chocolate and Confectionary Corporation in 2012. Hershey was able to convince the USPTO that the rectangles were not essential to the use or purpose of the article. Figure 24.1 shows the actual sketch that was submitted by Hershey with its trademark application. Apple is also aggressively registering product designs as trademarks and has successfully protected the design of the iPod, iPhone, and iPad, among many others. Trademarks as a Business Asset In business terms, marks are typically referred to as brands. The primary objective of trademark protection is to provide the mark holder with a means of preventing others from fooling consumers into buying a product that they erroneously believe is produced by the mark holder. Businesses thus invest significant time and resources in their trademarks to build consumer loyalty to a particular brand. Designs, color schemes, shapes, and other features all play a role in creating a link in the buying public’s mind. Trademarks allow consumers to quickly identify a product and distinguish it from similar or competing products. One of the main purposes of the Lanham Act is to prevent business competitors from getting a “free ride” on the shoulders of a more famous brand. For example, if a small economy-car manufacturer could use the name or symbols associated with Tesla or Rolls- Royce, the smaller company would deprive the mark holder of its investments in the mark and gain name recognition at no cost. Classifications of Trademarks As discussed earlier, trademark protection is based on distinctiveness. For a trademark to be distinctive, it must identify the source of a particular product (or service for service marks). Courts classify marks based on their level of distinctiveness, and this classification determines their level of protection. Nevertheless, there is no clear line of demarcation between these classifications. Rather, courts analyze a mark on a case-by-case basis. A good rule of thumb is this: the more distinctive the mark, the more protection the mark has under the Lanham Act. Arbitrary or Fanciful Marks A mark that has no direct connection to the product is categorized as arbitrary or fanciful. An arbitrary mark is a real word being used as part of a mark that has nothing to do with the word’s literal meaning (e.g., Apple, Uber, or Amazon). A fanciful mark is one that centers upon a word made up with the intention of being used as a distinctive term. For example, Spotify’s name and symbol were created by the company’s founders and have no obvious connection to streaming music. Therefore, Spotify fits into the fanciful category. Which type of mark is Google? Arbitrary or fanciful? Suggestive Marks Marks that suggest the product or service without literally describing it are considered highly distinctive. Courts classify a mark as suggestive if imagination, thought, and perception are required to understand how it is tied to the underlying product or service. For example, the trademark “Under Armour” suggests a product used under something for protection. “Netflix” suggests a web-based movie service. “Coppertone” suggests a suntan lotion. Understanding the actual product, however, requires a leap of imagination, thought, or perception. Suggestive marks are similar to arbitrary marks in that they tend to be highly distinctive and are given a high level of protection. Descriptive Marks A descriptive mark is one that makes specific reference to features, qualities, or characteristics of a product or service and is not inherently distinctive. Courts have held marks such as After Tan (moisturizing lotion for use after sunbathing), Tender Vittles (cat food), and Car Freshener (air deodorizer for cars) are descriptive marks because no leap of imagination is required to connect the mark with the product. Because descriptive marks are not inherently distinctive, they are not protected under the Lanham Act unless they have acquired a secondary meaning. Descriptive-mark holders must provide evidence that the general public connects the mark with the mark holder’s product or service rather than with the ordinary meaning of the term. Standards for Secondary Meaning A secondary meaning is created when the consuming public primarily associates a mark with a particular product rather than any alternate meaning. For example, Microsoft attempted to protect the term Windows as a mark for its revolutionary operating system for many years. In order to attain that right, Microsoft was required to show that, for much of the consuming public, the term Windows was more often associated with Microsoft’s operating system rather than with panes of glass. Similarly, Twitter’s initial application in 2009 to trademark the term tweet was rejected because of insufficient evidence of secondary meaning. However, by 2012, Twitter acquired full trademark rights to the term “tweet.” Recall our discussion of the product design trademark for a Hershey chocolate bar. Once Hershey overcame the hurdle of proving that the rectangular design was not essential to its function, it still had to prove that the design was part of a distinctive link to its product in the minds of consumers. Case 24.2 provides insight into an analysis of the secondary meaning requirement. CASE 24.2 In re Hershey Chocolate & Confectionery Corp., Serial No. 77809223 (T.T.A.B. June 28, 2012) FACT SUMMARY The Hershey Chocolate and Confectionery Corporation (Hershey) filed an application with the USPTO for a trademark to protect the product design of its chocolate bar. The application described the configuration of the candy bar as “twelve (12) equally-sized recessed rectangular panels arranged in a four panel by three panel format with each panel having its own raised border within a large rectangle.” The USPTO’s Examining Attorney refused registration on two grounds: (1) that applicant’s proposed mark is a functional configuration of the goods and (2) it consists of a nondistinctive configuration of the goods that does not function as a mark under existing trademark law. Hershey appealed the decision, arguing that the candy bar’s configuration had nothing to do with functionality and cited marketing surveys as evidence that a sufficient percentage of the consuming public connected the design with the Hershey product. SYNOPSIS OF DECISION AND OPINION The Trademark Trial and Appeal Board ruled in favor of Hershey and reversed the Examiner’s refusal to register the mark. In terms of functionality, the board held that the prominent decorative recessed rectangle and raised border design didn’t fall into the functional category because its sole purpose was as a unique branding design. With respect to secondary meaning, the board pointed to several factors that indicate a secondary meaning has been created. First, in a consumer recognition survey where respondents were shown the “four by three” panel candy bar configuration in the application, 44 percent of participants correctly identified Hershey’s as the maker of the candy bar. That percentage is higher compared to other cases in which survey results were used to establish secondary meaning. Second, Hershey’s offered evidence that it had used the mark for over 40 years and spent $186 million in advertising products embodying the candy bar configuration. WORDS OF THE COURT: Secondary Meaning “There is no clear standard as to the amount of evidence necessary for allowing a mark to register [as descriptive with a secondary meaning.] … ‘[T]he exact kind and amount of evidence necessarily depends on the circumstances of the particular case, and Congress has chosen to leave the exact degree of proof necessary to qualify a mark for registration to the judgment of the Patent Office and the courts.’ … While it is well settled that sales and advertising expenditures alone do not always amount to a finding of acquired distinctiveness, these are compelling numbers, particularly when viewed in the larger context of applicant’s evidence of acquired distinctiveness. Similarly, while there is no evidence that applicant has promoted the candy bar configuration via ‘look for’ advertisements, we note that at least some of the advertisements submitted with the [application] display the candy bar configuration prominently.” Generic Marks If the mark does not fall into the arbitrary, fanciful, suggestive, or descriptive with a secondary meaning categories, it is considered generic and cannot be registered as a trademark. For example, the U.S. Patent and Trademark Office has denied trademark protection of terms such as “smartphone” or “e-mail.” KEY POINT Courts determine mark protection eligibility based on a classification of the mark. The more distinctive the mark, the higher the chances of obtaining protection under the Lanham Act. Sometimes, however, a distinct mark can become so synonymous with a general class of product or service that it becomes generic and thus loses its trademark protection! Perhaps the most famous case of genericide is Bayer’s loss of the right to protect the mark “aspirin” in 1921. LO 24-3 Understand how federal laws aimed at regulating trademarks in cyberspace apply to domain names. Other well-known mark holders that lost rights to their marks include Otis Elevator in 1950 (“escalator”), King-Seely Thermos Co. in 1963 (“thermos”), and Duncan in 1965 (“yo-yo”). Typically, genericide occurs once the consuming public uses the mark’s terminology as a noun or a verb rather than as an adjective to describe a good, but not always. Case 24.3, for example, considers whether Google has become so synonymous with Internet search that it has become generic. CASE 24.3 Elliott v. Google, Inc., 860 F.3d 1151 (9th Cir. 2017) FACT SUMMARY Between February 29, 2012, and March 10, 2012, Chris Gillespie used a domain name registrar to acquire 763 domain names that included the word “google.” Each of these domain names paired the word “google” with some other term identifying a specific brand, person, or product—for example, “googledisney.com,” “googlebarackobama.net,” and “googlenewtvs.com.” Google, Inc. (“Google”), however, objected to these registrations and promptly filed a complaint with the National Arbitration Forum, which has authority to decide certain domain name disputes under the registrar’s terms of use. Shortly thereafter, David Elliott filed—and Chris Gillespie later joined—an action in the Arizona District Court. The plaintiffs petitioned for cancellation of the Google trademark under the Lanham Act, which allows cancellation of a registered trademark if it is primarily understood as a “generic name for the goods or services, or a portion thereof, for which it is registered.” This district court ruled in favor of Google. Elliott and Gillespie appealed. SYNOPSIS OF DECISION AND OPINION The U.S. Court of Appeals for the Ninth Circuit affirmed the lower court’s decision, holding that the plaintiffs failed to present sufficient evidence to support a jury finding that the relevant public primarily understands the word “google” as a generic name for Internet search engines and not as a mark identifying the Google search engine in particular. WORDS OF THE COURT: Genericide “We conclude that [the plaintiffs’] proposed inquiry is fundamentally flawed for two reasons. First, Elliott fails to recognize that a claim of genericide must always relate to a particular type of good or service. Second, he erroneously assumes that verb use automatically constitutes generic use…. “Even if we assume that the public uses the verb ‘google’ in a generic and indiscriminate sense, this tells us nothing about how the public primarily understands the word itself, irrespective of its grammatical function, with regard to internet search engines. As explained below, we also agree that Elliott’s admissible evidence only supports the favorable but insufficient inference already drawn by the district court—that a majority of the public uses the verb ‘google’ in a generic sense. Standing in isolation, this fact is insufficient to support a jury finding of genericide. The district court therefore properly granted summary judgment for Google.” LEGAL IMPLICATIONS IN CYBERSPACE Domain Names, Trademarks, and Cybersquatting The explosive growth of the Internet has caused concern among trademark holders on a number of fronts. Chief among them is the practice of individuals, so-called cybersquatters, who register domain names that are also words associated with a famous trademark. Once the domain name is secured, the individual would then turn around and offer the domain name at an extraordinarily inflated rate to the trademark owner. Cybersquatting was the subject of considerable media attention in the 1990s and early 2000s. Congress eventually responded to this practice by enacting a federal statute designed to curb some of the most unscrupulous cybersquatters. That law, the Anticybersquatting Consumer Protection Act (ACPA),7 provides specific statutory remedies to trademark owners to recover trademark- related domain names from users who act in bad faith. Bad faith is a dishonesty of belief or purpose. In this context, the bad-faith requirement may be met in a number of ways but is typically satisfied when the registrant has no legitimate reason for the use of the domain name or the registrant is using the domain name to profit or confuse consumers. In Case 24.4, a federal court outlines nine examples of bad faith under the ACPA. CASE 24.4 People for the Ethical Treatment of Animals v. Doughney, 113 F. Supp. 2d 915 (E.D. Va. 2000) FACT SUMMARY People for the Ethical Treatment of Animals (PETA) is the high-profile nonprofit organization devoted to educating the public at large and attempting to prevent the abuse of animals for corporate gain. Doughney registered the domain name peta.org, claiming he was head of an organization called “People Eating Tasty Animals” and, thus, was entitled to use the name. Doughney’s website contained links to furriers and others antithetical to PETA’s mission. PETA filed suit against Doughney, alleging, among other things, that his use of peta.org violated the ACPA. SYNOPSIS OF DECISION AND OPINION The U.S. District Court for the Eastern District of Virginia ruled in favor of PETA. The court pointed out nine examples of bad-faith action taken by Doughney and held that his actions violated the ACPA. The court rejected Doughney’s claim that the website was merely a parody of the PETA organization because of the likelihood of confusion. In fact, Doughney admitted that “many people” would initially assume that they were accessing an authentic site sponsored by PETA. WORDS OF THE COURT: Bad Faith “[Under the ACPA], there are nine factors a court must consider in making a determination of whether the Defendant had a bad faith intent. Applying these factors, it appears that Doughney had the requisite bad faith intent. “First, Defendant possessed no intellectual property rights in ‘PETA.ORG’ when he registered the domain name in 1995. Second, the ‘PETA.ORG’ domain name is not the Defendant, Michael T. Doughney’s legal name or any name that is otherwise used to identify the Defendant. Third, Defendant had not engaged in prior use of the ‘PETA.ORG’ domain name in connection with the bona fide offering of any goods or services prior to registering ‘PETA.ORG.’ Fourth, Defendant used the PETA mark in a commercial manner. Fifth, Defendant clearly intended to confuse, mislead and divert internet users into accessing his web site which contained information antithetical and therefore harmful to the goodwill represented by the PETA Mark. Sixth, on Doughney’s ‘PETA.ORG’ web site, Doughney made reference to seeing what PETA would offer him if PETA did not like his web site. Seventh, Defendant, when registering the domain name ‘PETA.ORG,’ falsely stated that ‘People Eating Tasty Animals’ was a non-profit educational organization and that this web site did not infringe any trade mark. Eighth, Defendant has registered other internet domain names which are identical or similar to either marks or names of famous people or organizations he opposes. Ninth, the PETA Mark used in the ‘PETA.ORG’ domain name is distinctive and famous and was so at the time Defendant registered this site in September 1995. ENFORCING THE MARK LO 24-4 Explain how trademarks are enforced and distinguish between trademark infringement and trademark dilution. If a mark is distinctive enough to be protected, the holder’s attention turns to preventing others from using it without the holder’s consent. In order to enforce the holder’s rights to exclusive use of the mark, a holder must acquire rights over the mark and must be vigilant in policing and maintaining the mark. If the mark holder’s rights have attached, she may prevent a third party from using it without consent and collect damages from the infringer. Acquiring Rights Holders acquire rights to trademark protection either through (1) use in commerce or (2) registration of the mark with the U.S. Patent and Trademark Office (USPTO). Acquiring rights through use in commerce carries a significant risk that the mark holder’s rights will not be fully realized nationwide, so most holders opt to register the mark (see the Strategic Legal Solutions feature later in this section). KEY POINT Trademark holders may acquire rights in the mark through use in commerce or through USPTO registration. A mark holder typically uses the symbolTM (orSM) to indicate that the mark is not yet registered with the USPTO. However, use of this symbol also indicates that the mark holder considers the mark distinctive enough to be protected and, in some cases, that the application for registration is pending. Once the mark has been approved by the USPTO, it is considered registered, and the mark holder now uses the symbol® to indicate completed registration. A mark may be registered with USPTO only if the holder has a bona fide intent to use the mark in commerce. Once the mark is registered, the mark holder has nationwide rights to its use. However, even with registration, the mark may still be used by anyone who used the mark in commerce prior to registration. As a result, depending on the timing of the holder’s registration, different parties can have trademark protection simultaneously. For example, if Robert begins to use a trademark for a specialty coffee in his coffee shop in Boston but does not use it in any other market, he has acquired the right to use it in Boston only because he was the first to use his mark in commerce. If, however, National Brand Coffee (NBC) wants to use the very same trademark, NBC may register it with the USPTO and be entitled to nationwide rights except the right to use it in the Boston geographic market. So both Robert and NBC would have rights to the same trademark, but their rights would extend only to their respective geographic areas. Applications and the USPTO Registration of a mark is not automatic. A mark holder must undergo an approval process through the USPTO, which examines the mark for distinctiveness, checks for any similar marks that are already registered, and ensures compliance with trademark registration standards (such as secondary meaning for descriptive marks). The Lanham Act also allows the USPTO to reject a mark if it is “immoral, deceptive, or scandalous matter” or may be disparaging to “people, institutions, beliefs, or national symbols.”8 This section of the statute, commonly referred to as Section 2a, provides broad authority to the USPTO in evaluating the content of a mark for scandalous material. Some recent rejections under this section include “Stop the Islamisation of America” (In re Geller, 751 F.3d 1355 [Fed. Cir. 2014]). “Heeb” (In re Heeb Media, LLC, 89 U.S.P.Q.2d 1071 [T.T.A.B. Nov. 26, 2008]). “Sex Rod” (Bos. Red Sox Baseball Club L.P. v. Sherman, 88 U.S.P.Q.2d 1581 [T.T.A.B. Sept. 9, 2008]). “Cocaine” in a label for a highly caffeinated soft drink (In re Kirby, Serial No. 77006212 [T.T.A.B. Sept. 22, 2008]), as depicted in Figure 24.2. First Amendment Issues In a landmark case that has changed the trademark landscape, the U.S. Supreme Court unanimously affirmed a federal appellate court’s decision to reverse the USPTO’s rejection of an application for the name “The Slants” by an Asian-American rock band. In its 2017 decision, Matal v. Tam,9 the Supreme Court addressed First Amendment concerns in holding that Section 2a was unconstitutional. The case arose after the USPTO rejected the application for “The Slants” based on the examiner’s conclusion that the term was a highly disparaging term for Asian-Americans. The trial court agreed with the USPTO and affirmed its ruling that the mark was appropriately rejected as scandalous. However, the Federal Circuit Court of Appeals then reversed the decision, and the Supreme Court affirmed the appellate court’s decision. The Supreme Court analyzed Section 2a under the Central Hudson10 test for government restriction of commercial speech and concluded that because no substantial government interest exists, the section is unconstitutional. The Court then summed up its First Amendment analysis as follows: [The Slants] contend that many, if not all, trademarks have an expressive component. In other words, these trademarks do not simply identify the source of a product or service but go on to say something more, either about the product or service or some broader issue. The trademark in this case illustrates this point. The name “The Slants” not only identifies the band but expresses a view about social issues…. There is also a deeper problem with the argument that commercial speech may be cleansed of any expression likely to cause offense. The commercial market is well stocked with merchandise that disparages prominent figures and groups, and the line between commercial and non-commercial speech is not always clear, as this case illustrates. If affixing the commercial label permits the suppression of any speech that may lead to political or social “volatility,” free speech would be endangered. Matal v. Tam (137 S. Ct. 1744 ). In light of the Supreme Court’s unanimous decision in the Tam case, Pro-Football, Inc., the corporation that owns the Washington Redskins NFL team, was able to keep its registered mark for “Redskins,” which the USPTO had previously found disparaging.11 Policing the Mark Mark holders have the primary obligation to protect their rights by policing their mark. A primary threat to a mark’s distinctiveness is the use of the mark by competitors and other third parties. Of particular concern to business owners and managers should be the use of the mark as a noun or verb in trade and nontrade publications. If a word becomes too generic to the point where it has lost its distinctiveness, the rights are lost through genericide, as we discussed earlier in this chapter. In addition, when holders of a mark misuse the mark or allow the mark to be misused by others (such as advertising agencies), such misuse can contribute to the demise of the mark’s distinctiveness and therefore its protectability. To combat the growth of any linguistic re- characterization of their mark in the media or pop culture, mark holders have focused their efforts on the source of words: writers. For decades, Xerox Corporation has used advertising campaigns in publications such as Writer’s Digest and The Hollywood Reporter intended to caution writers about the use of Xerox’s mark “only as an adjective to identify our products and services, such as Xerox copiers, not a verb, ‘to Xerox’ or a noun ‘Xeroxes.’” Trademark Infringement Infringement occurs when a party uses a protected mark without the mark holder’s consent. For a mark holder to prevail on a claim of trademark infringement under the Lanham Act, she has the burden of proving that the infringement would likely cause confusion among reasonable consumers. (This burden is called the likelihood of confusion standard.) KEY POINT For a trademark holder to prevent another from using the holder’s mark, the holder must prove that use of the mark by another is likely to cause consumer confusion as to the source of the goods. Courts use the eight-factor Polaroid test to assess likelihood of confusion. In determining whether a likelihood of confusion exists, many courts apply a balancing test that has largely grown from a model set out by the U.S. Court of Appeals for the Second Circuit in the landmark infringement case Polaroid Corp. v. Polarad Electronics Corp.12 The factors considered are (1) strength of the mark (how famous is it?), (2) similarity between marks, (3) proximity of the products and their competitiveness with each other, (4) evidence that the mark holder may be preparing to launch a product for sale in the market of the alleged infringer’s product (a technique known in trademark law as bridging the gap), (5) evidence of actual consumer confusion, (6) evidence of bad faith by the infringer, (7) respective quality of the products, and (8) sophistication of consumers in the relevant market. The application of the Polaroid test is not mechanical but rather focuses on the ultimate question of whether, looking at the products in their totality, consumers are likely to be confused. In Case 24.5, a case that received considerable media attention, an appellate court analyzes whether the use of a trademark in a song’s title and lyrics constitutes infringement. CASE 24.5 Mattel v. MCA Records, 296 F.3d 894 (9th Cir. 2002) FACT SUMMARY Barbie is the famous doll manufactured by Mattel with roots beginning in the 1950s. Mattel has invested significant resources in the worldwide marketing and development of the doll, and it has used the Barbie trademark on a variety of accessories for decades. This included development of a Ken doll, and the toy couple went on to become a common reference in pop culture. In 1997, the Danish band Aqua produced a song called “Barbie Girl” in which one band member impersonated Barbie by singing in a high-pitched, doll-like voice in a musical conversation with another band member called Ken. The song’s lyrics included details that are typical of the iconic Barbie doll sold by Mattel: plastic, changeable, and modern wardrobe. Mattel brought an action against Aqua’s record label, MCA, for trademark infringement (among other claims) for use of the Barbie mark. The trial court granted summary judgment to MCA, ruling that no infringement had occurred. SYNOPSIS OF DECISION AND OPINION The Court of Appeals for the Ninth Circuit ruled in favor of MCA. The court distinguished between use of a mark on a product and use of a mark in a song title and explained that although consumers frequently look to the title of a work to determine what it is about, they do not regard titles of artistic works in the same way as they do the names of ordinary commercial products. The court adopted a rule that literary titles do not violate the Lanham Act unless the title has no artistic relevance to the underlying work whatsoever or, if it has some artistic relevance, unless the title explicitly misleads as to the source or the content of the work. WORDS OF THE COURT: No Infringement “Applying [the literary title rule] to our case, we conclude that MCA’s use of Barbie is not an infringement of Mattel’s trademark. Under the first prong of [the rule], the use of Barbie in the song title clearly is relevant to the underlying work, namely, the song itself. As noted, the song is about Barbie and the values Aqua claims she represents. The song title does not explicitly mislead as to the source of the work; it does not, explicitly or otherwise, suggest that it was produced by Mattel. The only indication that Mattel might be associated with the song is the use of Barbie in the title[.]” Counterclaim Dismissed: “After Mattel filed suit, Mattel and MCA employees traded barbs in the press…. MCA filed a counterclaim for defamation based on the Mattel representative’s use of the words ‘bank robber,’ ‘heist,’ ‘crime’ and ‘theft.’ … In context, all these terms are nonactionable rhetorical hyperbole. The parties are advised to chill.” Trademark Dilution In addition to bringing an infringement claim under the Lanham Act, holders of famous marks may also enforce their rights via the Federal Trademark Dilution Act of 1995,13 as amended by the Trademark Dilution Revision Act of 2006.14 In a dilution claim, evidence of consumer confusion is not necessary in order for the mark holder to prevail. Dilution occurs through either blurring or tarnishment. Blurring dilutes the distinctive quality of the mark through its identification with goods that are not alike. Dilution by blurring may be found regardless of the presence or absence of actual or likely confusion, of competition, or of actual injury. For example, consider the hypothetical products of Red Bull brand pianos or Google brand tennis shoes. Consumers would not necessarily be confused about the origin, but each dilutes the distinctive quality of a famous mark. By contrast, dilution by tarnishment occurs when an association arising from the similarity between a mark or trade name and a famous mark harms the reputation of the famous mark with something that a consumer might find objectionable or unflattering (e.g., Apple brand cigarettes).15 The Trademark Dilution Revision Act now specifies six nonexhaustive factors for courts to consider in determining whether there is dilution by blurring:16 The degree of similarity between the mark and the famous mark. The degree of inherent or acquired distinctiveness of the mark. The extent to which the owner of the famous mark is engaging in substantially exclusive use of the mark. The degree of recognition (fame) of the mark. Whether use of the mark by the alleged infringer was intended to create an association with the famous mark. Any actual association between the mark and the famous mark. In addition to setting out statutory blurring standards, the Trademark Dilution Revision Act also requires the mark holder to prove that his mark is famous by offering evidence that it is widely recognized by the general consuming public of the United States. The Trademark Dilution Revision Act thus provides a powerful legal weapon for trademark holders who cannot prove infringement through consumer confusion. For example, in a case where Facebook sued to prevent Teachbook, a social networking site for secondary school teachers, from using the mark “Teachbook,” the court made clear that consumer confusion was not relevant in a dilution claim: Thus, despite what Teachbook says, not all of Facebook’s claims turn on the likelihood of consumer confusion. Rather, Facebook’s trademark dilution claim presents an alternative avenue for relief even if Facebook is unable to prove the likelihood of confusion necessary to sustain its trademark infringement and related claims. The allegations in the complaint are also sufficient to state a claim for trademark dilution…. Facebook also alleges that Teachbook’s use of the TEACHBOOK mark “impairs the distinctiveness of the FACEBOOK Marks and weakens the connection in consumers’ minds between the Facebook Marks and Facebook’s services.” … These allegations are sufficient to state a claim for trademark dilution. Facebook, Inc. v. Teachbook.com, LLC, 819 F. Supp. 2d 764 (N.D. Ill. 2011). COPYRIGHT LAW: PROTECTIONS OF ORIGINAL EXPRESSIONS LO 24-5 Define what a copyright is. Go ahead and take a picture on your smartphone. Congratulations. You have quite possibly created some intellectual property! The moment you took that photo, you most likely created an original work and became the copyright owner of that work, for copyright protection extends automatically to a work as soon as it is created. A copyright protects the rights of creators of original works for a defined period of time during which the holder has the exclusive rights to copy, distribute, display, or perform the work. In the U.S., copyright protection is an intangible right granted by the Copyright Act of 197617 (a federal statute) to the author or originator of an original literary or artistic production, whereby the artist is invested, for a specified period (see Table 24.1), with the sole and exclusive privilege of reproduction (copying) of the work and with the right to profit from its publication, performance, or display. TABLE 24.1 Copyright Protection Periods Copyright Owner Copyright Duration Sole author or originator 70 years from death of the author or originator Publisher or other party The earlier of either (1) 120 years from the date of creation or (2) (works for hire) 95 years from the date of publication More than one author or 70 years from the death of the last-surviving author or originator originator KEY POINT A copyright protects the rights of creators of original works for a defined period of time during which the holder has the exclusive rights to copy, distribute, display, or perform the work. Copyright laws apply to works made for hire (or works for hire), which are works created by an employee as part of her job. When a work is made for hire, the employer—not the employee— is considered the legal owner of the work, in the absence of an agreement to the contrary. Before proceeding any further, a key clarification is in order: Copyright law protects the expression of ideas, not ideas themselves. As a result, works that cannot be protected under copyright law include underlying ideas, facts, raw data, procedures, processes, systems, methods of operation, concepts, principles, and discoveries, no matter how they are explained, illustrated, or described.18 So, how does copyright law protect the expression of ideas? Specifically, the Copyright Act allows creators of original works to obtain a copyright by having an “original work of authorship fixed in any tangible medium of expression, not known or later developed, from which [it] can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.”19 As a result, protected works include such things as literary works, musical works, dramatic works, choreographic works, motion pictures, sound recordings, and pictorial or graphical works. Fundamentally, in order to obtain copyright protection, a work must pass the following three- part test: (1) originality, (2) some degree of creativity, and (3) fixation in a durable medium. Originality and Creativity Requirements The meaning of the word original has generated the most controversy in interpreting the requirements of the Copyright Act. What is to be considered original, and what guidelines should be used to determine creativity? The courts have ruled that an original work of authorship is a work that is original to the author, which means that the author must use her own creative capabilities to create the work or medium. Does this definition of originality mean that a compilation of raw data or other noncopyrightable facts (such as a list of names and telephone numbers) can be copyrighted as long as the creator of the list was the first to put the list together? In Feist Publications, Inc. v. Rural Telephone Service,20 a landmark case on copyright originality and creativity, the U.S. Supreme Court addressed this issue head on. In brief, the Court unanimously ruled that compilations of facts could be copyrightable only if the compilation contained some element of creativity. In the words of the Court: “copyright protects only those constituent elements of a work that possess more than a de minimis quantum of creativity.” As a result, the White Pages of a telephone directory do not meet the creativity requirement because they are simply arranged alphabetically. One federal appellate court has even gone as far as to hold that the Yellow Pages listings of a telephone directory do not meet the originality requirement.21 Durable Medium To be protected, a work must not only be original and creative; it must also be fixed in a durable medium. This requirement underscores the general principle that copyright law protects the expression of ideas, not ideas themselves. A work must be more than just an idea or thought process. In fact, the work must be fixed in a tangible form, such as writing, digital, video, and so forth. REGISTRATION AND NOTICE Although works may be registered with the U.S. Copyright Office, registration is not required for the creator to own the rights. The creation of the work itself automatically confers a copyright on the material. Registration of the copyright, however, affords the owner legal methods for enforcing the copyright, including the right to bring an infringement action in federal court, the right to collect statutory damages from infringers, and the right to obtain injunctive relief against infringers. The copyright notice is the familiar © symbol or the abbreviation “Copr.” or the word “Copyright” accompanied by the year of first publication and the copyright owner’s name. For works created after 1989, no copyright notice is necessary in order to preserve the rights of the owner. Still, placing a copyright notice on the work is a wise practice because it limits any defense by an infringer who might claim innocent infringement. COPYRIGHT INFRINGEMENT LO 24-6 Identify the remedies for acts of copyright infringement, describe the impact of technology on copyright law, and apply the fair use defense. When a copyright holder sues a party that it believes has infringed on its copyright, the copyright owner will generally pursue one of three theories of infringement. These theories have been developed by the federal courts to analyze copyright infringement cases. These theories are direct infringement, indirect infringement (also known as contributory infringement), and vicarious infringement. Direct Infringement Direct infringement occurs when the copyright owner can prove that she has legal ownership of the work in question and that the infringer copied the work without permission. While the first element is straightforward, the second element is more complex than appears at first glance. In the context of the copyright protections afforded by law, the word copied must have an expansive definition rather than a narrow one (i.e., copy means more than “exact replica”), but at the same time, the definition of copy cannot be so expansive as to foreclose any works of the same category. Given this tension, courts have developed the substantial similarity standard to guide the definition of copy under copyright law. Thus, a copyright holder need prove only that the infringer copied plots, structures, or organizations that made the infringing work substantially similar to the copyrighted work. Indirect Infringement Indirect infringement (also known as contributory infringement) involves three parties: the copyright owner, the direct infringer, and the facilitator of the infringement. Under this theory of indirect infringement, it is the facilitator who is liable for damages. Therefore, before pursuing a theory of indirect infringement, the copyright owner must first identify the direct infringer. Legal Speak >)) Direct and Imputed Knowledge Direct knowledge implies that a party has firsthand, actual knowledge of a fact. Imputed knowledge is gained from circumstances or a relationship with a third party in which a diligent party “should have known” about the fact at issue. Normally, for a facilitator to be liable, that party must either have direct or imputed knowledge of the infringement or contribute to the infringement in some material way. In the famous case of A&M Records, Inc. v. Napster, Inc.,22 a federal appeals court held that Napster’s business model of facilitating a peer-to-peer community for the sharing of digital music files constituted contributory infringement because Napster had the ability to locate infringing material listed on its search engines as well as the ability to terminate users’ access to the system. Digital file sharing is discussed more extensively later in this section (see the Legal Implications in Cyberspace feature). Vicarious Infringement The third copyright infringement theory, vicarious infringement, is similar to the indirect infringement theory in that they both involve third parties not involved in actual direct infringement. Vicarious infringement most often occurs in an employer-employee context in which the employee is acting with authority from the employer and commits an act of infringement that benefits the employer. The copyright owner is entitled to remedies against the employer to the same extent as against the direct infringer. Vicarious liability is based on agency law (see Chapter 10, “Agency”) and can be used as a theory of liability not only in the employer-employee context but whenever an infringing party (the agent) is acting on behalf of or for the benefit of another party (the principal). When such a vicarious infringement occurs, the principal party can be held vicariously liable for the acts of the agent. Criminal Sanctions for Infringement In addition to providing for civil remedies such as money damages for acts of infringement, copyright law also provides for criminal penalties as well. In particular, the controversial No Electronic Theft (NET) Act of 199723 increased the criminal penalties for violations of the Copyright Act. The NET Act imposes criminal liability on anyone infringing on a copyright by making a reproduction or distribution, including by electronic means, of one or more copies of a copyrighted work with a total retail value of more than $1,000. Penalties include maximum fines of $250,000 and potential incarceration.24 DEFENSES TO INFRINGEMENT CLAIMS Copyright owners do not enjoy unlimited rights to their work. Rather, the law attempts to balance competing public interests with the property rights of copyright owners. Specifically, infringement claims in copyright cases are subject to three major defenses: the public domain, the first sale doctrine, and the fair use tes Public Domain A work that is in the public domain is not protectable under copyright laws. Works fall into the public domain either because the copyright has expired or because federal or state governments publish the work. By way of example, reproductions of classical works in literature such as Homer’s The Odyssey or Tolstoy’s War and Peace do not require permissions because those works are now part of the public domain. Similarly, court cases, government agency correspondence, and statutes are all in the public domain and do not require permission for use. First Sale The first sale doctrine enables a lawful purchaser of a copyrighted work to resell, transfer, or gift her copy of the work to anyone else without the permission of the copyright owner. The first sale doctrine does not allow the purchaser of the work to copy the work itself; instead, it prevents the copyright owner from exercising distribution rights over a copyrighted work after the work enters the market Fair Use The most common and powerful defense in copyright infringement cases is fair use. A landmark case on the fair use defense is Sony Corp. of America v. Universal City Studios,25 in which the U.S. Supreme Court ruled that Sony’s manufacturing and selling of Betamax (the first videocassette tape recording format for use in home videocassette recorders, or VCRs) was not per se infringement. After Sony had started producing videotape recorders (sold under the brand name Betamax) in a price range that many consumers could afford, Universal saw the mass distribution of this product as a threat to its business model and market share. Universal sued Sony on an indirect infringement theory, claiming that consumers were using the Sony product to record its copyrighted movies and TV programs. The U.S. Supreme Court, however, made clear that Congress did not give absolute control over all uses of copyrighted materials. Some uses were permitted, and because the device could still be used for “substantial non-infringing uses,” the Court held that Sony was not liable for contributory infringement. Napster unsuccessfully attempted to invoke this fair use exception, known as the Sony defense or the Betamax doctrine, in the A&M Records v. Napster case (discussed previously in this chapter), and this exception was subsequently reexamined by the Supreme Court in the MGM v. Grokster case (discussed later in the chapter).26 The term fair use has now been codified in the Copyright Act with four general factors or guideposts: (1) the purpose and nature of the use, (2) the nature of the work itself, (3) the amount and substantiality of the material used, and (4) the effect of the use on the market. Purpose and Nature of the Use The first factor is often called the transformative factor because courts first analyze whether the work in question has added a new expression or new meaning to the copyrighted work. If a work is centered on the original but has created new information, aesthetics, or insights, the work does not infringe on the copyrighted work.27 By way of example, entertainers may use parody for purposes of mocking a particular work (e.g., song lyrics). At the same time, however, transformative use has its limits. In Warner Bros. Entertainment, Inc. v. RDR Books,28 a court held that a Harry Potter encyclopedia may qualify as “slightly transformative” but that fair use did not apply because so much of the encyclopedia’s text was taken directly from the Harry Potter book series. Moreover, if the use of the work is to promote education or scholarship, courts are more likely to be sympathetic to an assertion of fair use. Nevertheless, just because the use of a work is educational or scholarly or otherwise noncommercial in nature does not always make it a fair use. Entire sections of textbooks or copied videotapes may not be used without the copyright holder’s permission. Also, if the use is for some commercially profitable purpose, this fact will weigh heavily against the infringer. Nature of the Work The second factor in the fair use determination is the nature of the work that is being copied, that is, whether the copyrighted material is a work of fiction (such as a novel or play) or a work of nonfiction or factual work (such as a biography). Generally speaking, all other things being equal, a judge is more likely to find a determination of fair use if material was copied from a factual work than from a fictional work. Amount and Substantiality Used How much of the original work did the infringer take? A single sentence of a book, a whole paragraph, or an entire chapter? Courts analyze the totality of the circumstances regarding the amount of copyrighted material used compared to the entire work at issue. Short phrases and limited use of the copyrighted work are often protected by the fair use defense. Market Effect The fourth factor in a fair-use determination is the effect of the use on the potential market for the work that was copied. Courts are reluctant to allow fair use as a defense (even if the use meets the other three factors) if a copyright holder demonstrates that the value of a copyrighted work will be diminished by allowing its use. Fair use cannot impair the marketability or economic success of the copyrighted work. LEGAL IMPLICATIONS IN CYBERSPACE Copyrights in the Digital Age Technology has created new challenges for legislatures and courts struggling with applying copyright law in the digital age. Computer Software In order to settle uncertainty in the computer science field about the ability to copyright computer software, Congress amended the Copyright Act with the Computer Software Copyright Act.29 This law, enacted in 1980, specifically defines computer software programs as literary works and, thus, works entitled to protection. Nevertheless, the nebulous nature of computer software still brings with it a good deal of uncertainty in terms of copyright protection. Whelan v. Jaslow,30 decided in 1986, was the first case to address the issue of copyright protection for software. That landmark case extended broad protection to computer programs, including both the “look and feel” of a program’s displays and also the program’s structure, sequence, and organization. More recently, however, courts have been scaling back this broad protection and adopting a more sophisticated test. One appellate court has even suggested that patents, not copyrights, would be the most suitable form of intellectual property protection to protect the dynamic aspects of computer software programs.31 Jammie Thomas-Rasset. Julia Cheng/AP Images Evolution of Copyright Law and Technology The revolutionary technological gains and the increasing popularity of the Internet have led to significant threats to such copyright holders as record labels and movie studios. In the past, copyright infringement of movies and music was limited page 790because the technology that existed to copy these media was not capable of producing mass copies, except through a sophisticated criminal network. In short, when the average consumer was limited in what he could copy and distribute, copyright holders had little fear that day-to-day consumer infringement would impact their revenue stream from sales of the original. But when the digital age truly arrived, copyright holders responded by lobbying Congress for additional protections in the area of copyright laws. Digital Millennium Copyright Act Congress enacted the Digital Millennium Copyright Act (DMCA) in 1998 in an attempt to modernize copyright law to deal with the new challenges that had emerged in the digital age. The DMCA was controversial because it extended copyright law to the Internet and created a cumbersome notice and takedown procedure for policing copyrights on the Internet. In summary, in order to pursue a copyright infringement claim against an Internet service provider (ISP), the copyright owner must first provide the ISP with written notification of the claimed infringement. Moreover, the copyright owner’s notification must comply with the following requirements: Identification of the copyrighted work claimed to have been infringed and information reasonably sufficient to permit the Internet service provider to locate the material. Information reasonably sufficient to permit the Internet service provider to contact the complaining party, such as an address, telephone number, and e-mail address. A statement that the complaining party has a good faith belief that use of the material in the manner complained of is not authorized by the copyright owner, its agent, or the law. A statement that the information in the notification is accurate and, under penalty of perjury, that the complaining party is authorized to act on behalf of the owner of an exclusive right that is allegedly infringed. In addition, the DMCA provides a safe harbor (legal immunity) to Internet service providers who comply with the notice and takedown procedure. File Sharing Technology changed the status quo rapidly. The late 1990s saw the introduction of two very important technological advances: (1) the popular music file format known as MP3 (essentially, compressed digital files) and (2) the increasing speed advancements of the Internet. These two technological advances changed the once hours-long process of transferring music and movies over the Internet into a process that took just a few minutes or even seconds. The MP3 file, in particular, grew in popularity very quickly and enabled consumers to upload and download music and video files from one private personal computer to another. The ability to upload and download hundreds of files a day led to the establishment of peer-to-peer (P2P) networking and, of course, entrepreneurs who have leveraged this technology into profit. The pioneer of P2P file-sharing communities was Napster. As discussed, the Ninth Circuit Court of Appeals effectively shut down Napster after the court ruled that Napster’s business model was inherently illegal because Napster had imputed knowledge of copyright infringement. RIAA Lawsuits In addition to aggressively pursuing file-sharing services such as Napster and Grokster, the motion picture and music recording industries have filed thousands of infringement lawsuits against individuals engaged in file sharing. The Recording Industry Association of America (RIAA) in particular has invested substantial resources in tracking down and recovering damages from individual infringers. In a 2009 federal case out of Minnesota that garnered national media attention, a jury imposed damages of $1.92 million against Jammie Thomas-Rasset. The award was the result of a lawsuit filed by RIAA against Thomas-Rasset alleging she personally downloaded more than 1,700 copyrighted songs over a file-sharing service. Despite this jury award, other Napster-like sharing services began to thrive under a business model whereby the P2P provider could not have any actual knowledge of copyright infringement. The motion picture industry also doggedly pursued each of these companies by suing them under a contributory infringement theory. Ultimately, the issue of what level of intent is necessary to constitute infringement was decided by the U.S. Supreme Court in Landmark Case 24.6. LANDMARK CASE 24.6 Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 545 U.S. 913 (2005) FACT SUMMARY After the Napster decision, a number of other P2P file-sharing communities emerged with a slightly different business model. One famous firm, Grokster, used a business model whereby it would be impossible for Grokster to know if the files being shared were an infringing use. Thus, Grokster argued, no Napster-like imputed liability could attach and no contributor infringement existed. According to Grokster (and many other such firms that were emerging), its business was precisely the same business that Sony was in when selling the Betamax and, thus, Grokster was entitled to the same type of fair use exception—“capable of substantial non-infringing uses”—as was articulated by the Supreme Court in the Sony case. When MGM Studios sued Grokster (and others, including StreamCast, the distributor of Morpheus software), both the federal trial court and the federal court of appeals agreed with Grokster and allowed Grokster to use the Sony exception in its rulings against MGM.32 SYNOPSIS OF DECISION AND OPINION The U.S. Supreme Court unanimously held that Grokster could be liable for inducing copyright infringement and reversed the court of appeals ruling. The Court specifically ruled that anyone who distributes a device with the intent to promote its use to infringe copyright is liable for the resulting acts of infringement (contributory) by third parties. Although there was some disagreement among the justices about the Sony defense, ultimately the Court held that the lower courts had misapplied the Sony exception because there was ample evidence that Grokster had acted with intent to cause copyright infringement via the use of its software. WORDS OF THE COURT: Evidence of Intent “Three features of this evidence of intent are particularly notable. First, each company showed itself to be aiming to satisfy a known source of demand for copyright infringement, the market comprising former Napster users. StreamCast’s internal documents made constant reference to Napster, it initially distributed its Morpheus software through an OpenNap program compatible with Napster, it advertised its OpenNap program to Napster users, and its Morpheus software functions as Napster did except that it could be used to distribute more kinds of files, including copyrighted movies and software programs. Grokster’s name is apparently derived from Napster, it too initially offered an OpenNap program, its software’s function is likewise comparable to Napster’s, and it attempted to divert queries for Napster onto its own Web site. Grokster and StreamCast’s efforts to supply services to former Napster users, deprived of a mechanism to copy and distribute what were overwhelmingly infringing files, indicate a principal, if not exclusive, intent on the part of each to bring about infringement.” PATENTS: LEGAL PROTECTION OF INVENTIONS AND PROCESSES LO 24-7 Define what a patent is and explain how patents are obtained. A patent is a statutorily created monopoly right that confers on an inventor the exclusive right to make, use, license, and sell her invention for a limited period of time. Patent rights are especially vital in the manufacturing, technology, and pharmaceutical industries. Patents are often an important part of these firms’ planning because their business models depend on the benefits of obtaining a patent—the full legal protection of their ideas, methods, and inventions. Once a patent is obtained, a competitor is barred from profiting off the patented device or process during the life of the patent. Thus, a patent can be a firm’s most important and valuable asset. Business owners and managers, however, need to have a good working understanding of the fundamentals of patent law and need to be aware of the most common myths surrounding patents. The most common myth is the assumption that nearly any new idea or invention is “patentable” (able to obtain patent law protection). This assumption is not true. In fact, the patent process is a lengthy and costly one, for in order to be patented, the idea or invention must meet stringent criteria set forth in federal statutes. Cost Considerations To begin with, the patent application procedure itself is expensive because an inventor must almost always obtain legal counsel that specializes in patent law, and because of their specialized nature, such law firms—known colloquially as intellectual property (or simply IP) firms—are often more expensive than expert counsel in other areas of the law. By way of example, one intellectual property law firm estimates that legal fees and application fees related to obtaining a patent range from $20,000 for a mechanical tool invention to $30,000 for a software patent.33 In addition, even if one is successful in obtaining a patent, enforcing a patent via an infringement lawsuit is an even more expensive and daunting undertaking. According to one report, the median cost for enforcing a patent claim (assuming an infringement lawsuit is necessary) is around $650,000 for claims worth less $1 million.34 Although it is not always necessary to go all the way to trial to enforce a patent, litigation outcomes are often uncertain, so a company’s patent management strategy must weigh such significant cost and risk factors ahead of time. FUNDAMENTALS OF PATENT LAW Patent law in the United States dates back to the founding era. It is governed by the Patent Act, which was enacted by the First Congress in 1790, the same Congress that proposed the Bill of Rights. Inventors will typically seek help from a patent attorney who is skilled and experienced in the patent application process. The application process is called prosecuting a patent. Patent Prosecution Although patent prosecution varies based on the invention, the process typically has three stages. First, the inventor and patent counsel perform a database search in an attempt to ensure that a similar invention is not protected by an existing patent (known as prior art). Second, the inventor files a provisional application with the U.S. Patent and Trademark Office (USPTO). A provisional patent application discloses the invention in a general way and does not require the formalities necessary for a full (nonprovisional) application. In addition, a provisional application protects the invention and allows the inventor to work on improving the invention for 12 months before a full patent application. Third, once the parties are satisfied that the invention is patentable, the inventor’s counsel files a full nonprovisional application with the USPTO that is much more comprehensive and typically includes sketches or other supplementary materials. An attorney employed by the USPTO acts as an examiner and reviews the application in order to determine whether the application describes an invention that meets the legal standards for patentability. If the examiner concludes that the invention is patentable, he will issue the patent and the inventor then has full rights to enforce the patent against third parties. If the examiner determines that the invention is not patentable, the inventor may appeal to the Patent Trial and Appeal Board (PTAB). Categories There are three different categories of patents: Utility patents constitute a broad category that covers the invention of any new and useful process, machine, article of manufacture, or composition of matter or any new and useful improvement. An important subcategory of utility patents is the business method patent, which is discussed in more detail later in this section. Utility patents also cover software and hardware. The overwhelming majority of patents fall into this category. Design patents cover primarily the invention of new ornamental designs on articles of manufacture. This category covers how a product looks rather than how it functions; it is therefore increasingly common for business firms to obtain both trademark protection and a design patent for the same product. Plant patents are the least frequently issued type of patent and cover the invention or discovery of asexually or sexually reproducible plants (such as flowers). Patent Duration A patent for inventions or processes (utility and business method patents) lasts for a period of 20 years from the date of filing the application with the USPTO. A design patent lasts for 14 years. Patentability Standards In order to be patented, an invention must be novel and nonobvious and must be a proper subject matter for protection under the patent law. Novelty An invention or process must be unique and original, and a patent applicant must show that no other identical invention or process exists. The statute delineates the guidelines for this novelty standard based on a three-prong test. The first prong is the public use test and requires that the invention or process not already be in public use. The second prong governs priority for inventors of the same invention or process. The United States recognizes the first inventor-to-file rule, in which patent rights are granted to the first inventor to file a patent application. The first inventor to file then has priority over other inventors of the same product. The final prong requires a determination by the USPTO that the applicant filed the patent within a reasonable time of the invention. In Dunlop Holdings Ltd. v. RAM Golf Corporation,35 a landmark case on the issue of public use, a federal appellate court invalidated a patent held by the manufacturer of a specially coated golf ball. The court held that Dunlop’s patent on the specially coated ball did not meet the novelty test because there was evidence that the same product had been used by a sole proprietor golf pro 10 years prior to when the patent was issued. The court remarked: The only novel feature of this case arises from the fact that [the golf pro] was careful not to disclose to the public the ingredient that made his golf ball so tough…. But in this case, although [he] may have failed to act diligently to establish his own right to a patent, there was no lack of diligence in his attempt to make the benefits of his discovery available to the public…. [T]he evidence clearly demonstrates that [the golf pro] endeavored to market his golf balls as promptly and effectively as possible. The balls themselves were in wide public use. 524 F.2d 33 (7th Cir. 1975). Nonobviousness The nonobviousness standard requires that an invention must be something more than that which would be obvious, in light of publicly available knowledge, to one who is skilled in the relevant field. In other words, a patent cannot be granted for minimal or marginal improvements that were already apparent to those in the field. For example, Joanna adds a small extender switch to her lawn mower (an existing patented invention) that will make it easier for taller people to kill the engine. Joanna is not entitled to a new patent because the invention is essentially a minimal (also called de minimis) improvement and relatively obvious. Patentable Subject Matter Not all processes and inventions that are nonobvious and novel are patentable. The patentable subject matter standard bars laws of nature, natural phenomena, and abstract ideas from being patentable. Albert Einstein’s theory of relativity was groundbreaking. It was new and nonobvious beyond question. But should this natural phenomenon be patentable? The patent system was not intended to cover every novel and nonobvious idea. Courts have consistently held that mathematical algorithms, materials common to nature (such as penicillin), and unapplied or abstract ideas are not patentable. Requirements for Design Patents Patent laws also protect inventors of any new, original, and ornamental design for an article of manufacture. Design patents are subject to the same requirements as those for utility or business method patents (novelty and nonobvious); in addition, the design must be primarily ornamental (not primarily functional). Design patents are thus concerned with protecting the appearance of an article. For example, in Figure 24.3, the head dress popularized by the Dark Knight movie series received a design patent based on its appearance and not any particular function. Business Method Patents Because of the patentable subject matter standard (discussed earlier), courts have historically struggled with the notion of extending patent protection to processes and methods developed by business firms to improve efficiency or generate some other form of competitive advantage. In an attempt to provide guidance to inventors and business firms, the USPTO issued a directive in 1996 that recognizes business method patents and that instructs examiners to treat business method applications like any other process claims, and in 1998, a federal appeals court helped settle many issues related to business method patents and provided guidance for other courts in the landmark case of State Street Bank & Trust Co. v. Signature Financial Group.36 The State Street case ruled that business methods are patentable so long as they accomplish something practically useful in a novel and nonobvious way. After the State Street case, the number of applications for business method patents increased nearly sixfold. However, in Case 24.7, the U.S. Supreme Court significantly narrowed the scope of business method patents CASE 24.7 Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. 208 (2014) FACT SUMMARY Alice Corporation (Alice) holds several patents that disclose plans to manage certain forms of financial risk. According to the specification disclosed in the patents, the invention “enables the management of risk relating to specified, yet unknown, future events.” The claims at issue relate to a computerized scheme for mitigating “settlement risk”—that is, the risk that only one party to an agreed-upon financial exchange will satisfy its obligation. In particular, the claims are designed to facilitate the exchange of financial obligations between two parties by using a computer system as a third-party intermediary. The intermediary creates “shadow” credit and debit records (i.e., account ledgers) that mirror the balances in the parties’ real-world accounts at “exchange institutions” (e.g., banks). The intermediary updates the shadow records in real time as transactions are entered, allowing “only those transactions for which the parties’ updated shadow records indicate sufficient resources to satisfy their mutual obligations.” At the end of the day, the intermediary instructs the relevant financial institutions to carry out the permitted transactions in accordance with the updated shadow records, thus mitigating the risk that only one party will perform the agreed-upon exchange. CLS Bank International (CLS) operates a global network that facilitates currency transactions. CLS filed suit against Alice, seeking a declaratory judgment that Alice’s patents were invalid. The trial court ruled that the processes were ineligible for a patent because they are directed to the abstract idea of employing a neutral intermediary to facilitate simultaneous exchange of obligations in order to minimize risk. A divided panel of the U.S. Court of Appeals for the Federal Circuit reversed, holding that it was not “manifestly evident” that the petitioner’s claims were directed to an abstract idea. The parties appealed to the U.S. Supreme Court. page 798 SYNOPSIS OF DECISION AND OPINION The U.S. Supreme Court ruled in favor of CLS, holding that the patents were directed to an abstract idea and therefore were invalid because implementing those claims on a computer was insufficient to transform the idea into a patentable invention. The Court applied a two-part test. First, do claims cover an abstract idea? For this case, the Court answered yes, pointing to the concept of intermediated settlement used in Alice’s methods. Second, do claims contain an inventive concept sufficient to transform the idea into a patent-eligible application of the idea? On the second question, the Court ruled that the claims did not contain sufficient inventive concept to be patented. WORDS OF THE COURT: No Evidence of Transformation “Viewed as a whole, [Alice’s] method claims simply recite the concept of intermediated settlement as performed by a generic computer. The method claims do not, for example, purport to improve the functioning of the computer itself. Nor do they effect an improvement in any other technology or technical field. Instead, the claims at issue amount to ‘nothing significantly more’ than an instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer. Under our precedents, that is not ‘enough’ to transform an abstract idea into a patent-eligible invention.” INFRINGEMENT, NOTICE, AND REMEDIES LO 24-8 Identify the remedies for acts of patent infringement. Infringement is defined in the Patent Act as “whoever without authority makes, uses or sells any patented invention, within the United States during the term of the patent therefore, infringes the patent.”40 In addition, anyone who “actively induces infringement” of a patent is also considered an infringer as well.41 Infringement can occur in one of two ways: as literal infringement or through equivalence. Literal Infringement The courts have developed three rules for determining whether literal patent infringement has occurred. The rule of exactness applies when the infringer makes, uses, or sells an invention that is exactly the same as the patent holder’s claims in the patent application, thus infringing on the patent. An infringement also occurs if the infringing device does more than is described in the patent application of the protected invention. This second type of literal infringement is known as the rule of addition. Under the rule of omission, by contrast, when the alleged infringing invention lacks an essential element of the patent holder’s claims in the patent application, infringement has not occurred. Equivalence The rule of omission is subject to abuse because individuals may avoid infringement liability by omitting an element of the patented device and substituting another element that is substantially similar, but not exactly the same, to the one described in the patent. To prevent this abuse, the U.S. Supreme Court developed a doctrine that allows courts to find infringement if the invention performs substantially the same function in substantially the same way to achieve the same result. Under this doctrine, known as the doctrine of equivalence, courts must evaluate whether any of the key elements of a patent claim have been interchanged with known equivalents. Notice and Enforcement The Patent Act sets forth appropriate measures that individuals and business firms who own patents must take to properly inform users that an article is patented. This notice is often done by placing the word patent or the abbreviation pat. or the patent number on the specific article. If no marking is identifiable, then the patentee may not collect damages from infringers unless they have been properly warned and nonetheless continue to infringe. Remedies Patent infringers are liable for the following damages: Actual damages: Examples include profits from lost sales and royalties for any sale made by the infringer. Prejudgment interest: It is not uncommon for years to pass before an infringer is spotted; thus, revenue from possible sales may have been withheld from the patentee for a long period of time. Attorney fees: The prevailing party may receive reasonable attorney fees when the infringer has acted in bad faith (i.e., has received notice that the invention is patented and yet continues his infringing conduct).

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