Intellectual Property Law, 2017
This monumental project began in early 2004 when I met with Nora L. Crandall, a lawyer and then Director of Publishing a
1,905 75 6MB
English Pages 854 Year 2016
Polecaj historie
![Australian Intellectual Property Law [4 ed.]
1108746950, 9781108746953](https://dokumen.pub/img/200x200/australian-intellectual-property-law-4nbsped-1108746950-9781108746953.jpg)
Table of contents :
Part I: Patents
1. Patenting Inventions (Marc V. Richards, Keith D. Weiss)
2. Litigating U.S. Patent Rights in a Changing Landscape (Jafon Fearson, Laura Beth Miller)
3. Patent Antitrust, Misuse, Exhaustion, and Inequitable Conduct (Glen P. Belvis)
4. The Attorney-Client Privilege and the Work-Product Immunity Doctrine (Glen P. Belvis)
5. Ownership and Management of Patent Rights (John S. Paniaguas)
Part II: Trademarks
6. Creation and Maintenance of Trademark Rights (Bradley L. Cohn)
7. Transfer or Loss of Trademark Rights (Bradley L. Cohn)
8. Enforcement, Remedies, and Defenses in Trademark and Unfair Competition Law (Bradley L. Cohn)
Part III: Copyrights
9. Copyright Subject Matter and Exclusive Rights (William T. McGrath)
10. Ownership and Transfer of Copyrights (Richard C. Balough)
11. Copyright Infringement, Fair Use, and Remedies (William T. McGrath)
Part IV: Trade Secrets
12. The Identification and Protection of Trade Secrets (R. Mark Halligan)
13. Misappropriation of Trade Secrets (Steven E. Feldman, Sherry L. Rollo)
14. Trade Secret Remedies and the Inevitable Disclosure Doctrine (Linda K. Stevens)
15. Restrictive Covenants and Post-Employment Restraints (Michael R. Levinson, Daniel F. Lanciloti)
Part V: Intellectual Property, Technology, and the Internet
16. Jurisdiction in the Information Age (Matthew F. Prewitt, Matthew W. Callahan)
17. Licensing Online (Seth I. Appel, D. James Nahikian)
18. Business Method Patents (Timothy W. Lohse, Blake W. Jackson)
19. Software Licensing (John L. Hines, Jr.)
20. Cybercrime, Digital Evidence, and Your Intellectual Property Practice (Keith G. Chval)
Part VI: International Issues
21. Protecting Intellectual Property in the Global Marketplace (R. Mark Halligan)
Citation preview
INTELLECTUAL PROPERTY LAW (IICLE®, 2017) IICLE® is grateful to the General Editor, R. Mark Halligan, for planning and organizing this handbook, for enlisting authors, and for serving as an author. IICLE® also thanks the chapter authors, who donated their time and their knowledge to produce these materials. We are able to continue to publish current, accurate, and thorough practice handbooks because of the generous donation of time and expertise of volunteer authors like them. We would be interested in your comments on this handbook. Please address any comments to Director of Publishing, IICLE®, 3161 West White Oaks Drive, Suite 300, Springfield, IL 62704; call Amy McFadden at 800-252-8062, ext. 102; fax comments to Ms. McFadden at 217-787-9757; or e-mail comments to [email protected]. Call IICLE® Customer Representatives at 800-252-8062 for information regarding other available and upcoming publications and courses.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
i
HOW TO CITE THIS BOOK This handbook may be cited as INTELLECTUAL PROPERTY LAW (IICLE®, 2017).
Publication Date: November 28, 2016
ii
WWW.IICLE.COM
NOTICE RE: ACCESSING EDITABLE FORMS FILES FOR THIS PUBLICATION Thank you for purchasing INTELLECTURAL PROPERTY LAW (IICLE®, 2017). In response to customer demand and technological advances, we are now offering a web link to deliver editable forms files that accompany IICLE® publications in lieu of a Forms CD. PLEASE NOTE: IICLE® FORMS ARE NOT INTENDED TO TAKE THE PLACE OF PROFESSIONAL JUDGMENT AS TO THE LEGAL SUFFICIENCY AND LEGAL ACCURACY OF ANY MATERIAL CONTAINED IN THE FORM. ALWAYS PERFORM INDEPENDENT RESEARCH TO VERIFY THE APPLICABILITY OF ANY FORM TO THE SPECIFIC FACTS AND CIRCUMSTANCES OF YOUR MATTER BEFORE USING AN IICLE® FORM. To access the Rich Text Format files for this book, please follow the instructions below: 1. Type this exact URL into the address bar of your Internet browser (e.g., Google Chrome, Internet Explorer, Firefox):
http://www.iicle.com/download/forms/iplaw17.zip *Please note that the “.zip” extension must be included in the URL for the download to work. Without it, you will receive an error message. 2. Once you have entered the link, a download notification will appear in your browser (the location of which varies depending on your browser of choice) and may prompt you to decide what to do with the file. In that event, please choose the “Save” or “Save As” option, give the file a name, and save it to your directory of choice. 3. Clicking on the zip file itself will automatically open a window displaying the files in your computer directory. The file name of the form corresponds to the section in the handbook where the form is found. Simply double-click the subfolder of the chapter of, then the particular file for, the form you are looking for. Once you click on the form file name, it will automatically open in your word processing program, where you may then edit the form to your specifications. Alternatively, you can access the forms by clicking on the “Start” button on your desktop. Choose the “Documents” option, and a window will open. Select the “Downloads” folder option on the left of the window. Within the “Downloads” folder, you will see the forms files and may select the particular file you wish to open by clicking on it. If you are unable to access the forms files using these instructions, please contact IICLE® for technical support, at 800-252-8062 between 8:30 a.m. and 4:30 p.m. CST.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
iii
iv
WWW.IICLE.COM
INTELLECTUAL PROPERTY LAW 2017 General Editor: R. Mark Halligan Chapter authors: Seth I. Appel Richard C. Balough Glen P. Belvis Matthew W. Callahan Keith G. Chval Bradley L. Cohn Jafon Fearson Steven E. Feldman R. Mark Halligan John L. Hines, Jr. Blake W. Jackson Keith D. Weiss
Daniel F. Lanciloti Michael R. Levinson Timothy W. Lohse William T. McGrath Laura Beth Miller D. James Nahikian John S. Paniaguas Matthew F. Prewitt Marc V. Richards Sherry L. Rollo Linda K. Stevens
®
This 2017 edition revises and replaces the 2013 edition. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 3161 West White Oaks Drive, Suite 300 Springfield, IL 62704 www.iicle.com Owner: ___________________________________________________________________
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
v
INTELLECTUAL PROPERTY LAW
®
Copyright 2017 by IICLE . All rights reserved. Except in the course of the professional practice of the purchaser, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. ® IICLE encourages the adaptation and use of forms, checklists, and other similar documents printed in its publications in the professional practice of its customers.
®
IICLE is a not-for-profit 501(c)(3) organization dedicated to supporting the professional development of Illinois attorneys through Illinois-focused practice guidance. ®
IICLE ’s publications and programs are intended to provide current and accurate information about the subject matter covered and are designed to help attorneys maintain their professional competence. ® Publications are distributed and oral programs presented with the understanding that neither IICLE nor the ® authors render any legal, accounting, or other professional service. Attorneys using IICLE publications or orally conveyed information in dealing with a specific client’s or their own legal matters should also research original and fully current sources of authority.
Printed in the United States of America. 16IPLAW-N:11-16(854)CS PRD: 11-28-16 (1:CTP)
vi
WWW.IICLE.COM
TABLE OF CONTENTS
Table of Contents Preface ..................................................................................................................................ix About the Authors ...............................................................................................................xi
Part I: Patents 1. Patenting Inventions ..................................................................................................... 1 — 1 Marc V. Richards Keith D. Weiss 2. Litigating U.S. Patent Rights in a Changing Landscape ............................................ 2 — 1 Jafon Fearson Laura Beth Miller 3. Patent Antitrust, Misuse, Exhaustion, and Inequitable Conduct ............................. 3 — 1 Glen P. Belvis 4. The Attorney-Client Privilege and the Work-Product Immunity Doctrine ............ 4 — 1 Glen P. Belvis 5. Ownership and Management of Patent Rights .......................................................... 5 — 1 John S. Paniaguas
Part II: Trademarks 6. Creation and Maintenance of Trademark Rights ...................................................... 6 — 1 Bradley L. Cohn 7. Transfer or Loss of Trademark Rights ....................................................................... 7 — 1 Bradley L. Cohn 8. Enforcement, Remedies, and Defenses in Trademark and Unfair Competition Law ................................................................... 8 — 1 Bradley L. Cohn Part III: Copyrights 9. Copyright Subject Matter and Exclusive Rights ....................................................... 9 — 1 William T. McGrath 10. Ownership and Transfer of Copyrights .................................................................... 10 — 1 Richard C. Balough
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
vii
INTELLECTUAL PROPERTY LAW
11. Copyright Infringement, Fair Use, and Remedies ................................................... 11 — 1 William T. McGrath
Part IV: Trade Secrets 12. The Identification and Protection of Trade Secrets ................................................. 12 — 1 R. Mark Halligan 13. Misappropriation of Trade Secrets ........................................................................... 13 — 1 Steven E. Feldman Sherry L. Rollo 14. Trade Secret Remedies and the Inevitable Disclosure Doctrine ............................. 14 — 1 Linda K. Stevens 15. Restrictive Covenants and Post-Employment Restraints ....................................... 15 — 1 Michael R. Levinson Daniel F. Lanciloti
Part V: Intellectual Property, Technology, and the Internet 16. Jurisdiction in the Information Age ........................................................................... 16 — 1 Matthew F. Prewitt Matthew W. Callahan 17. Licensing Online .......................................................................................................... 17 — 1 Seth I. Appel ....................................................................... 2017 update author D. James Nahikian .......................................................................... 2013 author 18. Business Method Patents ............................................................................................ 18 — 1 Timothy W. Lohse Blake W. Jackson 19. Software Licensing ...................................................................................................... 19 — 1 John L. Hines, Jr. 20. Cybercrime, Digital Evidence, and Your Intellectual Property Practice .......................................................................... 20 — 1 Keith G. Chval
Part VI: International Issues 21. Protecting Intellectual Property in the Global Marketplace .................................. 21 — 1 R. Mark Halligan Index .............................................................................................................................. a — 1
viii
WWW.IICLE.COM
PREFACE
Preface This monumental project began in early 2004 when I met with Nora L. Crandall, a lawyer and then Director of Publishing at IICLE®. After some discussion, we both agreed that the time had come to prepare a handbook on intellectual property law for the Illinois bar. I knew that this would be a daunting task, but I was impressed by Nora Crandall and the IICLE® editorial staff, and I decided to accept the challenge. The next step was to assemble a “dream team” of authors who were not only outstanding lawyers in the intellectual property bar but also of a genre willing to make the deep sacrifices necessary for a pro bono project. In addition, this project called for excellent writers with a proven track record. I think you will agree that I assembled such a team to prepare this handbook. There is no doubt that this IICLE® handbook will stand the test of time and will prove to be an invaluable resource not only for Illinois lawyers but for lawyers all over the country. I am not aware of a comparable publication anywhere else in the country. For myself, I know that the INTELLECTUAL PROPERTY LAW handbook will be on my desk at all times. In a matter of seconds, I can now identify the panoply of critical issues that present themselves every day to practitioners in patent, copyright, trademark, and trade secret law as well as related antitrust, licensing, Internet, and “cyberspace” areas of the law. The revised 2017 edition follows the same format. We have revised the chapters to reflect current developments in intellectual property law over the past several years. I want to thank the IICLE® team that worked on this project. In addition to Nora Crandall and her vision and insight that led to the development of this handbook, I want to acknowledge and thank the IICLE® publications department staff: Director of Publishing, Amy L. McFadden, Manny Banks, Carole Chew, Matt Lund, Angela Moody, Darryl Parr, Laura Reyman, Kim Rouland, Courtney Smith, Megan Smith, Stephanie Thompson, and Joy Wolfe.
R. Mark Halligan General Editor November 2016
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
ix
INTELLECTUAL PROPERTY LAW
x
WWW.IICLE.COM
ABOUT THE AUTHORS
About the Authors General Editor R. Mark Halligan is a member of FisherBroyles, LLP, in Chicago. He is an accomplished trial lawyer who focuses his practice on intellectual property litigation including patent, copyright, trademark, and trade secret litigation in federal and state courts throughout the United States and abroad. Mr. Halligan has also developed a nationally recognized trade secrets litigation practice focused on all aspects of trade secret law. He represents individuals, middle-market companies, and large corporations, both as plaintiffs and defendants, in trade secret and noncompete disputes. He has become a “go-to” litigator on some of the most complex intellectual property matters in the United States and worldwide. Mr. Halligan has an AV Preeminent Rating from Martindale Hubbell, and peer reviews rank him as a top lawyer in Intellectual Property in Chambers USA and Best Lawyer. Legal 500 has recognized him as a leading lawyer in trade secrets litigation every year since 2008. He has also been ranked as one of the world’s Leading IP Strategists in IAM 250 and IAM 300 and recently was recognized as a leading TMT lawyer in Who’s Who Legal Telecommunications Media & Technology: Information Technology (2016). Mr. Halligan is a frequent lecturer on intellectual property issues; his speaking engagements include the American Intellectual Property Law Association (AIPLA), the Licensing Executives Society (LES), the United States Patent and Trademark Office (USPTO), and the Illinois Intellectual Property Law Association (IPLAC). He earned his J.D. from Northwestern University School of Law and B.A. from the University of Cincinnati summa cum laude. Mr. Halligan completed his 21st year as an adjunct professor in Trade Secret Law at The John Marshall Law School in Chicago in 2016.
Chapter Authors Seth I. Appel is a Partner at Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, in Chicago, where he focuses his practice on all aspects of trademark, copyright, unfair competition, and false advertising law, including IP clearance, prosecution, licensing, and enforcement. Mr. Appel has extensive experience litigating in federal courts and before the Trademark Trial and Appeal Board. He is the Cochair of the Copyright Society of the USA (CSUSA), Midwest Chapter, and serves on the Editorial Board of the CSUSA’s Journal. He is also a regular contributor to AIPPI e-News (the bimonthly newsletter of the International Association for the Protection of Intellectual Property), and he is active in the International Trademark Association (INTA) and ABA, Intellectual Property Law Section. Mr. Appel received his J.D. from Columbia Law School and his B.A. from Cornell University. Richard C. Balough is a Founding Member of Balough Law Offices, LLC, in Chicago, and concentrates his practice on intellectual property, cyberspace, and business law. Mr. Balough is Cochair of the Mobile and Connected Devices Subcommittee of the American Bar
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
xi
INTELLECTUAL PROPERTY LAW
Association’s Cyberspace Law Committee, Past Chair of the Chicago Bar Association’s Computer Law Committee, and a former member of the Board of Manager’s for the Intellectual Property Law Association of Chicago. Mr. Balough earned his LL.M. cum laude in addition to his J.D. Glen P. Belvis is a Partner at Steptoe & Johnson LLP, in Chicago, and practices in patent litigation and high tech startups. Mr. Belvis is a Master of the Richard Linn Inn of Court, an Illinois Super Lawyer, and the author of INTELLECTUAL PROPERTY IN BUSINESS TRANSACTIONS: PROTECTING THE COMPETITIVE ADVANTAGE. He graduated from DePaul University Law School, where he earned the West Publishing Company Hornbook Award, presented to the student with highest academic average in the class; he received his B.S. from the University of Notre Dame; and he was an extern for Judge Bauer, U.S. Court of Appeals for the Seventh Circuit. Matthew W. Callahan is an associate at Schiff Hardin LLP, in San Francisco, where he focuses on general litigation. Mr. Callahan earned his A.B. cum laude from Harvard University and his J.D. from New York University School of Law. Keith G. Chval is Founder of Protek International, Inc., in Willowbrook, and focuses on his practice on e-discovery, computer forensics, and investigations. Mr. Chval is an adjunct professor at The John Marshall Law School and a member of the FBI InfraGard Program. He was the first Chief of the High Tech Crimes Investigations Association, and the Association had a 100-percent conviction rate during his 7-year tenure as Chief. Mr. Chval received his B.S. from Indiana University and his J.D. from IIT-Chicago-Kent College of Law. Bradley L. Cohn is a Partner at Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, in Chicago, where he concentrates his practice in the field of trademarks, copyrights, unfair competition, right of publicity, and advertising and marketing law. Before entering private practice, Mr. Cohn served as law clerk to the Honorable Anne C. Conway, U.S. District Court for the Middle District of Florida. Mr. Cohn has served as an adjunct professor at DePaul University College of Law, teaching a seminar on trademark law and writing. He has also served as a Director of the Chicago Bar Association’s 9,000-member Young Lawyers Section and as a Past Chair of the Chicago Bar Association’s Professional Responsibility Committee and the Young Lawyers Section’s Intellectual Property Committee. He received his B.A. from Duke University and his J.D. from the University of Michigan Law School. Jafon Fearson is an associate at Brinks, Gilson & Lione, in Chicago, where he concentrates his practice on patent and copyright litigation. Mr. Fearson is a member of the Federal Circuit, Chicago, and American Bar Associations. He received his B.S. from the University of Alabama at Birmingham and his J.D. from the University of Missouri-Columbia.
xii
WWW.IICLE.COM
ABOUT THE AUTHORS
Steven E. Feldman is a Partner at Hahn Loeser & Parks LLP in Chicago, where he concentrates his practice on complex intellectual property litigation and counseling involving patents, trade secrets, trademarks and unfair competition, and copyrights. Mr. Feldman is a member of the Intellectual Property Law Association of Chicago, the Licensing Executives Society, and the Executive Counsel of the Northwestern University Institute for Sustainability and Energy. He served as Chairman of the Intellectual Property Law Association of Chicago Section on Trade Secrets and Unfair Competition from 1999 – 2003 and as Secretary from 2006 – 2008. Mr. Feldman received his undergraduate degree from Northwestern University and his J.D. with honors from the George Washington University Law School. John L. Hines, Jr. is a member of Clark Hill PLC’s Intellectual Property Practice Group, in Chicago, where he focuses on IP and technology transactions. Mr. Hines was selected as an Illinois Leading Lawyer in Computer & Technology Law and Intellectual Property Law (Illinois Leading Lawyers Network, 2016). He serves as a trustee of the Erikson Institute (a graduate school in early childhood development) and of the Chicago Institute of Psychoanalysis. Mr. Hines earned his J.D. from Northwestern University School of Law and his A.B. from Princeton University. Blake W. Jackson is a member of DLA Piper LLP (US), in East Palo Alto, California. He concentrates his practice on creating intellectual property strategies and solutions for his clients, while focusing on intellectual property as a real business asset. Mr. Jackson is involved in strategic patent prosecution, counseling, and patent litigation support. He has been involved in patent sales and negotiations, patent licensing, acquisition diligence analysis, and corporate training in patents and other IP. He is a former U.S. Naval officer and enjoys working on numerous veteran’s pro bono projects. Mr. Jackson received his B.S. from the United States Naval Academy and his J.D. from Chicago-Kent College of Law. Daniel F. Lanciloti is a Partner at Freeborn & Peters LLP, in Chicago, where he focuses on trial work and counseling in the areas of trade secrets and restrictive covenants litigation. Prior to joining Freeborn, Mr. Lanciloti was a Partner at Seyfarth Shaw, LLP, where he was a member of the firm’s Trade Secrets, Computer Fraud and Non-Compete Practice Group. Mr. Lanciloti also worked as an Assistant Attorney General in the Illinois Attorney General’s Office. He received his B.A. with honors from Knox College and his J.D. magna cum laude from Valparaiso University School of Law. Michael R. Levinson is a Partner at Seyfarth Shaw LLP, in Chicago, focusing his practice on litigation, with particular experience in commercial and intellectual property lawsuits. He has handled cases in federal and state courts and in private arbitrations, in Illinois and throughout the country, involving sporting goods, financial services and products, electronics, food products, construction, business forms, and consulting services, among many others. Mr. Levinson has represented dozens of employers and employees at temporary restraining order
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
xiii
INTELLECTUAL PROPERTY LAW
and preliminary injunction hearings and at trials in fiduciary duty, noncompete, trade secrets, and computer fraud cases. Mr. Levinson earned his undergraduate degree at ClaremontMcKenna College, his M.B.A. from the University of Chicago, and his J.D. from Harvard Law School. Timothy W. Lohse is a Partner at DLA Piper LLP (US) in East Palo Alto, California, where he concentrates his practice in patent prosecution, litigation, and counseling. Mr. Lohse is a member of the Institute of Electrical and Electronics Engineers, has been a member of the Law Practice Management Committee of the California Bar Association, and has been an instructor of “Crafting and Drafting Winning Patents” for the Patent Resources Group. Mr. Lohse also serves as a board member for the Resource Area for Teaching, which is a nonprofit organization dedicated to providing teachers in California with teaching materials and lesson plans. Mr. Lohse also participates as a judge in the Giles Rich Moot Court Competition. Mr. Lohse has a BSEE from Tufts University College of Engineering and a J.D. from Golden Gate University School of Law. William T. McGrath is a Partner at Davis McGrath LLC, in Chicago, where his areas of concentration are copyright, trademark, and Internet law, as well as publishing law, trade secret law, and software licensing. Mr. McGrath serves as an arbitrator for the AAA on intellectual property and other commercial disputes and is a mediator for the Lanham Act Mediation Program in the U.S. District Court for the Northern District of Illinois. He is an adjunct professor and Associate Director of the Center for Intellectual Property Law at The John Marshall Law School and writes a column on intellectual property law for the Chicago Daily Law Bulletin, for which he has twice won the Lisagor Award from the Chicago Headline Club. Mr. McGrath is Past President of the Intellectual Property Law Association of Chicago and has served on the Board of Trustees of the Copyright Society of the USA and the Board of the Lawyers for the Creative Arts. He received his B.A. from the University of Notre Dame and his J.D. from Washington University in St. Louis. Laura Beth Miller is a Shareholder at Brinks Gilson & Lione, in Chicago, where she serves as Chair of the firm’s International Trade group and is a member of the firm’s China Task Force. She regularly represents clients in both Section 337 investigations and federal court litigation involving a variety of patent, trademark, unfair competition, trade secret, and copyright issues. In addition, she has extensive commercial litigation experience in the areas of contract, antitrust, RICO violations, and bankruptcy. She is a frequent speaker on intellectual property issues and an adjunct professor at The John Marshall Law School. She also was guest lecturer on intellectual property issues at St. Peter’s College, Oxford University. Ms. Miller received her B.A. from the University of Virginia and her J.D. from the Marshall-Wythe School of Law at the College of William and Mary. D. James Nahikian is Managing Principal of Nahikian Global Intellectual Property & Technology Law Group, in Chicago, where he serves clients in respect to patent, trade identity, trade secrets, copyright, and digital rights matters. Mr. Nahikian received his undergraduate degree from the University of Michigan at Ann Arbor, M.S. from DePaul University, and J.D. with concurrent LL.M. coursework in intellectual property law from The John Marshall Law School, where he was editor of the Journal of Computer and Information
xiv
WWW.IICLE.COM
ABOUT THE AUTHORS
Law and received the first prize award for copyright paper in the ASCAP-sponsored Nathan Burkan Competition. John S. Paniaguas is a Partner at Clark Hill PLC, in Chicago, and focuses his practice on patent law. Mr. Paniaguas is Chair of the International Patent Law Committee of the Intellectual Property Law Association of Chicago; is Chair Emeritus: Center for Intellectual Property Law and Information Technology at DePaul University College of Law; and is on the Board of Governors for the Lake County (IN) Bar Association. He is also an adjunct professor of law at DePaul University College of Law (Advanced Patent Law) and at The John Marshall Law School (Intellectual Property Licensing). Mr. Paniaguas earned his B.S.E. from Purdue University-Calumet and his J.D. from DePaul University College of Law. Matthew F. Prewitt is a Partner at Schiff Hardin LLP, in Chicago, and concentrates his practice on trade secrets, data security and privacy, and employee mobility. Mr. Prewitt is a Certified Information Privacy Professional (CIPP-US) and a member of the Sedona Conference Working Groups 1 and 11; Drafting Team Commentary on Bring Your Own Device (BYOD) Security, Privacy, and Discovery; and Drafting Team for U.S. Data Privacy Law Primer. He is an adjunct professor at Chicago-Kent College of Law. Mr. Prewitt received his B.A. from Delta State University and his J.D. with honors from the University of Chicago School of Law. Marc V. Richards is a Shareholder at Brinks Gilson & Lione, in Chicago and concentrates on intellectual property law and patents. Mr. Richards is Vice-Chair of the International Association for the Protection of Intellectual Property — U.S. Division, a board member of the Patent Trial and Appeal Board Bar Association, and former Treasurer and board member of the Intellectual Property Law Association of Chicago. He received his J.D. from Loyola University of Chicago, M.B.A. from the University of Chicago, and B.S. from Washington University in St. Louis. Sherry L. Rollo is a Partner at Hahn Loeser & Parks LLP, in Chicago, where she concentrates her practice on patents, trade secrets, trademarks and unfair competition, copyrights, and associated licensing issues, both domestically and internationally. Ms. Rollo is a member of the International Association for the Protection of Intellectual Property (AIPPI), is on the Board of Managers and Chair of the Trade Secrets and Unfair Competition Committee of the Intellectual Property Law Association of Chicago (IPLAC), is the YMC Chair Elect and Vice-Chair Communications for the Licensing Executives Society International, is a Pro Bono Committee Member of the International Trademark Association, and is a Member of Women in BIO. Ms. Rollo received her undergraduate degree from the University of Texas at Austin and her J.D. from The John Marshall Law School with a certificate from the Center for Intellectual Property Law. Linda K. Stevens is a Partner at Schiff Hardin LLP, in Chicago, and is a Cochair of the firm’s Trade Secrets and Restrictive Covenants Client Service Team. Ms. Stevens has served as an adjunct faculty member at Northwestern University School of Law and for the National Institute for Trial Advocacy, as well as Chair of the Trade Secrets Subcommittee of the ABA Litigation Section’s Intellectual Property Committee. She received her B.A. cum laude from Kalamazoo College and her J.D. cum laude from the University of Michigan Law School.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
xv
INTELLECTUAL PROPERTY LAW
Keith D. Weiss is an associate at Brinks Gilson & Lione, in Ann Arbor, Michigan, where his focus is intellectual property law and patents. Mr. Weiss has over 20 years of corporate research and development experience and is listed as an inventor on more than 30 patents. He received his B.S. magna cum laude from Clemson University, where he was the recipient of the Mark Bernard Hardin Award; his Ph.D. from the University of Florida; and his J.D. cum laude from Thomas Cooley Law School, where he was the recipient of an Honors Scholarship.
xvi
WWW.IICLE.COM
BOARD OF DIRECTORS
IICLE® Board of Directors Chair Thomas A. Lilien, Office of the State Appellate Defender, Elgin* Vice Chair Robert Z. Slaughter, Avison Young, Chicago* Secretary Ben Neiburger, Generation Law, Ltd., Elmhurst* Treasurer Paul E. Bateman, Littler Mendelson P.C., Chicago* Immediate Past Chair William J. Anaya, Greensfelder, Hemker & Gale, P.C., Chicago* Mark Brittingham, SIU School of Law, Carbondale Bradley L. Cohn, Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, Chicago Jane N. Denes, Posegate & Denes, P.C., Springfield* LaVon M. Johns, Goldstein & McClintock LLLP, Chicago Michele M. Jochner, Schiller DuCanto & Fleck LLP, Chicago James M. Lestikow, Hinshaw & Culbertson LLP, Springfield Hal R. Morris, Arnstein & Lehr, LLP, Chicago Katherine Opel, Weinheimer Law Firm, PC, Edwardsville Stacy E. Singer, Northern Trust, Chicago Hon. Ronald D. Spears, Taylorville Kathy H. Xiahou, Attorneys’ Title Guaranty Fund, Inc., Chicago *Executive Committee Members
IICLE® Board of Directors Past Chairs H. Ogden Brainard (1962 – 1969) John S. Pennell (1969 – 1971) William K. Stevens (1971 – 1972) J. Gordon Henry (1972 – 1973) Roger J. Fruin (1973 – 1974) Joseph J. Strasburger (1974 – 1975) William J. Voelker (1975 – 1976) Harold W. Sullivan (1976 – 1977) John J. Vassen (1977 – 1978) James M. (Mack) Trapp (1978 – 1979) Theodore A. Pasquesi (1979 – 1980) George W. Overton (1980 – 1981) Peter H. Lousberg (1981 – 1982) Kenneth C. Prince (1982 – 1983) Edward J. Kionka (1983 – 1984) Joseph L. Stone (1984 – 1985) Thomas S. Johnson (1985 – 1986) Richard William Austin (1986 – 1987) J. William Elwin, Jr. (1987 – 1988) Donald E. Weihl (1988 – 1989) Tomas M. Russell (1989 – 1990) John K. Notz, Jr. (1990 – 1991) Michael J. Rooney (1991 – 1992)
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
Willis R. Tribler (1992 – 1993) Thomas Y. Mandler (1993 – 1994) Ralph T. Turner (1994 – 1995) Robert E. Bouma (1995 – 1996) Patrick B. Mathis (1996 – 1997) Michael H. Postilion (1997 – 1998) Robert V. Dewey, Jr. (1998 – 1999) Roma Jones Stewart (1999 – 2000) Hon. John A. Gorman (2000 – 2001) Michael L. Weissman (2001 – 2002) George W. Howard III (2002 – 2003) Robert E. Hamilton (2003 – 2004) Patricia A. Hoke (2004 – 2005) Thomas M. Hamilton, Jr. (2005 – 2006) Hon. Dale A. Cini (2006 – 2007) Susan T. Bart (2007 – 2008) Adrianne C. Mazura (2008 – 2009) George F. Mahoney, III (2009 – 2010) Robert G. Markoff (2010 – 2011) Hon. Leonard Murray (2011 – 2012) Donald P. Seberger (2012 – 2013) Lorraine K. Cavataio (2013 – 2014) William J. Anaya (2014 – 2015)
xvii
STAFF OF THE INSTITUTE
INTELLECTUAL PROPERTY LAW
IICLE® Staff Michael J. Rooney, Executive Director Amy L. McFadden, Director of Publications Megan K. Moore, Director of Programs
Publications
Programs
Manny Banks, Publications Administrative Assistant Carole Chew, Executive Managing Editor Matthew Lund, Editor Angela Moody, Managing Editor Darryl Parr, Editor-in-Chief Laura Reyman, Managing Editor Kim Rouland, Publications Compositor Courtney Smith, Managing Editor Megan Smith, Publications Marketing Associate Stephanie Thompson, Subscriber Services Associate Joy Wolfe, Managing Editor
Suzanne Dennis, Planner Konner Dudley, Programs Marketing Associate Stephanie Laffey, Online Education Coordinator Richard Martineau, Programs Associate Christopher Noel, Volunteer Coordinator Angela Wanger, Program Administration Coordinator
Curt Conrad, Manager of Sponsorship Growth and Development
Administrative Services Dawn Bruce, Accounts Payable Diana Celano, Customer Service Representative Jennifer Cook, Assistant to Executive Director Chris Hull, Information Technology Manager Jeff Kurmann, Human Resources & Accounting
Readers may contact staff members via e-mail at [email protected] or [first initial][last name]@iicle.com (e.g., [email protected])
xviii
WWW.IICLE.COM
INTELLECTUAL PROPERTY LAW 2017 Edition List of Forms Chapter 1: Patenting Inventions 1.79
Invention Disclosure Form
Chapter 2: Litigating U.S. Patent Rights in a Changing Landscape 2.67 2.68 2.69 2.70 2.71 2.72 2.73 2.74 2.75 2.76 2.77
Checklist of Business Considerations in Bringing a Patent Infringement Suit Checklist of Facts To Investigate in Assessing Damages Checklist of Lost Profit Considerations Checklist of Reasonable Royalty Considerations Checklist of Complaint Elements Checklist of Categories of Typical Discovery Sought by Patentee Checklist of Categories of Typical Discovery Sought by Alleged Infringer Sample Complaint for Patent Infringement Affirmative Defenses to Complaint for Patent Infringement Patentee Interrogatories Accused Infringer Interrogatories
Chapter 5: Ownership and Management of Patent Rights 5.15 5.16 5.17 5.18A 5.18B 5.19 5.30 5.32 5.33 5.34 5.35
Sample Language — License Grant Sample Language — Field-of-Use Restriction for a Lighting Technology Sample Language — Definition of Licensed Territory Sample Language — Lump-Sum Royalty Provision Sample Language — Running Royalty Provision Sample Language — Term Provision of Package Patent License Seller’s Warranties Concerning Purchased Rights Employee Agreement Regarding Confidentiality and Intellectual Property Assignment of Patent Rights Nonexclusive Patent License Agreement Exclusive Patent License Agreement
Chapter 7: Transfer or Loss of Trademark Rights 7.5
Assignment of Trademark
Chapter 8: Enforcement, Remedies, and Defenses in Trademark and Unfair Competition Law 8.85
Cease-and-Desist Letter
8.86 8.87
Complaint for Trademark Infringement, False Designation of Origin, Unfair Competition, and Deceptive Trade Practices Notice of Opposition
Chapter 10: Ownership and Transfer of Copyrights 10.8 10.15
Copyright License Accounting Provision License Agreement Between Photographer and Studio
Chapter 17: Licensing Online 17.19A 17.19B 17.19C 17.19D 17.21 17.33
Disclaimer of Warranties Warranty Narrowly Defined Warranty of Ownership Limitation of Liability Provision Arbitration Provision Hybrid Browsewrap and Clickwrap Agreement for a Streaming Multimedia Service Provider
Chapter 18: Business Method Patents 18.40
Checklist for Business Method Inventions in the United States
Chapter 20: Cybercrime, Digital Evidence, and Your Intellectual Property Practice 20.40
Checklist for an Effective Intellectual Property Plan
Part I: Patents
1
Patenting Inventions
MARC V. RICHARDS Brinks Gilson & Lione Chicago
KEITH D. WEISS Brinks Gilson & Lione Ann Arbor, MI
®
©COPYRIGHT 2017 BY IICLE .
1—1
INTELLECTUAL PROPERTY LAW
I. [1.1] Introduction II. Patent Basics A. [1.2] What Is a Patent? 1. [1.3] Patents Provide the Right To Exclude 2. [1.4] Historical and Constitutional Underpinnings 3. [1.5] Evolution of Patent Laws 4. [1.6] Functions of United States Patent and Trademark Office B. [1.7] Comparison with Copyrights, Trademarks, and Trade Secrets 1. [1.8] Copyrights 2. [1.9] Trademarks 3. [1.10] Trade Secrets III. [1.11] Types of Patents and Patentable Inventions A. [1.12] Utility Patents 1. [1.13] Processes 2. [1.14] Machines or Apparatus 3. [1.15] Manufactured Articles 4. [1.16] Compositions of Matter 5. [1.17] Computer Software and Computer-Related Inventions 6. [1.18] Business Methods 7. [1.19] Nonpatentable Subject Matter B. [1.20] Design Patents C. [1.21] Plant Patents IV. [1.22] Requirements for a Patent A. [1.23] Utility B. [1.24] Novelty 1. [1.25] Was the Inventor the First To Create the Invention? 2. [1.26] Was This Invention or an Identical Invention Publicly Disclosed? 3. [1.27] Changes to the Novelty Requirement Under the Leahy-Smith America Invents Act C. [1.28] Nonobviousness V. Inventorship and Ownership A. [1.29] Who Is an Inventor? B. [1.30] Who Owns an Invention?
1—2
WWW.IICLE.COM
PATENTING INVENTIONS
VI. Deciding To Seek Patent Protection A. B. C. D.
[1.31] [1.32] [1.33] [1.34]
Advantages Disadvantages Economic Value Use of Patent Attorneys and Patent Agents
VII. [1.35] Timing Considerations A. United States Patents 1. [1.36] Prior Inventions 2. [1.37] One-Year Grace Period B. [1.38] Foreign Patents 1. [1.39] Absolute Novelty 2. [1.40] Exceptions C. [1.41] Confidentiality Agreements VIII. [1.42] Keeping Records of Inventions A. [1.43] Notebooks B. [1.44] Former Document Disclosure Program and Provisional Patent Applications C. [1.45] Sealed, Mailed Documents IX. [1.46] Patentability Search X. [1.47] Patenting Process A. [1.48] Provisional Patent Applications B. Preparing and Filing the Patent Application 1. [1.49] Contents of the Application 2. [1.50] Oath or Declaration and Related Papers 3. [1.51] Duty To Disclose Known Prior Art C. [1.52] Publication of the Application D. [1.53] Restriction Requirements E. [1.54] Office Actions F. [1.55] Responses G. [1.56] Interviews H. [1.57] Appeals I. [1.58] After Final Consideration Pilot 2.0 and Post-Prosecution Pilot Program J. [1.59] Allowance and Issue of Patent
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1—3
INTELLECTUAL PROPERTY LAW
K. [1.60] Interferences and Derivation Proceedings L. Correction, Reissue, Reexaminations, and Post-Grant Reviews 1. [1.61] Certificates of Correction 2. [1.62] Reissue 3. [1.63] Ex Parte and Supplemental Reexaminations 4. [1.64] Post-Grant and Inter Parte Reviews M. Patent Expiration and Maintenance Fees 1. [1.65] Patent Term 2. [1.66] Patent Term Adjustment 3. [1.67] Patent Term Extension 4. [1.68] Terminal Disclaimers 5. [1.69] Maintenance Fees XI. Issued Patents A. [1.70] Anatomy of a Patent: Sample Utility Patent B. [1.71] Sample Design Patent C. [1.72] Marking Patent Numbers on Products XII. Foreign Patents A. B. C. D.
[1.73] [1.74] [1.75] [1.76]
Foreign Filing Licenses Patent Cooperation Treaty International Patent Applications Foreign Priority Rights Foreign National and Regional Patent Offices
XIII. [1.77] Invention Promotion Companies XIV. [1.78] Glossary XV.
1—4
[1.79] Appendix — Invention Disclosure Form
WWW.IICLE.COM
PATENTING INVENTIONS
§1.3
I. [1.1] INTRODUCTION This chapter discusses some basic information about patents. It discusses what a patent is and how it compares with other forms of intellectual property. The chapter describes the types of inventions that may be protected with a patent, the requirements for obtaining a patent, and the patenting process with the United States Patent and Trademark Office (USPTO). The chapter also provides practical considerations, such as the importance of timely filing a patent application, and guidelines for deciding whether pursuing patent protection serves the needs of the business or the inventor. Other practical issues surrounding obtaining a patent are also addressed. A glossary of patent terms is included in §1.78 below.
II. PATENT BASICS A. [1.2] What Is a Patent? In simple terms, a patent is an official document or certificate issued by a federal governmental agency that describes a new invention. The document is typically between 5 and 20 pages (but may be longer) and includes a written description of an invention and often a few drawings of the invention. The patent concludes with numbered paragraphs that are long run-on sentences, written in legalese or “patent-ese,” which contain the patent claims that define the scope of the invention that is protected by the patent. Some patents are hundreds of pages long. The original issued patent from the United States Patent and Trademark Office includes the agency’s official gold seal on the front and is often referred to as the “letters patent.” A patent signifies that the exclusive rights to the invention have been given to the owner of the patent. Those rights are given by the government in exchange for providing the public with a detailed written description of the invention and allowing the invention to fall into the public domain after the patent expires. A patent has the attributes of personal property. 35 U.S.C. §261. A patent may be compared with a land patent or land grant, which confers the exclusive rights to a plot of land transferred from the government to an individual. As with a land owner, a patent owner may prevent others from trespassing on his or her property. As with land, a patent may be sold. For transactions between individuals, the conveyance for land is a deed, and the conveyance for a patent is an assignment, which uses very similar legal language to transfer ownership rights. 1. [1.3] Patents Provide the Right To Exclude In the United States, the owner of a patent may be entitled for a limited time to exclude any person or entity from making, using, selling, or offering to sell the patented invention defined in the patent. 35 U.S.C. §271. These rights are awarded as a quid pro quo with the inventor for publicly disclosing the secrets of his or her invention. This sharing of the invention with the public is said to advance the world’s knowledge of science. As these rights are awarded exclusively by the U.S. government, patent rights may be asserted in all U.S. territories. With few exceptions, the rights are limited to protect the invention only against infringing activity occurring in the United States. A patent acts as a so-called ticket for admission to a U.S. federal court, where the patent owner may seek to have those rights enforced against others who
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1—5
§1.4
INTELLECTUAL PROPERTY LAW
“trespass” on the patent. This right to exclude may be enforced by obtaining a court injunction against an infringer. A patent owner must prove that traditional equitable considerations warrant a permanent injunction; alternatively, a court may award a royalty to the patent owner in exchange for allowing the infringing activity to continue. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006). A common misconception is that the exclusive rights in a patent give the inventor or patent owner a guaranteed monopoly to use the invention. First, it is improper to refer to a patent as conferring a “patent monopoly” or describing a patent as “an exception to the general rule against monopolies.” Carl Schenck, A.G. v. Nortron Corp., 713 F.2d 782, 786 n.3 (Fed.Cir. 1983). Second, it is possible that a person may be awarded a patent on his or her invention, only to find out that a prior inventor holds a so-called “dominating” or “blocking” patent on a broad category of inventions that includes that person’s invention. Thus, a patent owner may find that he or she may not be able to use his or her own invention without violating another person’s patent. For example, assume that Inventor A obtains a patent on a pencil, and Inventor B obtains a patent on the improvement of a pencil with an attached eraser. Inventor A can prevent the sale of any type of pencil, including those with attached erasers described in Inventor B’s patent. Thus, the potential of a patent allowing the exclusive right to use an invention is limited by any other patents covering aspects of the invention. 2. [1.4] Historical and Constitutional Underpinnings Patents are not a new form of legal rights. Patents were reportedly granted at least as far back as 1449 in England when King Henry IV reportedly granted a monopoly for stained glass manufacturing. These royal edicts evolved in 1624 into the English Statute of Monopolies, 21 Jac. 1, ch. 3, which took away royally sanctioned monopolies for inventions or even whole industries and replaced them with legislatively awarded monopolies for new products. The founding fathers of the United States evidently appreciated the encouragement that patents provided to innovators and thus embedded such rights in the Constitution. Article I, §8, gives Congress the authority to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” At first, under this authority, Congress directly granted patents to inventors. The U.S. patent statutes were first written in 1790. As Secretary of State, Thomas Jefferson oversaw the award of patents by a patent board. In 1836, a patent office was established to undertake the examination and award of patents. The United States Patent and Trademark Office is one of the oldest agencies in the U.S. government. One of the most famous Illinoisans to obtain a patent was President Abraham Lincoln. Indeed, he is reported to be the only U.S. President ever to have received a patent. In 1849, Lincoln received U.S. Patent No. 6,469 for “A Device for Buoying Vessels over Shoals.” President Lincoln is often quoted as saying, “The patent system added the fuel of interest to the fire of genius.” 3. [1.5] Evolution of Patent Laws The U.S. patent statutes have evolved from numerous judicial rulings and the old form of the laws, which were rewritten in 1952 and codified in Title 35 of the United States Code, 35 U.S.C.
1—6
WWW.IICLE.COM
PATENTING INVENTIONS
§1.7
§1, et seq. Although there have been numerous amendments since then, the basic patterns of the laws trace their roots back to numerous U.S. Supreme Court decisions in the 1800s. Since the late 20th century, significant amendments have extended patent rights to prohibit the import into the United States of products made overseas by manufacturing processes patented in the United States (35 U.S.C. §271(g) (1988)), change the duration of patents from 17 years from the issue date to 20 years from the filing date (35 U.S.C. §154(a) (1995)), and provide for the publication of pending patent applications (35 U.S.C. §122(b) (1999)). In 1982, Congress created the Court of Appeals for the Federal Circuit to hear appeals of patent lawsuits from all of the federal district courts and appeals from decisions by the United States Patent and Trademark Office. In 2011, Congress passed the Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat. 284 (2011), which is the most significant change in the patent laws since the 1952 patent act. The AIA has changed the U.S. patent laws to be closer in some respects to the patent laws in foreign countries. In particular, the U.S. patent laws apply a standard in harmony with many foreign countries as to what is considered part of the state of the art to which an invention is compared when determining if a patent should be awarded. Instead of measuring the state of the art one year before a patent application is filed, it is now measured as of the date the patent application is filed. Also, in the case of multiple inventors filing for a patent for the same invention, rather than awarding the patent to the first person to invent, the patent is awarded to the first person who filed an application for a patent. In addition, the USPTO has procedures that allow parties to challenge the award of a patent. These changes apply to patent applications filed after March 16, 2013, but patents granted on patent applications filed before the implementation of the AIA will be grandfathered under the old standards. Therefore, for a period of time, a confusing set of double standards will be in effect — one standard for old patents and another standard for newer patents. These different standards are explained in more detail throughout this chapter. 4. [1.6] Functions of United States Patent and Trademark Office Established as an agency within the United States Department of Commerce, the United States Patent and Trademark Office has the full and exclusive authority to grant patents and register federal trademarks. 35 U.S.C. §§1, 2. Individual states have the right to register state trademarks but not patents. A separate government agency, the United States Copyright Office, registers copyrights. In addition to granting patents, the USPTO records title or ownership in patents, much as deeds to real estate are recorded. Also, the USPTO maintains depository libraries around the country where copies of patents are made available to the public. This same information is available at the USPTO website, www.uspto.gov. The bulk of the activity of the USPTO is the examination process to determine whether the requirements for patentability are satisfied by a patent application. B. [1.7] Comparison with Copyrights, Trademarks, and Trade Secrets Quite often, the general public is confused as to what form of intellectual property is needed to protect new products and ideas. In general, utility patents are useful for protecting the utilitarian or functional aspects of a product or process. These patents protect how a product is made, how it works, the shape of the product as it relates to a useful function, the interrelationship of its parts, etc. Copyrights (see §1.8 below), trademarks (see §1.9 below), trade secrets (see §1.10 below), and design patents (see §1.20 below) can protect other aspects of products and creative endeavors.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1—7
§1.8
INTELLECTUAL PROPERTY LAW
PRACTICE POINTER
It is important to understand the differences and similarities among the different forms of intellectual property protection. The different areas of intellectual property are not mutually exclusive in terms of the types of creations they protect. Often, creations are best protected by using combinations of different forms of intellectual property to protect the different aspects of the intellectual creations. The reader is thus encouraged to become familiar with at least the basics outlined by the different chapters in this handbook and to consult with intellectual property specialists.
1. [1.8] Copyrights A copyright protects the expressive, aesthetic aspects of an article, work of art, writing, or performance, among other things. An expressive aspect, for example, is not the basic plot outline of a play but the detailed intricacies of the plot, which are protectable with a copyright. For architectural drawings of a house, copyrights prevent not only copying of the blueprints but also building a house according to the blueprints without permission. Copyrights can protect the written codes of a software program as they would a book. Nonetheless, protecting the functions performed by the software is done with a patent. There may be some overlap between things protected by copyrights and things protected by patents, but each form of intellectual property protects different aspects. For more details on copyrights, see Chapters 9 – 11 of this handbook. 2. [1.9] Trademarks Trademarks have no overlap with utility patents. Trademarks protect names associated with goods and services and are designed to protect the public from confusingly similar marks so that the marks may become surrogates for a source identifier of the product. Unlike utility patents, trademarks do not protect any functional attribute of a product. Thus, a clever, catchy name for a new product may be protected with a trademark, while the functional product design is protected with a utility patent. Nonetheless, there is some overlap between patents and trademarks when it comes to ornamental aesthetic product designs. There is one form of patent called a “design patent,” as discussed in §1.20 below, that protects the purely ornamental features of a product. Trademark law allows the protection of such features of a product when those features are distinctive and have become associated in the public’s mind with a source of the product. For example, the shape of an old-fashioned Coca-Cola bottle has received a trademark registration. In 2008, Apple received a trademark registration for the shape of an iPod. Trademark laws protect the product shapes for as long as they are in commercial use, whereas a design patent protects a product design only for 15 years even when the patent owner is no longer using the design. For more details on trademarks, see Chapters 6 – 8 of this handbook. 3. [1.10] Trade Secrets Trade secrets may be considered the antithesis of patents. Trade secrets protect only that subject matter that a company has attempted to maintain in secrecy, such as secret formulas or
1—8
WWW.IICLE.COM
PATENTING INVENTIONS
§1.12
customer lists, whereas patents are awarded only in exchange for publicly disclosing all the relevant details of the invention. Moreover, trade secrets are protected only against illegal misappropriation, whereas patents may protect against others unknowingly and independently creating the same invention. Finally, trade secrets act to protect those secrets as long as they remain secret, while patents are for a limited duration. For more details on trade secrets, see Chapters 12 – 14 of this handbook.
III. [1.11] TYPES OF PATENTS AND PATENTABLE INVENTIONS There are three basic types of patents: utility patents; design patents; and plant patents. Utility patents are awarded for the inventing of new functional things and processes and last for up to 20 years. Design patents are awarded for inventing new ornamental designs for manufactured products and last for up to 15 years. Plant patents are awarded for inventing new plant varieties through asexual reproduction and last up to 20 years. Utility patents are, by any measure, the most prevalent and common type of patent obtained to protect inventions. From 2003 –2015, the number of utility patents granted and applied for has nearly doubled, while design patents have increased moderately and plant patents have remained the same. In 2003, the United States Patent and Trademark Office reported that it issued 169,026 utility patents, 16,574 design patents, and only 994 plant patents. In 2015, the USPTO reported that it issued 298,407 utility patents, 25,986 design patents, and 1,074 plant patents. Over that 12year span, the number of new utility patent applications filed annually increased from 342,441 to 589,410. U.S. Patent Statistics Report, www.uspto.gov/web/offices/ac/ido/oeip/taf/reports.htm. As the demand for utility patents is greatest, this chapter focuses primarily on utility patents, discussed in §§1.12 – 1.19 below. Design patents and plant patents are briefly discussed in §§1.20 and 1.21 below, respectively. Regardless of the type, patents are awarded only for inventions that are found useful, novel, and nonobvious. These requirements are explained in more detail in §§1.22 – 1.28 below. A. [1.12] Utility Patents According to the patent laws, “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. §101. A utility patent protects the utilitarian or functional aspects of an invention, as opposed to its ornamental features or broad concept. This functionality may be in the order, structure, sequence, or combination of parts or steps that make up the invention. The invention may be defined by the patent, for example, in terms of the function or the structural configuration of parts that are able to carry out that function or as a new composition that inherently has such a function. Sections 1.13 – 1.18 below list the types of subject matter that may be protected by a utility patent, while §1.19 below lists the types of subject matter that cannot be patented. A sample utility patent is shown at §1.70 below.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1—9
§1.13
INTELLECTUAL PROPERTY LAW
PRACTICE POINTER
Other than deciding whether to file a utility, design, or plant patent, the inventor does not need to decide into what subject-matter category his or her invention falls. Often, it is useful to fully consider the broadest uses to which an invention may be put and protect it in several forms, such as a product, the process by which it is made, and the process by which it is used. For product inventions, it is possible to file both a utility patent on the functional aspects of the invention and a design patent on the ornamental aspects of the invention.
1. [1.13] Processes Patents may be obtained for almost any invention relating to a process for doing something, although some processes may not be patentable. See §1.19 below. Traditionally, process patents have been awarded for manufacturing processes, but patents are now awarded for processes relating to data processing, games, methods for doing physical therapy, medical procedures, teaching, and conducting business. New uses for known devices and materials may also be patented in the form of a process patent covering the new or improved process in which the known device or material is used. In the United States, patents may be obtained on medical procedures on humans. However, medical professionals and related healthcare facilities are exempt from infringement liability to the extent that the procedure does not involve the use of patented devices or compositions. 35 U.S.C. §287(c). Inventions relating to new business methods merit special consideration, as discussed briefly in §1.18 below and in more detail in Chapter 18 of this handbook. 2. [1.14] Machines or Apparatus Most people think machines and equipment make up most of the patented inventions. The machines or apparatus category usually includes devices that have mechanical parts that move or interact. For a period in the 1800s, the United States Patent and Trademark Office required inventors to bring working models of machines to the patent office. Now working models are not required. 3. [1.15] Manufactured Articles The manufactured articles category of invention might be considered to be products without moving or interacting parts, such as a bottle, an ashtray, or a comb. 4. [1.16] Compositions of Matter The compositions of matter category of invention includes chemical compounds, mixtures, formulas, plastics, metal alloys, and DNA. This category also includes living organisms that are human creations, such as genetically engineered bacteria that eat oil, mice that are useful in conducting scientific studies, and plants that have had genes inserted to produce pesticides. Because of the confusion in how to deal with biotechnological materials, the biotech industry
1 — 10
WWW.IICLE.COM
PATENTING INVENTIONS
§1.18
successfully lobbied Congress to amend the patent laws to ensure fair treatment in the patenting of biotech inventions. See pre-2011 35 U.S.C. §103(b). Because these provisions were rarely used, this section was removed from the revised statue under the Leahy-Smith America Invents Act. 5. [1.17] Computer Software and Computer-Related Inventions The computer software and computer-related category of invention includes computer programs. A computer program itself is an abstract sequence of code but can be considered to be bits of codes stored on memory devices. As such, patents covering computer programs may be written in a form covering computer-readable memory storing code capable of carrying out certain methods (e.g., CDs), computer systems configured to perform certain processes embodied in the software, or merely the method of transforming and/or processing the data as performed by the software. Computer programs were traditionally thought to be protected only by copyrights. However, numerous court cases since the early 1970s have opened the boundaries for patenting software. A high-profile case included Amazon.com, Inc.’s “one-click” patent. Amazon.com, Inc. v. Barnesandnoble.com, Inc., 239 F.3d 1343 (Fed.Cir. 2001). 6. [1.18] Business Methods There is no established definition of a so-called “business method patent.” This category of invention had historically been considered to include business and accounting procedures thought by many, including the United States Patent and Trademark Office, to be nonpatentable. However, the Federal Circuit, relying on old U.S. Supreme Court caselaw, held that any method is patentable subject matter if it produces a “useful, concrete and tangible result.” State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1373 (Fed.Cir. 1998), quoting In re Alappat, 33 F.3d 1526, 1544 (Fed.Cir. 1994). In 2010, this ruling was overruled by the Federal Circuit itself and thereafter confirmed in the Supreme Court decision in Bilski v. Kappos, 561 U.S. 593, 177 L.Ed.2d 792, 130 S.Ct. 3218 (2010). The Supreme Court confirmed that there is no exception that categorically disqualifies business methods from being patentable. However, the Supreme Court stated that, to be patentable, business methods must not be merely abstract ideas. Following Bilski, the Supreme Court addressed this issue again in Alice Corporation Pty. Ltd. v. CLS Bank International, ___ U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014). See §1.19 below for a discussion on Alice Corporation. Often, software patents, Internet patents, and e-commerce patents are considered business method patents when the core concept of the invention is the automation of steps useful in carrying out the function of a business as opposed to a manufacturing process. Business methods have been singled out for special treatment. Legislation was proposed in 2001 to treat the patenting of such inventions differently from other patentable subject matter. See the Business Method Patent Improvement Act of 2001, H.R. 1332, 107th Cong., 1st Sess. This legislation was not passed. In 1999, a law was enacted that allows for the secret prior use of a business method as a defense against an assertion of patent infringement. See 35 U.S.C. §273. Such secret prior use is not a defense to patent infringement as it pertains to patents on manufacturing processes or other subject matter. Under the 2011 Leahy-Smith America Invents Act, a transitional procedure for challenging so-called business method patents is included, but a specific definition of “business method” is not provided. For a detailed discussion of business method patents, see Chapter 18 of this handbook.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 11
§1.19
INTELLECTUAL PROPERTY LAW
As a practical matter, the USPTO is still backlogged from a high number of patent filings for business methods that started during the dot-com boom and continued with the transformation of the country away from manufacturing and into a service-based economy in which corporate value is derived from innovative service offerings. In some departments of the USPTO, the backlog is such that it may be three or more years until the patent application is first picked up and examined. Compare that with other departments handling areas of conventional manufacturing technology, such as cigarette manufacturing, in which the applications are usually examined about one year after being filed. The AIA included a special carveout for business method patents related to tax strategies. In §14 of the AIA, it is stated that when determining the novelty and nonobviousness of an invention, any tax strategies that are part of the invention cannot be relied on to differentiate the invention from the prior art. See 35 U.S.C. §102 note. This is about the same as declaring that tax strategies are not patent-eligible subject matter. 7. [1.19] Nonpatentable Subject Matter The United States Patent and Trademark Office will refuse to award a patent for general categories of things such as a. laws of nature; b. physical phenomena; c. abstract ideas, mental processes, or mathematical formulas; d. printed matter; e. naturally occurring substances (but these may be patented in a nonnatural purified and isolated form); f.
inventions that violate the laws of physics (e.g., perpetual motion); and
g. inventions that have only an illegal or immoral purpose (e.g., torture devices). The determination of what is considered patentable or nonpatentable subject matter has received considerable debate in the courts. In 2012 – 2014, the Supreme Court decided three cases that reiterated that the three main exceptions to patent-eligible subject matter are (a) laws of nature, (b) physical phenomena, and (c) abstract ideas. In Mayo Collaborative Services v. Prometheus Laboratories, Inc., ___ U.S. ___, 182 L.Ed.2d 321, 132 S.Ct. 1289 (2012), the Court held that an invention for a method of treatment was not patent-eligible subject matter when it relied on a law of nature to determine a relationship between concentrations of metabolites in a person’s blood and the need to administer more or less of a drug, that is, the combination of a diagnostic method to determine the need for a drug. The Mayo Court ruled that the steps of administering the drug were routine and conventional and did not transform the unpatentable natural correlations into patent-eligible subject matter. In other words, something other than routine or conventional steps or things needs to be combined with a law of nature to make it eligible to be patented. The following year, the Supreme Court ruled in Association of Molecular
1 — 12
WWW.IICLE.COM
PATENTING INVENTIONS
§1.20
Pathology v. Myriad Genetics, Inc., ___ U.S. ___, 186 L.Ed.2d 124, 133 S.Ct. 2107 (2013), that an invention directed to isolated DNA in a form not naturally found in nature was not patent eligible because it essentially had the same structure as naturally occurring DNA; that is, the patent essentially claimed material that fell into the natural phenomena exception to patent-eligible subject matter. In contrast, in Myriad, the Court found that synthetically manufactured cDNA was patent eligible because its structure was not the same as found in nature; i.e., it was not a natural phenomenon. Following these two decisions, the USPTO released guidelines extrapolating from these two decisions and explaining how its examiners should analyze patent claims reciting or involving laws of nature, natural principles, natural phenomena, and/or natural products. As a result, it has been far more difficult to obtain patents on life science inventions involving diagnostic methods and genetic materials. Following Myriad, the Supreme Court issued a decision in Alice Corporation Pty. Ltd. v. CLS Bank International, ___ U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014), restricting what is considered patent-eligible subject matter involving software or computer-related inventions. In Alice Corporation, the Court ruled that an invention directed to the abstract idea exception of patent-eligible subject matter must include something more than conventional or routine methods, steps, or computer elements to transform the abstract idea into patent-eligible subject matter. Following this decision, the USPTO released guidelines explaining how examiners should analyze computer-related patent claims involving abstract ideas. As a result, it has been far more difficult to obtain patents on computer-related inventions, especially those inventions involving financial services or business operations. B. [1.20] Design Patents According to the patent laws, “[w]hoever invents any new, original and ornamental design for an article of manufacture may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. §171. A design patent covers the “ornamental features as shown” in the drawings of the patent, without specifying precisely what features are ornamental and what features are functional. The ornamentation may exist in a surface ornamentation applied to the product, or it may reside in the configuration of the product itself. Design patents are usually cheaper and faster to obtain than utility patents. They can be an effective tool to protect against product knockoffs. Because of this, design patents are useful to provide some level of market exclusivity for a period of time to allow the consuming public to associate a product’s design with a specific company. After the product obtains this acquired distinctiveness, trademark laws and trade dress protection may extend the protection of the product design beyond the term of the design patent. The protection offered by a design patent is limited. As the design patent protects only the ornamental features of a product, if the ornamentation may be easily modified on a competitive product, the patent may be easily avoided. Likewise, if the ornamental feature is integral with the functional utility of the product and cannot be separated, then the design patent may not prevent someone else from incorporating that function into his or her product even if the product also requires the use of that same ornamentation. See Best Lock Corp. v. Ilco Unican Corp., 94 F.3d 1563 (Fed.Cir. 1996).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 13
§1.21
INTELLECTUAL PROPERTY LAW
In analyzing a design patent, the test for infringement is that if, in the eye of an ordinary observer, giving such attention as a purchaser usually gives, two designs are substantially the same, if the resemblance is such as to deceive such an observer, inducing him to purchase one supposing it to be the other, the first one patented is infringed by the other. Gorham Co. v. White, 81 U.S. (14 Wall.) 511, 528, 20 L.Ed. 731, 737 (1871). Embraced within the ordinary-observer test is the implied knowledge possessed by the ordinary observer. The ordinary observer is hypothetically possessed with the knowledge of prior art designs such that a comparison of the features of the patented design with the accused design is made with the prior art as a frame of reference. Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed.Cir. 2008). The procedures and requirements for obtaining a design patent are very similar to the steps outlined in §§1.47 – 1.60 below for obtaining a utility patent. The design patent application consists primarily of drawings showing all the different sides and/or perspectives of a product. A sample design patent is shown at §1.71 below. A design patent application is limited to one specific design for a product; however, modified forms of the same design concept may be included in a single design patent application. The written portion of the application includes the title, a one-line description of each drawing, and a one-sentence patent claim to “the ornamental design for the article (specifying name) as shown.” 37 C.F.R. §1.153(a). At the United States Patent and Trademark Office, the design patent application undergoes an examination as to its originality, novelty, and obviousness over prior designs, much the same as a utility patent. A design patent filed after May 13, 2015, is valid for 15 years from its issue date and does not require any maintenance fees to keep it in force. 35 U.S.C. §173. For more details on the design patent process, see United States Patent and Trademark Office, Design Patent Application Guide, www.uspto.gov/patents-getting-started/patent-basics/types-patent-applications/designpatent-application-guide. C. [1.21] Plant Patents The patent laws provide: Whoever invents or discovers and asexually reproduces any distinct and new variety of plant, including cultivated sports, mutants, hybrids, and newly found seedlings, other than a tuber propagated plant or a plant found in an uncultivated state, may obtain a patent therefor, subject to the conditions and requirements of this title. 35 U.S.C. §161. A plant patent covers a living plant organism that has a single set of characteristics determined by its genotype, which may be only asexually reproduced. Naturally occurring mutations may be patented, provided they are discovered in a cultivated area. Bacteria are not covered by plant patents, but algae and microfungi are covered. A plant patent may be used to prevent others from asexually reproducing, selling, or using the patent plant. “Asexual reproduction” is the propagation of a plant without the use of genetic seeds. Examples of asexual reproduction include rooting cuttings, grafting budding, bulbs,
1 — 14
WWW.IICLE.COM
PATENTING INVENTIONS
§1.23
division, rhizomes, runners, and tissue cultures. A sport or mutant of a “parent” plant is of a different genotype and is not covered by the patent covering the parent. For more details on the plant patent process, see United States Patent and Trademark Office, General Information About 35 U.S.C. 161 Plant Patents, www.uspto.gov/patents-getting-started/patent-basics/types-patentapplications/general-information-about-35-usc-161. While genetically engineered plants may be protected by utility patents, they — along with traditional sexually bred and reproduced (by seed) plant varieties — may also be protected through the Plant Variety Protection Office. To get more information about the Plant Variety Protection Act, Pub.L. No. 91-577, 84 Stat. 1542, see United States Department of Agriculture, Plant Variety Protection, www.ams.usda.gov/services/plant-variety-protection.
IV. [1.22] REQUIREMENTS FOR A PATENT As set forth by the patent laws, assuming that an invention constitutes patentable subject matter, there are three hallmark requirements for a patent: usefulness, novelty, and nonobviousness. 35 U.S.C. §§101 – 103. These statutes set forth the requirements that the invention have some practical use, that the invention be new, and, even if new, that the invention not be an obvious combination of features found in prior inventions or an obvious variation. Previously, the United States stood alone in that patents were ultimately awarded not to the first person to file a patent application for an invention, but to the first person to create the invention. Under the Leahy-Smith America Invents Act, for new patent applications filed after March 16, 2013, as between applicants for the same invention, the patent will be awarded to the first person who filed a patent application. However, the patent laws setting forth this standard are complex. Under the old laws, the standard is combined with statutory bars, which act like a statute of limitations, allowing only one year after an inventor publicly discloses his or her invention before the inventor must file for a patent or lose the right to do so. Moreover, there are almost two hundred years of court decisions that add layers of exceptions and complexity. The AIA adds even more complexity in that there are statutory exceptions to the new standards and exceptions to the exceptions, some of which are explained in §1.27 below. A. [1.23] Utility The initial requirement of showing an invention to be useful, or to have utility, is easily satisfied. Almost all products have some usefulness, even if that usefulness is frivolous, such as that of a toy or game. However, if an invention is inoperative, such as a perpetual motion machine, it does not meet this standard. Likewise, if a new chemical is developed by a pharmaceutical company but it is not known what that chemical might be used for, then the utility requirement is not satisfied. See Nelson v. Bowler, 626 F.2d 853, 856 (C.C.P.A. 1980). However, the purported use for the invention need not be proven, and nearly any assertion of a specific, substantial, and credible usefulness for an invention is acceptable, provided the “specific benefit exists in currently available form.” Brenner v. Manson, 383 U.S. 519, 16 L.Ed.2d 69, 86 S.Ct. 1033, 1042 (1966). As an illustration of the legal standard for utility, the court in Juicy Whip, Inc. v. Orange Bang, Inc., 292 F.3d 728 (Fed.Cir. 2002), found that an invention for a beverage dispenser met
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 15
§1.24
INTELLECTUAL PROPERTY LAW
this utility requirement when the invention was directed to simulating the appearance that a different beverage would be dispensed other than what the consumer would actually receive. The court of appeals noted that the principle that inventions are invalid if they are principally designed to serve illegal or immoral purposes has not been applied broadly in recent years. The fact that one product can be altered to make it look like another is in itself a specific benefit sufficient to satisfy the statutory requirement of utility. B. [1.24] Novelty Patents are awarded only to new inventions. Therefore, during the examination of a patent, the examiner determines whether there is evidence that someone else had earlier created or described the same invention. This condition of having a new and unique invention is also referred to as “novelty.” If something was in existence, was described in a publication prior to the invention, or was described in another patent application filed before the one under examination, and the thing in existence or the prior description expressly or implicitly included all the same features of the invention, it is said to “anticipate” the invention. In evaluating an application for a patent, the invention is defined not by specific examples but rather by the patent claims, which are long, run-on, numbered sentences found at the end of a patent that describe the boundaries of the subject matter sought to be covered by the patent. If an invention is found to be in prior existence or merely described in a prior document and the prior description would fall within the boundaries of the patent claim, then the claimed invention is not novel. For this reason, there are usually many different patent claims in a patent that try to define the invention in different ways to carve out an irregular border that avoids prior inventions. There are several different ways in which the novelty of an invention is measured, as set forth in 35 U.S.C. §102. This statute tests whether the inventor was the first to create the invention and whether the inventor duly filed an application for a patent within one year from first publicly disclosing the invention or first commercially exploiting the invention. The Leahy-Smith America Invents Act established dual standards and grandfathered existing patent applications and patents under the old standards. Therefore, the old standards are discussed first in §§1.25 and 1.26 below, followed by a discussion of the changes under the new standards established by the AIA in §1.27. 1. [1.25] Was the Inventor the First To Create the Invention? Under the Leahy-Smith America Invents Act, the existing laws are applicable for patent applications filed before March 16, 2013, or later-filed patent applications that claim priority to earlier applications filed before March 16, 2013. For such applications to be eligible for a patent, the alleged inventor must have been the actual creator of the inventive concept. A person is not entitled to obtain a patent for something derived from or invented by another person. 35 U.S.C. §§100, 135(b). A patent will not be awarded if, prior to the patent applicant’s invention date, the identical invention was known or used by others in the United States or patented or described in a printed publication anywhere in the world. 35 U.S.C. §102(a). A patent will not be awarded if the prior public use of the invention was in the United States. If an identical invention has been sold in France but not known in the United States before the
1 — 16
WWW.IICLE.COM
PATENTING INVENTIONS
§1.25
applicant’s invention, then the U.S. inventor can still obtain a patent. However, if a publication was printed anywhere in the world — for example, in France — before the U.S. inventor’s invention date and that French publication described the product being sold in France, the publication will prevent the U.S. inventor from getting a valid U.S. patent. It is possible under this scenario that neither the inventor nor the United States Patent and Trademark Office will be aware of the French product or the French publication, so a patent may be issued by the USPTO. Should the existence of the French publication later come to light, however, it can be used as evidence that the U.S. patent is not valid since there was a printed publication somewhere in the world that described the same invention before the U.S. inventor created it. For the purposes of the examination process at the USPTO, the examiner assumes that the invention date is the filing date of the patent application. However, the inventor may submit a declaration with evidence to prove an earlier invention date, if necessary, to remove certain publications or knowledge as being “prior art.” See 37 C.F.R. §1.131. In the declaration, the inventor swears that he or she created the invention prior to the publication or public use or knowledge of others. The inventor also has to swear that he or she was diligent in making the invention and filing for a patent. Thus, if an inventor abandons an invention only to be spurred on to file for a patent after learning that someone else created the same invention, the inventor will be given credit only for the date when he or she was spurred into activity. The consequence for not diligently pursuing an invention is loss of the ability to assert being the first inventor. An invention is not novel if the identical invention has been known or used by others. A public use or printed publication by the inventor is not that of another and is self-proving that the inventor made the invention at the time of that use or publication. However, a description of the inventor’s own invention may be in an article coauthored by the inventor or authored by others. The term “by others” has been interpreted to mean any other “inventive entity.” Thus, unless the group of inventors applying for a patent is identical to the group associated with the prior use or printed publication, it is considered to be by others. However, when such a situation occurs during examination, the inventors may submit a declaration showing that the prior use or knowledge was their own or that the prior publication described their own invention. To the extent activity was within one year of the application filing date, the declaration may remove that activity as being prior art under 35 U.S.C. §102. As mentioned above, for the purposes of the examination process at the USPTO, the examiner assumes that the invention date is the filing date of the patent application. However, the inventor may submit a declaration with evidence to prove an earlier invention date, if necessary, to remove certain publications as prior art. 37 C.F.R. §1.132. An invention is not novel if the same invention has been “publicly” known or used by others in the United States. Thus, if the other inventor’s use was secret or maintained in confidence, then it is not considered a “public” use under 35 U.S.C. §102(b). Prior to the implementation of the AIA, there were two exceptions to this requirement that allowed others’ prior inventions that were kept secret to prevent an inventor from getting a patent. The first exception occurred when the other’s secret invention was described in a U.S. patent application filed before the applicant’s invention and the patent application was later published or granted. See pre-AIA 35 U.S.C. §102(e). The second exception occurred when the prior use was not public but was by another inventor who did not abandon, suppress, or conceal the invention. See pre-AIA 35 U.S.C. §102(g). Often, this latter rule was invoked in situations in which two groups of inventors were seeking a patent on the same invention and the USPTO declared an interference proceeding to
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 17
§1.26
INTELLECTUAL PROPERTY LAW
determine who created the invention first. This type of so-called “secret” prior art may be used during litigation of a patent to prove that the patent was not given to the first inventor and should be found to be invalid. A determination of whether the prior inventor abandoned, suppressed, or concealed the invention is based on the specific facts of each case, which must be examined to determine whether the delay in making the invention known was reasonable under the circumstances. See Checkpoint Systems, Inc. v. United States International Trade Commission, 54 F.3d 756 (Fed.Cir. 1995). Currently, under the provisions of the AIA, a dispute as to the identity of the first inventor to file can be addressed through the implementation of a derivation proceeding. See §1.60 below. 2. [1.26] Was This Invention or an Identical Invention Publicly Disclosed? As applicable for patent applications filed before March 16, 2013, the invention, or an identical invention, for which a patent is sought must not have been publicly disclosed more than one year before the application was filed. This requirement invokes the one-year grace period or statute of limitations given to inventors before which they must file for a U.S. patent application on their inventions. As described in §§1.38 – 1.40 below, most countries do not offer any grace period and require that a patent application be filed before any public disclosure or description of the same invention. A printed publication includes any imaginable public distribution of a document in any language and includes U.S. and foreign patents. Thus, any such publication anywhere in the world in any language describing the same invention may be used to prevent the award of a patent. There is some debate as to what constitutes a “publication,” but the key to determining whether a reference has been published is its dissemination and public accessibility to those with an interest in the technology. Constant v. Advanced Micro-Devices, Inc., 848 F.2d 1560, 1568 (Fed.Cir. 1988). The court in In re Hall, 781 F.2d 897 (Fed.Cir. 1986), held that a single copy of a graduate school thesis indexed and shelved in a college library is a publication. In Massachusetts Institute of Technology v. AB Fortia, 774 F.2d 1104, 1109 (Fed.Cir. 1985), the court held that distributing a few copies of a paper at a scientific conference is a publication. Postings on websites are also considered printed publications. Because obscure documents can be used to prevent a patent from being issued, minimal due diligence before filing for a patent to find such documents will likely not be able to turn up all potentially relevant documents that may be at any of the four corners of the earth. Neither, for that matter, do patent examiners have the time and resources to dig up such obscure documents when examining a patent application. Therefore, it is possible that patents have been granted when there were earlier publications no one located that described the invention. Nonetheless, when a patent is asserted against another party in highstakes litigation, there are specialists who do scour the four corners of the earth looking for that obscure publication to prove that the asserted patent is invalid. There must not have been any public use of the invention in the United States more than one year before the patent application was filed. The standard for what is public is similar to that noted in §1.25 above. However, the so-called “experimental use” exception allows an inventor to try out his or her invention in public in a limited manner under close supervision and control to test whether it works for its intended purpose. Tests for marketing purposes or for technical reasons unrelated to the technical features of the invention do not qualify as an experimental use. See In re Smith, 714 F.2d 1127, 1134 (Fed.Cir. 1983).
1 — 18
WWW.IICLE.COM
PATENTING INVENTIONS
§1.27
The invention must not have been on sale or commercially exploited more than one year before the patent application is filed. To be “on sale,” the invention must have been sufficiently developed to be ready for patenting, and a definite offer for sale of a product embodying the invention must have been made. Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 142 L.Ed.2d 261, 119 S.Ct. 304, 311 – 312 (1998). As to what constitutes an offer for sale, the courts look to the federal common law of contracts. Linear Technology Corp. v. Micrel, Inc., 275 F.3d 1040, 1048 (Fed.Cir. 2001). This on-sale bar includes the commercial exploitation of an invention, such as a manufacturing process in which the goods being offered for sale are made by the new manufacturing process sought to be patented. See TP Laboratories, Inc. v. Professional Positioners, Inc., 724 F.2d 965 (Fed.Cir. 1984). The award of a patent should be given only to a new invention and not merely a new discovery of something that existed but was not recognized before. An invention is not novel if a missing feature was inherent in a prior invention, even if it was not recognized at the time. For example, a patent on a new titanium alloy characterized by good corrosion resistance was refused because it was found to be anticipated by a prior description of a similar alloy composition that was silent as to its corrosion resistance properties. Titanium Metals Corporation of America v. Banner, 778 F.2d 775 (Fed.Cir. 1985).
PRACTICE POINTER
In evaluating an invention for a potential patent application filed before March 16, 2013, a matter of first priority is to evaluate any public disclosures of the invention. One should determine if there have been any nonconfidential disclosures by the inventor that would either start the one-year grace period for filing in the United States ticking or represent a loss of the right to file in a foreign country. One should also determine if there has been any commercial activity that would suggest the invention has been on sale, which starts the one-year grace period. If none, one should determine if there is any planned activity in the near future that should be halted until a patent application can be filed or if such activity can occur under a signed nondisclosure agreement. In evaluating an invention for a potential patent application to be filed on or after March 16, 2013, the first priority is to determine if there have been any public disclosures of the invention. If such disclosures were made by the inventors or made by others who obtained the information from the inventors, there may still be a one-year grace period available from the earliest date of such first disclosure. But as the patent is awarded to the first inventor to file an application, expediency must be exercised to file the application as soon as possible within the one-year grace period. If another party has come up with the same invention and publicly disclosed it, or filed an application describing the same invention, then it may be too late for the first inventors to file a patent application in the United States and in some foreign countries.
3. [1.27] Changes to the Novelty Requirement Under the Leahy-Smith America Invents Act There are significant changes to the novelty requirements under the Leahy-Smith America Invents Act. These standards for novelty are applicable to patent applications filed on or after
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 19
§1.27
INTELLECTUAL PROPERTY LAW
March 16, 2013, that do not claim priority to a patent application filed before this date. See 35 U.S.C. §102. First, under the new standard, absolute novelty is required, as in many foreign countries. By absolute novelty, it is meant that a person is not entitled to a patent if the invention was exactly described in a printed publication, in public use, or on sale or otherwise available to the public any time anywhere in the world before the patent application was filed. In comparison, the prior law required the public use, sale activity, or public availability to be only in the United States to bar a patent. In addition, the prior law allowed a one-year grace period before the patent application was filed as against any publication or prior disclosure of the invention. Another change under the AIA is that there is a requirement that the invention is new with respect to the same or similar inventions previously filed with the United States Patent and Trademark Office. That is to say, as between applications filed by different inventors for the same invention, the patent is awarded to the inventor who first filed a patent application — the so-called “first inventor to file” (FITF). Notwithstanding the above requirements, the new laws include several complex exceptions to absolute novelty and first-to-file entitlement. For example, under the new laws, there is a form of a one-year grace period, but it is available only when the inventor has disclosed his or her own invention before filing for a patent application. In one scenario of this exception, if an inventor makes a disclosure of the invention within one year before the filing date of the patent application, then such disclosure shall not bar the inventor from obtaining a patent. This one-year grace period applies also to disclosures made by another person who obtained the information about the invention directly or indirectly from the inventor. In another scenario of this exception, the one-year grace period applies to the disclosure of similar subject matter by others if the inventor had first publicly disclosed the invention either directly himself or herself or indirectly through others. To illustrate this latter scenario, if an inventor files for a patent application, and it is determined that another party has independently created and publicly disclosed the same invention within one year before the patent application filing, then the inventor will not be entitled to a patent unless the inventor can show that he or she publicly disclosed the invention before that other party. In other words, the public disclosure of an invention by an inventor will start the one-year clock ticking for the deadline of the inventor to file a patent application, and such early public disclosure will prevent a later public disclosure by a third party from disallowing the patent. As one can imagine, an inventor would have to present strong documented evidence of the public disclosure of his or her invention to be able to later prove entitlement for a patent should such a situation come to light. The new laws also provide for exceptions to absolute novelty as it relates to disclosures appearing in patent applications and patents that were filed before the inventor’s patent application and published after the inventor’s application was filed. Normally, the award of a patent would go to the first inventor to file a patent application regardless of when it was published. But this exception carves out certain disclosures in earlier-filed, but later-published patent applications from disallowing an inventor’s patent. In one scenario, the disclosure in an earlier patent application will not prevent the inventor’s patent if the subject matter disclosed in the earlier patent application was obtained directly or indirectly from the inventor. In another scenario, the disclosure in an earlier patent application will not prevent the inventor’s patent if, before the filing of the earlier patent application, the inventor had directly or indirectly through another person publicly disclosed the invention. Note, however, as described above, the inventor has only a one-year grace period from the date of this public disclosure to file the patent application. Finally, an exception is also made when the disclosure in the earlier patent
1 — 20
WWW.IICLE.COM
PATENTING INVENTIONS
§1.28
application and the invention were both owned by the same person or entity, or under obligation to be assigned to the same person or entity. The new laws also allow exceptions of prior disclosures in patent applications by one party to an invention made under a joint research agreement by that party with another party.
PRACTICE POINTER
The AIA transitions the U.S. patent system from a first-inventor system to a first-inventor-to-file system. This change has caused much concern, especially among small companies and individual inventors with limited resources. A common concern is that the U.S. system has changed to be a race to be the first inventor to file a patent application at the United States Patent and Trademark Office. While the change seems dramatic, it is important to note that the remainder of the world has operated on a FITF system for many years. Many U.S. corporations and U.S. patent attorneys have experience in obtaining patent protection for clients in foreign countries and thus have experience with the changes that have come under the AIA. The preexisting laws and rules apply to all applications filed before March 16, 2013, and to continuation and divisional applications of those applications. Some of the benefits under the old system include the ability to eliminate published documents as prior art that were published within one year before the filing date and to eliminate patent applications as prior art that were filed before the patent application was filed, but after the date of invention. Thus, it may be useful to strongly consider pursuing continuation and divisional applications to retain the benefit of the preexisting laws to such inventions.
C. [1.28] Nonobviousness Even if an identical invention has not been made or described before and the invention has not been publicly disclosed, the patent is awarded only for an invention that is not obvious in light of the prior inventions. The previous version of 35 U.S.C. §103(a) stated that a patent may not be granted “if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains.” [Emphasis added.] Under the laws implemented by the Leahy-Smith America Invents Act, for patent applications filed on or after March 16, 2013, the standard for obviousness has not changed. Instead, the relevant time for evaluating obviousness has changed. The relevant time frame under the AIA will not be “at the time the invention was made.” Rather, that clause has been replaced to evaluate obviousness “before the effective filing date of the claimed invention.” [Emphasis added.] See 35 U.S.C. §103. The “effective filing date” is either the earlier of the date the patent application was filed or the earliest date of any earlier patent applications that the specific patent application asserts it is entitled to the benefit of. Nonetheless, when all the parts of an invention are old (as measured from the relevant time frame under either the old or the new law) and found in different items or have been described in different publications, the new and unique way in which the parts are combined in the invention may be sufficient to deserve a patent if the way the parts are combined is not obvious.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 21
§1.28
INTELLECTUAL PROPERTY LAW
In determining whether an invention is obvious, the Supreme Court has set forth the following considerations: (1) the scope and content of the prior art; (2) the level of ordinary skill in the art; and (3) the number of differences between the prior art and the claimed invention. Graham v. John Deere Company of Kansas City, 383 U.S. 1, 15 L.Ed.2d 545, 86 S.Ct. 684, 694 (1966). This framework is still applicable under the revisions to the law under the AIA. Typically, inventors are considered to have extraordinary skill, so a person of ordinary skill in the art is hypothetically a person with an appropriate undergraduate or graduate-level technical degree and a few years’ experience in the relevant industry — by no means an expert in the field. See, e.g., Environmental Designs, Ltd. v. Union Oil Company of California, 713 F.2d 693, 696 (Fed.Cir. 1983). In conducting an examination of a patent application, the examiner assumes that this hypothetical person would combine features found in different publications or items in a way that uses the features for their known or intended purpose and would be motivated to combine these features based on some reason disclosed by the publications describing these features. For example, if a feature is described in a prior publication as having a certain advantage, it might be obvious to add that feature to another invention to impart those same advantages to the combination. On the other hand, it may not be obvious to make a certain combination when a reference teaches that a certain feature should be avoided. There is no single test for determining if an invention is obvious. In KSR International Co. v. Teleflex Inc., 550 U.S. 398, 167 L.Ed.2d 705, 127 S.Ct. 1727 (2007), the Supreme Court revisited this issue and upheld the broad framework announced in Graham that looks at the totality of the circumstances, including the application of common sense. In evaluating whether an invention is obvious, there are so-called “secondary considerations” or “objective factors” that may be argued to show that certain combinations are not obvious. Examples of secondary considerations include (1) the commercial success of the invention; (2) the failure of others to make the same invention; (3) a long-felt need in the industry for this invention that had been unfilled; and (4) unexpected results or a synergy achieved by the invention. B.F. Goodrich Co. v. Aircraft Braking Systems Corp., 72 F.3d 1577, 1582 (Fed.Cir. 1996). For example, mere optimization of features is typically not patentable unless there are new or unexpected properties obtained by that optimization that were not present or recognized before.
PRACTICE POINTER
1 — 22
Obviousness is a fact-specific analysis. As such, it is highly subjective, and the scope of allowed patent claims may depend on the particular patent examiner assigned to handle the application. Inventions that seem obvious at first glance ultimately may be proven patentable. In deciding whether to file an application for a patent in the face of questions about the obviousness of the invention, there are other considerations, such as the cost benefit if successful, the deterrence of marking a product as “Patent Pending,” etc. The potential benefit may justify the risk in proceeding when obviousness is a concern.
WWW.IICLE.COM
PATENTING INVENTIONS
V.
§1.30
INVENTORSHIP AND OWNERSHIP
A. [1.29] Who Is an Inventor? Different ideas have been asserted about what activity constitutes invention. In 1941, the U.S. Supreme Court said invention was a “flash of creative genius.” Cuno Engineering Corp. v. Automatic Devices Corp., 314 U.S. 84, 86 L.Ed. 58, 62 S.Ct. 37, 41 (1941). Thomas Edison reportedly said that it is 1 percent inspiration and 99 percent perspiration. Others consider the act of inventing to be a lucky accident. The authors believe that the saying “necessity is the mother of invention” is closer to reality. Most often, invention is the creation of a solution to a problem. How the solution is achieved is irrelevant as to whether something is an invention or should be awarded a patent. “Patentability shall not be negated by the manner in which the invention was made.” 35 U.S.C. §103(a). The courts have devised a construct that invention is a two-part process: (1) the conception of the invention; and (2) the reduction to practice of the invention. The inventive activity is not complete until the actual or a constructive reduction to practice is achieved. An “actual reduction to practice” is an actual working embodiment of the invention or demonstration of it working. A “constructive reduction to practice” is the preparation of a patent application that describes the invention in sufficiently complete terms that a person in the relevant industry could make and use the invention without undue experimentation. Within the two-stage invention framework, inventors are those who made significant contributions to the conception of the invention and not those who contributed only routine skill to reduce the invention to practice. The inventive contributions must be significant and not merely a recitation of what was known in the state of the art. In some cases, the conception and reduction to practice may occur simultaneously. In a joint inventorship, the contributions to the conception of the invention may have come from different persons at different times. Multiple inventors are considered coinventors or joint inventors. Incorrect inventorship occurs when there is a failure to correctly name all inventors, either by omission or by inclusion of non-inventors. If it later turns out that the original determination of inventors was incorrect, the list of inventors may be corrected by petition to the United States Patent and Trademark Office. Under the laws applicable to proceedings instituted before September 16, 2012, this may result in an invalid patent if the error is proven to be the result of an intent to deceive the USPTO. Under the laws of the Leahy-Smith America Invents Act, after September 16, 2012, it is no longer necessary to assert the error in naming inventors was made without intent to deceive, and as such, having such deceptive intent will no longer be grounds to cause a patent to be invalid. See 35 U.S.C. §116. For more details on inventorship, see Chapter 5 of this handbook. B. [1.30] Who Owns an Invention? Under U.S. laws, it is presumed that inventors have initial ownership of their own inventions. In the case of joint inventors, each inventor has the right to exercise complete and independent control over the invention without interference or an obligation to account to the other inventors.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 23
§1.31
INTELLECTUAL PROPERTY LAW
Thus, a joint inventor has the right to license or assign his or her rights in the invention to any third party without permission of the other joint inventors or owners. 35 U.S.C. §262. Most states have laws that require companies to have written agreements supported by adequate consideration to assert an obligation that employees have to assign ownership of inventions made in the course of the employees’ work to the employer. See, e.g., 765 ILCS 1060/2. The United States Patent and Trademark Office records assignment documents evidencing the transfer of ownership of a patent or patent application much as deeds to real estate are recorded. The bona fide purchaser rule applies to subsequent purchasers of the patent rights as against prior purchasers who have not recorded their assignments. See 35 U.S.C. §261. An assignee has three months to submit an assignment document for recording for this rule to be effective. A transfer of an invention and patent by assignment must be in writing. Id. Oral agreements will not be enforced. The USPTO issues the granted patent to the party asserting ownership of the invention, not to the inventors.
PRACTICE POINTER
When there is a good-faith basis for asserting that an employee is an inventor, even though it is unclear, it may be in the best interests of the employer to be over-inclusive in determining who is a joint inventor. As most inventors are contractually obliged to assign their rights in any inventions to their employers, this avoids a situation in which a disgruntled former employee later asserts that he or she was wrongly excluded as a named inventor on a patent and attempts to assert independent rights over the invention covered by the patent.
VI. DECIDING TO SEEK PATENT PROTECTION A. [1.31] Advantages Patents are highly desirable for the competitive business advantages they provide the patent owner. Because a patent gives the patent owner the right to exclude others from copying the patented invention, the patent may give the patent owner an exclusive position in a market for the patented goods. For the duration of the patent, that exclusivity can translate into the ability to dictate a higher price for patented products for which no comparable alternative is available. Patents covering improvements to existing nonpatented products can offer the opportunity for the patent owner to market improved features to the product to distinguish its version of the product from others. A patent may have value even though it only narrowly covers the invention so as to allow competitive products on the market. For example, the patent may cover a unique low-cost way of making a product or a low-cost ingredient that forces competitors to have higher manufacturing costs and limits their price competitiveness.
1 — 24
WWW.IICLE.COM
PATENTING INVENTIONS
§1.32
Even before a patent is granted, the ability to mark a product with “Patent Pending” has value in a business situation. A company may not want to copy a product marked “Patent Pending” because of the risk for potential lawsuits when the patent issues. This may deter others from copying new products even if a patent is not yet granted. Being able to advertise a product as using patent-pending technology provides a credential that may impress customers with the notion that the product contains the latest technological improvements. A patent may have some value in recording a company’s innovations as against the activity of later collaborators. For example, a company that develops ideas for new machinery may contract out the detailed engineering of the machinery. Filing for a patent may record and establish that the company had the invention before the engineers became involved and possibly prevent the engineers from later trying to patent the perfected version of the machinery. Along this same line of thought, a patent on a manufacturing process that would otherwise be kept confidential may be useful to prevent a competitor from later getting a patent on the same process. Thus, getting a patent can help ensure that the company will have the continued right to use its own manufacturing technology. B. [1.32] Disadvantages The authors do not believe there are many disadvantages in filing for a patent application. One disadvantage, however, is the limited life of a patent as compared to that of a trade secret. Patents now have a life of 20 years from their filing date. The formula for Coca-Cola, for example, is believed to have been kept secret for more than 120 years. If a patent had been sought at first, the formula for Coke would have become available to the public to copy and use more than 100 years ago. This disadvantage is exacerbated when a patent is sought but not obtained. In this situation, the technology may have been disclosed in a published patent application, so potential trade secret protection is lost. However, to guard against such instances, it is possible in limited situations to prevent the patent application from being published. For inventors with limited financial resources, the cost of obtaining a patent may be a disadvantage. The total costs to obtain a patent may be between $15,000 and $30,000, depending on the complexity of the invention and how vigorously the patentability of the invention must be argued before the United States Patent and Trademark Office. According to the American Intellectual Property Law Association 2015 Report of the Economic Survey, the median attorneys’ fees in 2014 in the Chicago region for preparing patent applications ranged from $7,500 to $15,500, depending on the technical subject matter and level of complexity. In comparison, for the same region the median attorneys’ fees in 2010 for a provisional patent application were $5,000. For some inventions with a small market for the products covered by the patent, the costs of obtaining a patent may never be recovered, especially when the patent obtained is not broad enough to exclude all competition, substitutes, and alternatives to the patented product. Another disadvantage is the length of time it takes to obtain a patent. It takes an average of about three years to get a utility patent for all categories of inventions and longer for inventions involving software and biotechnology. For some high-tech products, the product lifecycle may be
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 25
§1.33
INTELLECTUAL PROPERTY LAW
less than three years, the product may be obsolete, or the product may compete with newer technology before the patent issues. In this situation, the main benefit may be the patent pending status during the product’s lifecycle that may act as a deterrent to competitors. Ideally, the patent attorney preparing the application should work with the inventor to prepare patent claims that define the invention in technology-neutral terms. This way, a patent may be obtained that will still cover future generations of the product as it is redesigned to take advantage of newer technologies. C. [1.33] Economic Value In view of the advantages and disadvantages discussed in §§1.31 and 1.32 above, an inventor or the invention’s owner should do a cost-benefit analysis to determine whether the value of the patent justifies the cost of filing a patent application. If it is decided that the invention should not or could not be protected as a trade secret, one should consider the possible scope of protection that may be obtained with a patent and whether that scope of protection may adequately block competition to provide a competitive market advantage to the product sought to be protected by a patent. In addition, a patent has value when the inventor may not be interested in selling products but desires to license an invention to other companies that would market the product. The value to a licensee may be in the technique and know-how taught by the patent or in the power of the patent to keep a product off the market. There are patent attorneys and licensing professionals who will work on a contingency basis to assist patent owners in the licensing of their patents, which may require the threat and pursuit of a lawsuit to convince a company to agree to a license under the patent. One prolific individual inventor, Jerome Lemelson, and later his estate, reportedly earned more than $1.5 billion dollars by licensing patents relating to machine vision manufacturing technology. Large corporations find economic value in having and maintaining a portfolio of patents for defensive purposes. Often, when one corporation is sued for patent infringement by another, the defendant may locate a patent in his or her own portfolio to countersue against the plaintiff. This can provide the defendant with some leverage to negotiate a settlement of the lawsuit with a cross-license between the parties of some of each other’s patents. Also, large corporations may be able to “mine” their large patent portfolios for unused patents that can be a source of licensing revenue. For more on this subject, see Kevin G. Rivette and David Kline, REMBRANDTS IN THE ATTIC: UNLOCKING THE HIDDEN VALUE OF PATENTS (2000). Further testament to the value of patents is found in the 2011 deal by a consortium of companies including Apple, Microsoft, and RIM that purchased the 6,000 patents of bankrupt NorTel for a total price of $4.5 billion, which is equivalent to $750,000 per patent. Admittedly, this was an unusual sale of a large portfolio of patents sold in an auction in which multiple companies formed consortiums that likely overbid the price any company would be willing to pay on its own. Still, the value of any individual patent may vary greatly depending on the technology, the market it protects, the scope of protection it offers, and the number of years of life remaining on it. Many patents may have zero value, while a few patents may have values in the tens or hundreds of millions of dollars.
1 — 26
WWW.IICLE.COM
PATENTING INVENTIONS
§1.36
D. [1.34] Use of Patent Attorneys and Patent Agents Much as courts allow parties to represent themselves pro se, the United States Patent and Trademark Office allows inventors to represent themselves pro se in obtaining a patent. There are numerous self-help books on the market that purport to guide inventors through the process step by step. For example, Nolo Press has several such books available at bookstores and through its website, www.nolo.com. The USPTO has special customer service representatives and materials available at www.uspto.gov for assisting individual inventors. Despite the assistance offered to individual inventors, the authors recommend hiring the services of an experienced patent attorney or patent agent. The highly specialized procedures at the USPTO are complex and require precise compliance. Failure to comply with these procedures and deadlines can result in the abandonment of the patent application. These procedures are written out in the USPTO MANUAL OF PATENT EXAMINING PROCEDURE (9th ed. rev. Nov. 2015) (MPEP), www.uspto.gov/web/offices/pac/mpep. The MPEP in printed form is more than six inches thick. Registered patent attorneys or patent agents are required to have a college level science or engineering education and to pass an entrance exam into the patent bar. The entrance exam tests their knowledge of patent law and the rules set forth in the MPEP. Moreover, competent patent attorneys keep abreast of the latest developments in patent law, which is constantly changing. Thus, while the USPTO keeps its eyes on its own rules, good patent attorneys keep their eyes on how courts are interpreting the patents so they can develop patent claims to obtain the broadest possible coverage for their clients’ patents consistent with the current trends in the law.
VII. [1.35] TIMING CONSIDERATIONS As the saying goes, “timing is everything.” This is true for patenting inventions. It is important to file for a patent application as soon as possible. Keeping an invention secret for an extended time can result in either the loss of the right to patent it or the loss of certain advantages of being the first to file for a patent. The inventor or owner of the invention should be well advised of the consequences for delaying the filing of the patent application. Such consequences should be measured against the value of delaying filing, such as time spent perfecting the invention or developing variations and evaluating the invention’s commercial value and market potential against the resources required to try to obtain a patent. Sections 1.26 and 1.27 above discuss the timing issues in terms of the legal requirements for awarding a patent. Sections 1.36 – 1.40 below provide some guidelines on dealing practically with the inventions and deciding when to file the patent application. A. United States Patents 1. [1.36] Prior Inventions As discussed in §§1.24 – 1.27 above in connection with the novelty requirement, the U.S. patent laws are transitioning from a system in which patents are awarded to the first to invent to a system in which patents are awarded to the first inventor to file for a patent. In contrast, many
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 27
§1.37
INTELLECTUAL PROPERTY LAW
foreign countries award patents to the first to file for a patent application on the invention, even if the first person to file is not an inventor. So there is the possibility that when two people independently come up with the same invention, the U.S. patent goes to Inventor A (the first to invent) and the foreign patent goes to Inventor B (the first to file a patent application). Deciding who was the first to invent can be a lengthy, expensive process at the United States Patent and Trademark Office, known as an “interference proceeding.” Certain advantages in this proceeding are given to the inventor who was the first to file for an invention. To establish the right to have an interference proceeding, the claim for the same invention must be brought to the USPTO within one year of the first patent being granted. Therefore, an inventor cannot sit back and keep an invention secret for an indeterminate amount of time thinking he or she may tinker it to perfection before filing for a patent because the inventor believes he or she is the first to have come up with it. As the U.S. patent laws transition away from the first-to-invent system, the interference proceeding has been replaced with a “derivation” proceeding for patent applications filed after March 16, 2013. See §1.60 below. As between two inventors who separately filed for patent applications on the same invention, one inventor may challenge the patent of the other inventor by asserting the other derived his or her invention from the first inventor and was thus not a true inventor. In this manner, the patent is awarded to the “true” inventor who filed a patent application, thus giving credence to calling the new system a FITF system. 2. [1.37] One-Year Grace Period A major issue for many inventors is whether to delay filing for a U.S. patent to postpone the expenses until the inventors are certain they want to commit the resources to file a patent application. As discussed in §1.27 above, under the 2013 Leahy-Smith America Invents Act laws, the United States provides inventors a one-year grace period after they publicly disclose or commercially exploit an invention, by which time an application must be filed or the right to do so is lost. Taking advantage of this one-year grace period may be valuable for small businesses and inventors to work at perfecting the invention and testing its marketability. On the other hand, there may be a recent publication unknown to the inventor that describes the same invention and would be a basis for rejecting the inventor’s patent application should he or she delay filing the application more than one year beyond the date of the publication. Under the 2013 laws of the AIA, the unknown publication may block the award of a U.S. patent completely if the inventor files the patent application after the publication date. The only exception to this under the AIA is when the inventor publicly disclosed his or her invention before the date of the publication and such public disclosure was within one year of the inventor’s application filing date. Also, with any public disclosure of an invention, there is the potential loss of rights to file for foreign patents as described in §1.39 below. As described in more detail in §1.48 below, as an alternative to completely delaying the filing of a patent application, the United States Patent and Trademark Office allows the filing of what is called a “provisional patent application.” This provisional application is intended to be a quick, low-cost option to get a patent application filed. The provisional application reserves the benefit of the early filing date for a regular patent application and any foreign patent applications covering the same invention that are filed within one year of the provisional patent application. Under both the preexisting laws for applications filed before March 16, 2013, and under the laws
1 — 28
WWW.IICLE.COM
PATENTING INVENTIONS
§1.40
for applications filed on or after March 16, 2013, the one-year grace period applies to the filing of a provisional application. Thus, if only U.S. patents are desired, an inventor may publicly disclose the invention, file a provisional application one year later taking advantage of the one-year grace period, and then file a regular U.S. patent application one year after that.
PRACTICE POINTER
One course of action is to file a provisional patent application prior to any public disclosure of an invention and then allow the inventor to devote one year for further developing and test marketing the invention without the need to keep the invention confidential. Before the end of the one year, the inventor must decide whether it is beneficial to continue the patenting process by filing a regular U.S. patent application and any desired foreign patent applications.
B. [1.38] Foreign Patents An international treaty known as the Paris Convention for the Protection of Industrial Property, March 20, 1883 (Paris Convention), www.wipo.int/treaties/en/text.jsp?file_id=288514, gives an inventor first the right to file a patent application in the United States (or any other country where he or she resides) and then, within one year, the right to file a similar patent application in another signatory country with the benefit of the year-earlier filing date. This is an important right as most foreign countries require a patent application to be filed before the public disclosure of an invention. Under this treaty, the foreign patent applications will be treated as though filed when the first application was filed up to one year earlier. This is also an important treaty as it gives an inventor a one-year delay after the first patent application is filed before the inventor must commit the financial resources to seeking foreign patents without any loss of rights due to the delay. For a list of the countries that have signed on to the Paris Convention, go to www.wipo.int/treaties/en/ip/paris. See also §1.76 below. 1. [1.39] Absolute Novelty Most countries, but not the United States, award patents only covering subject matter that has not been previously disclosed to the public. Thus, it is said that the foreign patents require “absolute novelty.” The public disclosure anywhere in the world of either the inventor’s own invention or another person’s similar invention before a first application is filed can prevent a patent from being awarded. A foreign patent application filed under the Paris Convention for the Protection of Industrial Property gets the benefit of the filing date of the first filed application in a different country. The critical date of a public disclosure invalidating a foreign patent is the day before the patent application is first filed in that other country. Thus, filing a patent application in the United States before any public disclosure of the invention meets the absolute novelty requirements of any later-filed foreign patent applications as to the inventor’s own disclosures. 2. [1.40] Exceptions Canada allows a one-year grace period for prior public disclosures by the inventor of his or her own invention. However, the one-year period is measured not from the date the patent
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 29
§1.41
INTELLECTUAL PROPERTY LAW
application is first filed in another country but one year from the actual filing date in the Canadian Intellectual Property Office. Also, the one-year grace period does not apply as against public disclosures of another person’s similar invention. A few other countries, such as Mexico, have a similar grace period for an inventor’s own disclosure of his or her invention prior to filing an application. The European Patent Office allows a six-month grace period for the prior public disclosure by the inventor of his or her own invention at certain certified trade shows or exhibitions. A six-month grace period is allowed if the public disclosure is a result of a third party violating a written confidentiality agreement. C. [1.41] Confidentiality Agreements While an inventor cannot control prior disclosures of other persons’ inventions, the inventor can control the public disclosure of his or her own invention to avoid such disclosure destroying valuable patent rights. A chief tool to achieve this end is a nondisclosure agreement (NDA), or confidentiality agreement. In working with outside designers or consultants or even when showing the invention to potential customers to gauge their interest (short of actually offering the inventive product for sale), having those outside parties sign NDAs can preserve the secrecy of the invention and avoid prior public knowledge of it. This can prevent such disclosures from breaching the absolute novelty requirements of foreign countries and beginning the running of the one-year grace period in the United States.
VIII. [1.42] KEEPING RECORDS OF INVENTIONS Keeping records of the creation of an invention is an important first step in seeking to protect it. There are different ways of documenting a new idea that may ultimately be used to prove either that a person was the first inventor and warrants a patent over another party or that a person was the first inventor but did not seek a patent. In the latter case, the prior invention can be used to show that another person’s patent is invalid. Likewise, such records can be used to document who had confidential access to the invention to support a claim that the other party derived his or her patent application from the true inventor. If it turns out that the other party filed a patent application on the invention derived by the first inventor before the first inventor filed his or her application, the first inventor may file a derivation proceeding at the patent office to have the other party’s patent application disqualified as prior art against the first inventor’s patent application. See §1.60 below. A. [1.43] Notebooks An effective recording system for new inventions is the old-fashioned, composition-style notebook. These notebooks typically have numbered pages and a stitched binding to prevent pages from being removed and replaced. The notebooks should be used to record ideas and experiments in a diary fashion to document the creation of inventions and how they were developed. Drawings and photographs are helpful. Blank spaces should be crossed out. Each page or entry should be signed and dated by the inventor or other person doing the experiments. Each page should be reviewed by one or two other persons, such as a coworker or
1 — 30
WWW.IICLE.COM
PATENTING INVENTIONS
§1.45
other person who is obligated to keep the information confidential. That “witness” should sign and date each page, preferably with a statement such as, “Read and understood by [witness signature] on [date].” This witness corroborates the activity of the inventor. If needed, the witness can later be called to testify or attest to the recording of the invention on the dates so noted. New technology is available to replace paper notebooks with electronic notebooks on computer systems. Electronic lab notebooks (ELNs) provide digital records in secure, authenticated, and backed-up retrieval systems that can serve the same function as paper notebooks. Also, an “invention disclosure form” may be used to describe details of the invention and significant information about the invention, its comparison with known prior art, and potential disclosures. A sample is included at §1.79 below. The invention disclosure form is a useful summary of the invention that is used by many companies to evaluate the business potential of an invention and to start the patenting process. B. [1.44] Former Document Disclosure Program and Provisional Patent Applications The United States Patent and Trademark Office used to operate a program to assist inventors by officially recording documents describing inventions. This program was discontinued effective February 1, 2007. The USPTO recommends instead that inventors file a provisional patent application. See §1.48 below. The document disclosure program provided for the receipt of invention disclosure documents and the retention of them for up to two years pending the filing of a patent application. The documents were destroyed after the two-year period unless a patent application was filed and a request was made to retain the papers with the patent application. The USPTO’s fee for submitting a disclosure document was only ten dollars. The documents filed under this program did not constitute a patent application but merely provided a way to evidence the date of the conception of an invention, at least as of the date the document was received by the USPTO. A provisional patent application may serve the same purpose but is maintained for only one year, unless a nonprovisional patent application is filed within the year. Therefore, an inventor should maintain his or her invention in confidence until a patent application is filed to preserve patent rights in the United States and foreign countries. C. [1.45] Sealed, Mailed Documents A common myth is that an inventor should mail a copy of an invention description to himself or herself and retain the unopened, postmarked envelope in a safe. This is thought to be solid evidence of the date of an invention to prove that an inventor had the idea before someone else. Unfortunately, such attempts are unreliable. Most laws require corroboration of evidence of a prior invention. There is no support, usually, other than the inventor’s own word that the envelope has not been tampered with to replace its contents. The courts and the United States Patent and Trademark Office require some corroboration by second persons and documents to support an inventor’s claim to be a prior inventor. See Thomson, S.A. v. Quixote Corp., 166 F.3d 1172, 1176 (Fed.Cir. 1999). Moreover, under the Leahy-Smith America Invents Act, patents for applications filed for the same invention after September 11, 2013, are no longer awarded to the first inventor. Therefore, evidence of being the first to have conceived of an idea may have little value unless it is used to prove another party derived his or her invention from the first inventor.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 31
§1.46
INTELLECTUAL PROPERTY LAW
IX. [1.46] PATENTABILITY SEARCH Provided there is no urgent deadline to file a patent application, such as an upcoming public disclosure of a new invention, a patentability search may be a wise investment to probe into the existence of documents that may prove that the invention is not original. This can help save the inventor the costs of preparing and filing for a patent when it is clear that a description of the same invention was made before by others. Also, if the invention is original, this search can help determine how broad the patent coverage may be before it bumps up against not too dissimilar inventions made previously by others so that the patent application can be prepared to explain how the invention is not obvious. Patents have been reported to describe more than 95 percent of all the technology invented on this planet. It should then be no surprise that, for most inventions, a primary source for searching for prior inventions is in existing patents and published patent applications. Typically, a patent search testing an invention’s novelty can be accomplished for $500 to $1,000, not including the attorneys’ fees for providing a patentability opinion. Simple mechanical devices tend to be less expensive, and chemical compositions tend to be more expensive. Professional patent searchers, many of whom are former patent examiners, can be hired to conduct the search and try to locate prior patents that include a description of either the same invention or past inventions that may come close to the new invention. In addition, depending on the technology, the searchers may examine scientific literature available on computer databases. Often, patent attorneys employ searchers or work with independent searchers to complete this task. The searcher locates the patents or other documents that describe the closest prior inventions. The patent attorney then analyzes those patents and provides a professional legal opinion as to the potential for obtaining a patent and the potential breadth of the subject matter that may be patented. A patent search may easily be conducted by inventors themselves. The United States Patent and Trademark Office has set up about 80 patent and trademark depository libraries around the country to serve as Patent and Trademark Resource Centers (PTRCs). The staffs at these libraries are trained to assist customers to conduct their own searches through the patents available at the libraries and online. Often, a thorough search at these libraries may take a full day. In Illinois, there are two PTRCs, the Chicago Public Library in downtown Chicago (see www.chipublib.org) and Western Illinois University’s Leslie S. Malpass Library in Macomb (see http://wiu.edu/libraries/govpubs/patents.php). For more information, see www.uspto.gov/ learning-and-resources/support-centers/patent-and-trademark-resource-centers-ptrcs. A limited preliminary patent assessment may be made over the Internet using the patent database available on the USPTO’s website, www.uspto.gov. The search may be conducted using strings of words describing the invention. However, the word search feature is limited to patents from 1976 until the present. Another free resource on the Internet is the Google patent database, www.google.com/patents, which allows text-based searches of patents going back to the 1800s.
1 — 32
WWW.IICLE.COM
PATENTING INVENTIONS
§1.48
PRACTICE POINTER
X.
If an inventor is interested in filing a patent application only because he or she thinks the patent will provide exclusive rights to a market, a patentability search and opinion may be valuable to provide an assessment as to the potential scope of a patent. The investment of $10,000 for a patent may not be a good investment if the patent search shows that a commercially practical alternative is in the public domain.
[1.47] PATENTING PROCESS
Sections 1.48 – 1.60 below briefly discuss the general process and procedures for the submission of a patent application to and examination by the United States Patent and Trademark Office. The entire process from the date of filing the application to the issuance of the granted patent may take on average between 16 months and 3 years. The USPTO continues to have a backlog of patent applications for inventions relating to computer architecture, information security, software, mechanical engineering, and product manufacturing. In those areas of technology, it may take as long as 2 years before the first examination report is prepared. However, there are procedures available (but not discussed in this chapter) whereby an applicant may request that the examination be expedited. The basic outline of the process is that a patent application is filed with the appropriate fees. In turn, the application is reviewed by an examiner who also handles other patent applications covering that same field of technology. The examiner searches for evidence that the invention is not novel or is obvious and prepares a report called an “office action.” In more than 90 percent of the cases, the examiner rejects the claimed invention in the first office action. The applicant then can prepare a response to amend the claims and/or argue that the claims are patentable. This back-and-forth process may continue until the examiner is convinced that the claims are amended sufficiently to avoid overlap with the subject matter claimed in prior inventions, the applicant abandons the application, or the applicant decides to appeal the examiner’s rejection to an appeals board of administrative patent judges. On average, two to three office actions are issued by the examiner on a patent application prior to the final disposition of the application (i.e., either allowed or abandoned). When the claims are found patentably distinct over the prior art references cited by the examiner, the application is allowed. After payment of the issue fees, the USPTO grants the patent and issues the published granted patent to the applicant. A. [1.48] Provisional Patent Applications As noted in §1.37 above, a “provisional patent application” is a patent application that is not examined but merely establishes the priority date for a period of up to one year for a later-filed regular patent application. The formal requirements for a provisional patent application are less stringent. However, the provisional patent application must meet the statutory requirements under 35 U.S.C. §112 for including an enabling description of the invention — a description that supports any later written claims that define the invention (although the provisional application itself does not require claims) and a description of the best mode known to practice the invention. Short of not requiring the inclusion of patent claims, these requirements are the same as for a regular patent application.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 33
§1.49
INTELLECTUAL PROPERTY LAW
The less stringent formal requirements are directed to the format of the text, the quality of the drawings, etc. Thus, when in a rush to get an application filed before an upcoming public disclosure of an invention, a provisional patent application may be a quick shortcut. In fact, a copy of the pending public disclosure (e.g., presentation slides, etc.) may be included as part of the specification in a provisional patent application. Because of the allowable imperfections, a provisional patent application may cost less for an attorney to prepare and, as noted in §1.37 above, may be a low-cost alternative to delay the costs for a regular patent application until an inventor can gauge the market potential for the invention. There are pitfalls, however. Even though a provisional patent application may be filed with numerous informalities, it should not be filed without a complete description of the invention and broad definitions of all the potential subject matter that would be sought to be protected by the patent. In this sense, it may be wise to draft several broad independent claims that fully encompass the scope of the subject matter for which protection will be sought. A provisional patent application that merely describes one embodiment of a proposed invention may not support the claims in a later regular patent application that tries to define the broad scope of the subject matter sought to be protected by the patent. Some foreign patent offices, such as the European Patent Office, insist on strict, literal, word-for-word support of patent claims in the priority U.S. patent applications. Failure to have adequate descriptions in a provisional patent application for broad definitions of an invention may not be fatal to a later-filed patent application, but the later-filed patent application may not be entitled to the benefit of the filing date of the provisional patent application or may be entitled to the benefit of the earlier filing date only for claims that are as narrow as the description of the embodiments described in the provisional patent application.
PRACTICE POINTER
The authors believe that a provisional patent application should be as complete and detailed as a regular nonprovisional patent application and include claims that define the invention to ensure complete support for obtaining broad protection of the invention. Such a complete description is required to support claimed inventions in the U.S. nonprovisional application and any foreign patent applications based on the U.S. provisional application. However, if time is not available to prepare a complete application, an abbreviated version may be quickly prepared and filed that at least describes what will be shortly thereafter publicly disclosed. A more complete provisional application may then later be filed. Within one year of the filing date of the first provisional application, a U.S. nonprovisional application and foreign applications may be filed that get the benefit of both earlier filed provisional applications.
B. Preparing and Filing the Patent Application 1. [1.49] Contents of the Application A patent application includes a written specification and drawings of the invention and an oath or declaration executed by the inventors. 35 U.S.C. §111. The United States Patent and Trademark Office rules state that the specification should include the following sections in the following sequence:
1 — 34
WWW.IICLE.COM
PATENTING INVENTIONS
§1.49
a. title of the invention; b. a cross-reference to any related patent applications (if applicable); c. a statement concerning any federal sponsorship of the research or development (if applicable); d. a reference to any genomic sequence listing, table, or computer program listed in an appendix (if applicable); e. the background of the invention; f.
a brief summary of the invention;
g. a brief description of the drawings; h. a detailed description of the invention; i.
a claim or claims (not required, but recommended, for a provisional application);
j.
an abstract; and
k. an appendix of DNA sequence listing, if needed. See 37 C.F.R. §1.77(b). The specification must meet three separate and distinct requirements, which are commonly referred to as the “written description,” “enablement,” and “best mode” requirements. See 35 U.S.C. §112. In order to meet the written description requirement, the specification must describe the invention in a sufficient amount of detail that demonstrates the inventors have possession of the subject matter that is set forth in the claims of the patent application. In order to meet the enablement requirement, the description must be “in such full, clear, concise, and exact terms as to enable any person skilled in the art or science to which the invention or discovery appertains, or with which it is most nearly connected, to make and use the same.” See 37 C.F.R. §1.71(a). The description must also completely describe a specific embodiment of the thing invented and the mode of operation or principle whenever applicable and must set forth the best mode contemplated by the inventor of carrying out the invention at the time the application is filed. See 37 C.F.R. §1.71(b). Failure to meet any of these three requirements may result in a ruling by a court that the patent is invalid. See Chapter 2 of this handbook for details on asserting the lack of these requirements as a defense to an allegation of patent infringement. However, under the Leahy-Smith America Invents Act, although it is still required to include the best-mode description in the patent application, for proceedings commenced after September 16, 2012, the lack of such description may not be asserted as a defense in a patent lawsuit. See 35 U.S.C. §282(b)(3)(A). Suffice it to say that in preparing a patent application, the inventor must not withhold describing the “secret sauce” that makes the invention work or the most preferred embodiment of the invention. Fortunately, there is no requirement that a specific embodiment be marked as “best.” Therefore, including the best mode as one among a number of preferred embodiments of an invention is sufficient to meet the best-mode requirement.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 35
§1.50
INTELLECTUAL PROPERTY LAW
The claims define the subject matter sought to be covered or protected by the patent. A patent application is required to include at least one claim “particularly pointing out and distinctly claiming the subject matter which the [applicant] regards as the invention.” 35 U.S.C. §112(b). Practically speaking, an inventor will develop a specific embodiment of a product or process or a number of alternative embodiments. The claims set forth the generic inventive concepts common to those different embodiments. It is the claims — the numbered sentences at the end of a patent — that actually define the patented invention and the scope of the protection afforded by the patent. The claims may be written in independent form or dependent form. An “independent claim” is a claim that stands alone without reference to any other claims. A “dependent claim” is a claim that refers to another claim and adds at least one additional narrowing feature to the other claim. In other words, a dependent claim includes all of the features of the claim to which it refers along with the additional feature(s) specifically introduced within the dependent claim. A dependent claim may refer back to or depend from an independent claim or another dependent claim. For example, an independent claim and associated dependent claim might state: Claim 1. An apparatus for applying indicia on a substrate comprising a hollow shaft and a graphite rod placed in the hollow shaft, the rod extending beyond the shaft at one end thereof. Claim 2. The apparatus of Claim 1 further comprising a cylinder of rubber at an opposite end of the shaft. In the above example, the apparatus of Claim 2 contains all of the features defined in independent Claim 1 along with the inclusion of “a cylinder of rubber at an opposite end of the shaft.” Further examples of independent and dependent claims, along with an example of the various other sections required in the specification, are provided in the sample patent in §1.70 below. 2. [1.50] Oath or Declaration and Related Papers Each inventor is required to sign an oath or declaration that is submitted along with the patent application or shortly thereafter. There are special rules that provide what to do when an inventor is uncooperative, cannot be located, or is deceased. In the oath or declaration, the inventor swears or declares that he or she believes himself or herself to be the original and first inventor, either alone or with coinventors, of the subject matter that is sought to be patented. The declaration also includes an acknowledgment by the inventor of his or her duty to disclose to the United States Patent and Trademark Office any prior art that he or she becomes aware of while the application remains pending before the USPTO. 3. [1.51] Duty To Disclose Known Prior Art The United States Patent and Trademark Office imposes a duty of candor and good faith in dealing with the USPTO on all persons substantively involved in the prosecution of a patent application. See 37 C.F.R. §1.56(a). This duty is ongoing until the patent issues and includes the duty to disclose information known to the person that may be material to the patentability of the claimed invention. Information is considered to be material when it is not cumulative to other material already of record and (a) establishes by itself or in combination with other information a
1 — 36
WWW.IICLE.COM
PATENTING INVENTIONS
§1.52
prima facie case of the unpatentability of a claim or (b) refutes or is inconsistent with a position the applicant has taken. 37 C.F.R. §1.56(b). This information may be in the form of printed publications, such as issued patents, published patent applications, or published technical articles, and may also include negative examination reports for counterpart foreign applications regarding the same invention. Alternatively, this information does not have to be documentary in nature, but rather can be something the inventor saw that sparked the invention or from which the invention was derived. If the information includes an assertion about a potential public disclosure of the invention more than one year prior to the filing of the patent application, the authors suggest that upon submitting the information about the disclosure additional evidence and/or arguments should also be included that demonstrate the disclosure was not sufficient to put the entire invention before the public or that some exception exists that disqualifies the disclosure from barring the award of the patent. The duty to disclose material information exists only as to information known to a person having such a duty. There is no duty to search for such information not known by that person, but a person must divulge all such pertinent information of which he or she is, was, or later becomes aware. The failure to comply with this duty may result in a court ruling that the patent is not enforceable due to “inequitable conduct” by the applicant. This lack of candor or good faith is said to constitute a fraud on the USPTO. Even when it can be successfully argued that the hidden information would not make the patent invalid, failure to disclose it can nonetheless render the patent unenforceable. However, the courts have raised the bar for proving inequitable conduct and apply a test that essentially asks whether the patent would not have been granted “but for” the failure to disclose the information and whether such failure to disclose the information was based on an intent to deceive the USPTO. See Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276 (Fed.Cir. 2011). Additional details on the legal standards for finding inequitable conduct are provided in Chapter 3 of this handbook.
PRACTICE POINTER
The duty of disclosure is imposed not only on inventors but also on attorneys and other business people substantively involved with the prosecution of a patent application. Because of the potential harm in inequitable conduct being asserted, it is best to disclose everything potentially relevant in compliance with the duty and to have the patent examiner evaluate it for its materiality.
C. [1.52] Publication of the Application 35 U.S.C. §122(b) provides that pending patent applications will be published 18 months after their filing dates and that the patent application files will then be available to the public. Since a provisional application is pending only for a period of 12 months, the provisional application is not published. Rather, the nonprovisional application that is filed, which claims priority to the provisional application, will be published 6 months after its filing.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 37
§1.53
INTELLECTUAL PROPERTY LAW
When a patent application is filed, a request can be made to keep the patent application confidential if the applicant certifies that the invention will not be disclosed in a foreign patent application. If later a patent application is filed in a foreign country, a request must be filed to rescind the earlier request to not publish the application upon penalty of having the patent application declared abandoned. Upon publication of an application, the applicant may have certain provisional rights against parties that copy or infringe the invention claimed in the application. Those rights are limited to receiving damages in the form of a reasonable royalty. Those rights, however, are retroactive after the patent has been granted. The patent must have claims substantially the same as in the published application, and notice of the published application must have been given to the offenders. See 35 U.S.C. §154(d). This last point is important to consider because the claims in the patent application may have to be amended (e.g., changed) during prosecution in order to overcome either novelty (35 U.S.C. §102) or obviousness (35 U.S.C §103) rejections made by the examiner in view of the prior art that is identified. D. [1.53] Restriction Requirements Though a patent application may contain many claims defining an invention in different combinations of features, a patent should cover only a single inventive concept. A patent application may include up to 3 independent claims and 17 dependent claims for a total of 20 claims without incurring any additional surcharges or fees. The independent claims are usually drawn to a material composition, a product containing the material composition, a method of making the material composition or the product, and/or a method of using the product. The patent examiner has the authority to determine whether the claims are directed to more than one invention and require the applicant to restrict the claims to a single invention or inventive concept. 35 U.S.C. §121. For example, if a patent includes some claims directed to a product, other claims directed to a method for making the product, and still other claims directed to a method for using the product, the examiner may at his or her discretion impose a three-way restriction requirement. The application must then elect one of the three inventive concepts to be examined. The claims directed to the unelected inventions are marked as “withdrawn” during the remainder of the prosecution. 37 C.F.R. §1.142(b). When the claims directed to the elected invention are in a condition for allowance, the examiner may request that the applicant cancel the claims to the nonelected inventions from the application or reexamine the withdrawn claims to rejoin them into the application, provided the nonelected claims meet certain requirements. A claim to a nonelected invention is eligible for rejoinder if it depends from or otherwise requires all the limitations of an allowable claim. The applicant has the right at any time prior to the issuance of a patent that claims the elected invention to refile the application as a “divisional” application containing claims directed to the nonelected inventions. As a practical matter, a patent examiner has broad discretion in imposing restriction requirements. The determination is highly subjective, and whether a restriction requirement is imposed may depend on which examiner is reviewing a patent application. On the positive side, in imposing the restriction, the examiner is stating that the inventive concepts are separately patentable. If one invention is found not patentable during examination, it should create no presumption that the other inventions are not patentable. See 35 U.S.C. §121. On the negative side, the total cost of obtaining full patent protection on all of the different inventive concepts
1 — 38
WWW.IICLE.COM
PATENTING INVENTIONS
§1.54
disclosed in the patent application may increase by the multiple of the number of separate inventions found in the patent claims that require multiple divisional applications to be filed. In certain situations, the need for a divisional application may be tempered if the applicant amends the withdrawn claims during prosecution to require all of the limitations of the elected invention, thereby maintaining the right for claim rejoinder when the elected invention is found to be allowable.
PRACTICE POINTER
A patent application should include claims directed to different inventive concepts created by the inventor, despite the possibility of a restriction requirement being imposed. This allows the inventor the benefit of hindsight and experience with the invention and perhaps more knowledge as to which inventive concepts are more commercially valuable if and when a restriction requirement is imposed.
E. [1.54] Office Actions A patent application is given one or more United States Patent Classification (USPC) codes that signify the general technical area associated with the subject matter in the application. The application is then assigned to a group of patent examiners located in a technical unit that handles patent applications related to that technical area. Unless a petition is filed requesting that the examination process be expedited, the patent application is taken up by order of its filing date. The examiner reviews the application and the claims defining the invention sought to be patented to determine if it meets the requirements for patentability discussed in §§1.22 – 1.28 above. The examiner conducts a search for publicly available documents describing the same or a similar invention in existence before the application filing date. Typically, these documents include issued patents or published patent applications, although it is not uncommon to see nonpatent literature from technical journals, webpages, or textbooks also cited by the examiner. The examiner prepares a report called an “office action” detailing the documents found and explaining how the invention is not new or is obvious in view of the prior art documents found. It is usually only a very small minority of cases in which the examiner may issue a notice of allowance as the first office action. In fact, if such a first action is received, the subject matter may have been too narrowly claimed in the filed application. In this situation, the authors suggest that the applicant consider the different ways in which claimed subject matter can be broadened (i.e., file a continuation application or a broadening reissue application). Most of the time, the examiner makes at least some superficial argument supporting a rejection of the claims over the prior art in the office action. This at least puts the burden on the applicant to file a response and make a record or create a file history. In addition to reviewing the claims for patentability over the prior art, the examiner reviews the application and claims to be sure the claims comply with 35 U.S.C. §112. This compliance requires the claims to be supported and enabled by the application and to distinctly claim the invention in a way that is not indefinite, vague, or confusing. The claims may be rejected under 35 U.S.C. §112 because they are misnumbered or include grammatical errors of a nature that inject some confusion as to how the invention is defined or what the patent intends to protect. One example of such a grammatical error that is commonly encountered is an element in a
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 39
§1.55
INTELLECTUAL PROPERTY LAW
dependent claim being described in a way that lacks proper antecedent basis in the claim(s) from which the dependent claim depends, thereby, rendering the claimed subject matter ambiguous. The examiner may also raise objections to the application that deal with mere formalities. Examples of such objections include typographical errors in the specification or reference numbers in the drawings not matching up with the written description of the drawings in the specification. The applicant is given an opportunity to respond to the office action. The examiner may come back with a notice of allowance if the response is persuasive, or the examiner may issue another office action rejecting the response. However, even if the applicant’s response is persuasive, the examiner still may do another search to locate different prior art documents that provide new or additional grounds for supporting a rejection of the invention as being unpatentable. With the initial patent application filing fee, the United States Patent and Trademark Office is obligated to provide at least two rounds of office actions. Upon payment of additional fees, the applicant may purchase additional rounds of office actions for the examiner to continue examination by considering additional arguments or amendments made by the applicant as further described in §1.55 below. F. [1.55] Responses After an office action is received, an applicant typically has three months to file a response. The filing of the response may be delayed an additional three months with payment of an extension fee. The examiner is required to consider the response to the first office action, but thereafter, if an office action is made final, the examiner is not required to consider the response if it raises new issues regarding patentability. However, additional fees can be paid along with a request for continued examination that essentially withdraws the finality of the office action and continues the examination of the application for at least two more rounds of office actions. In the response, the applicant must reply to every objection and rejection made in the office action. Arguments must be made to show the specific distinctions believed to render the claims patentable over the prior art documents relied on to reject the claims. General allegations that the claims are patentable are not sufficient to overcome a rejection. In addition to mere arguments describing how or why the examiner is in error, the claims may be amended to include additional features or more narrowly define the existing features. The response must include arguments that show how the amendment distinguishes the amended claims from the prior art documents. The response should also show the examiner where in the original specification and/or drawings written support for the amendment is provided. In some situations, it may be necessary to include declarations by the inventor or others to support the response. A “Rule 131 declaration” by an inventor may show that the invention was created before a cited document relied on by the examiner. 37 C.F.R. §1.131. This may remove the document as being prior art and is commonly referred to as “swearing behind” a reference. A “Rule 132 declaration” may be filed to support the nonobviousness of an invention or to provide evidence to rebut any rejection as to the requirements for patentability, including utility and
1 — 40
WWW.IICLE.COM
PATENTING INVENTIONS
§1.56
enablement. 37 C.F.R. §1.132. As noted in §1.28 above, there are secondary considerations of nonobviousness. These considerations are usually supportable only by the introduction of facts by way of a declaration attesting to the truthfulness of the facts. The following are some examples of declarations that may be provided: 1. A declaration may be introduced by an expert in the industry related to the invention showing that there has been a long-felt need for the invention but that others had tried and been unable to achieve the invention. 2. A declaration by the inventors may include test data showing how their invention attains synergistic results or results that would be unexpected in view of the cited prior art teachings. 3. A declaration of the inventors or others may be provided to explain how a person of ordinary skill in the art would interpret a cited prior art reference differently such that the invention would not be obvious. 4. A declaration may be provided with test data that rebuts an examiner’s assumption that certain materials described in a prior art document have the properties being claimed by the applicants. G. [1.56] Interviews During the examination process, the applicant is allowed to request a personal interview with the examiner either over the phone or in a face-to-face meeting. The face-to-face meetings are usually held in the examiner’s office or in the supervisor’s office; they are not formal hearings. The interview may range from an informal discussion to clarify the rejections in the office action to a discussion presenting fully prepared arguments to convince the examiner of the errors in the rejections. Even amendments to the claims can be proposed and openly discussed during the interview. Often the interviews are helpful to clarify the examiner’s misunderstanding of the invention and focus the examiner on the differences between the invention and the prior art. After the interview, both the examiner and the inventor’s attorney must file an interview summary, which is a brief description of who attended the interview, what was discussed, and whether any agreement was reached.
PRACTICE POINTER
The interview and the applicant’s relationship with the examiner are best viewed not as an adversarial situation but as a cooperative relationship with both parties working toward finding an agreeable scope of the claims that covers the invention but does not cover items in the prior art. One advantage of an interview is that many details may be discussed that do not get placed into the official record. This may be helpful to avoid such details being used by a court to limit the patent. However, the applicant should keep in mind that any written document, even if it is marked for discussion only, that is provided to the examiner will most likely find its way into the record or file history for the application. See Chapter 2 of this handbook for information regarding the doctrine of equivalents.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 41
§1.57
INTELLECTUAL PROPERTY LAW
H. [1.57] Appeals After multiple rounds of office actions and responses, if a second or later office action is made final, or even after a second nonfinal office action, the applicant has the option to appeal the rejection set forth in the office action. The ex parte appeal is made to the United States Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB), which, prior to September 16, 2012 (implementation of the Leahy-Smith America Invents Act), was known as the Board of Patent Appeals and Interferences (BPAI). Three administrative patent judges typically hear the appeal of each case. On a rare occasion, an expanded panel of 11 judges may hear an appeal containing an important issue. The appeal process may take about 22 months to get a decision after all the briefs are filed and an optional oral hearing is conducted. As of July 2015, there were slightly more than 224 administrative patent judges on the board, who heard about 9,964 appeals to that point in fiscal year 2015 with about 22,722 appeals still pending. See Nathan K. Kelley and Scott R. Boalick, Patent Trial and Appeal Board Update, presented at Patent Public Advisory Committee Quarterly Meeting, Aug. 20, 2015, www.uspto.gov/sites/default/files/documents/20150820 _PPAC_PTAB_Update.pdf (case sensitive). For the appeal process, the applicant first files a notice of appeal. Then, within two months (or longer, if extension fees are paid), the applicant files an appeal brief. Within two months, the examiner files an answer. Then, two months later, the applicant may file a reply brief and may also request an oral hearing, which is optional. After considering the applicant’s appeal brief, the examiner has an option to not file an answer and instead allow the application or conduct a new search and issue a new office action raising new grounds for rejecting the application. The appeal only considers the record established during the prosecution of the application. No new evidence or declarations may be presented by the applicant. The PTAB may affirm in whole or in part the examiner’s rejection, restate a rejection based on new grounds, or reverse the rejection in whole or in part. In Fiscal Year 2014, the USPTO reported that about 67 percent of appeals were affirmed in whole or in part, 30 percent were reversed, 1 percent were remanded, and 2 percent were dismissed. Id. After an unfavorable decision, the applicant has two months in which to request a rehearing, appeal the decision to the Court of Appeals for the Federal Circuit, or request continued examination of the patent application with revised patent claims. Otherwise, the application is returned to the examiner for disposition, which may include abandonment, continued examination, or, if the appeal decision was favorable, allowance of the patent. For more details, see 37 C.F.R. §§1.191, 1.197 – 1.198. I. [1.58] After Final Consideration Pilot 2.0 and Post-Prosecution Pilot Program The United States Patent and Trademark Office has implemented a pilot program to assist in advancing prosecution of applications with the timely review and disposition of responses meeting certain criteria that are made after final rejection. This After Final Consideration Pilot 2.0 (AFCP 2.0) program allows the examiner to execute an additional prior art search, conduct an interview with the applicant, and provide additional time to consider an amendment filed in response to a final rejection. In order for a response to be eligible for consideration, the response must be filed under 37 C.F.R. §1.116 and include a request for consideration under the pilot program, as well as make a narrowing amendment to at least one independent claim. A response will be accepted under the AFCP 2.0 program provided the amendment that is made only requires the examiner to perform a limited search and/or consideration in order to determine patentability.
1 — 42
WWW.IICLE.COM
PATENTING INVENTIONS
§1.60
On July 11, 2016, the USPTO implemented a six-month trial of a Post-Prosecution Pilot Program (P3), which provides an alternative way in which one can respond to a final rejection. P3 combines the effective features of the existing pre-appeal program with some of the features offered by the AFCP 2.0 program. In P3, a panel of examiners will review the applicant’s response and allow the applicant to make a 20-minute presentation during the review process. A notice of decision, which includes a brief written summary as to the examiners’ reasoning, is provided to the applicant by the examiner panel. This notice of decision will inform the applicant that the final rejection is upheld, the application is allowed, or prosecution is reopened. P3 may be useful for consideration when no agreement with the examiner can be reached prior to filing a response to the final office action. The time frame over which an applicant can file a response under the AFCP 2.0 program has been extended multiple times with the current extension allowing the program to be fully operative through September 30, 2017. The authors expect that the success of this program will give rise to a further extension of time as this due date approaches. The time frame associated with the P3 pilot program may also be extended or made permanent if this pilot program is found to be successful. J. [1.59] Allowance and Issue of Patent When a patent application is allowed, it is deemed that the patent application has met all the requirements for patentability, all informalities have been corrected, and the patent application is in final condition ready to be issued as a patent. Formal examination or prosecution of the application is closed, so no new amendments of a significant nature are permitted. Minor amendments to correct informalities, such as typographical errors, are permitted. The applicant is given three months after the notice of allowance is mailed to pay the issue fee. Along with payment, the applicant is permitted to designate the name of the assignee that will appear on the face of the granted patent. If there is a request to make any corrections to the drawings, the corrected drawings must be submitted no later than the time of payment of the issue fee. Usually, within two months after payment of the issue fee, the official patent is issued. An issue notification is usually mailed to the applicant a few weeks before the patent is issued announcing the expected issue date and the assigned patent number. Any continuation applications or divisional patent applications must be filed no later than the issue date to be “copending” with the prior application and entitled to claim the benefit of the earlier filing date of the prior application. The issued patent is first published on the United States Patent and Trademark Office website, www.uspto.gov. Paper copies and the official ribbon copy of the patent are mailed to the applicant and usually arrive several weeks after the official issue date. For a sample and details of an issued patent, see §1.70 below. K. [1.60] Interference and Derivation Proceedings As noted in §1.25 above, in the United States, patents with an effective filing date before March 16, 2013, were awarded to the first to create the invention. When two or more parties applied for a patent on the same invention, an interference proceeding was held by the United States Patent and Trademark Office to determine the first inventor, who was thus awarded the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 43
§1.61
INTELLECTUAL PROPERTY LAW
patent. Since most other countries award patents to the first to file for a patent application, sophisticated inventors keeping close records of the creation of their inventions may have an advantage over foreign inventors whom did not foresee the need to record the creation of their inventions as closely. To establish the right to an interference proceeding, a claim must have been presented in the inventor’s application that was substantially the same as the claim in the other patent application or issued patent. In the case of a published application or a granted patent, the same claim must have been presented within one year of the publication of the application or invention. For more details, see generally 37 C.F.R. §§41.200 – 41.208. Interference proceedings are expensive, with costs approaching that of a small lawsuit. For patent applications filed on or after March 16, 2013, interference proceedings are not applicable because the implementation of the Leahy-Smith America Invents Act awards the patent to the first inventor who files a patent application for the same invention. However, the requirements for novelty have also changed, such that an inventor who filed his or her application later may institute a derivation proceeding to prove that the alleged inventor who filed the patent application earlier actually derived the invention from the inventor who filed later. If such proof is successful, the patent will be awarded to the inventor who filed later. The person who derived the invention from the other party is deemed not to have invented the invention, such that the patent is awarded to the first “true” inventor who filed a patent application. See 35 U.S.C. §135. Derivation proceedings are heard before the Patent Trial and Appeals Board. The USPTO has adopted final rules for derivation proceedings that took effect March 16, 2013. See 77 Fed.Reg. 56,068 (Sept. 11, 2012), adopting 37 C.F.R. §§42.400 – 42.412. Of importance is the need to file a petition for the proceeding within one year from the publication of the patent claims of the laterfiled patent application. 37 C.F.R. §42.403. L. Correction, Reissue, Reexaminations, and Post-Grant Reviews 1. [1.61] Certificates of Correction After a patent has issued, any errors made by the United States Patent and Trademark Office and any clerical or typographical errors made by the applicant can be corrected by presenting a request for a certificate of correction. Typographical errors, either by the applicant or by the USPTO, are the most frequent items corrected by a certificate of correction. However, additional items may be corrected by a certificate. For example, the claim to priority of a patent may be corrected by a certificate. The list of named inventors also may be corrected by a certificate. See 37 C.F.R. §§1.322 – 1.325. However, any further errors that would otherwise result in the invalidity of the patent or one of the patent claims must be corrected by reissue or reexamination. 2. [1.62] Reissue A reissue application is a request to the United States Patent and Trademark Office to reissue the patent because it includes some defect that causes it to be wholly or partly inoperative or invalid. The defect may be in the specifications, drawings, or claims. No new matter may be introduced in the reissue application. The term of the reissue patent is the same as for the original patent. A reissue application seeking to broaden the scope of the claims must be filed within two
1 — 44
WWW.IICLE.COM
PATENTING INVENTIONS
§1.64
years from the issue of the original patent. See 35 U.S.C. §251. The reissue application is examined according to the same procedure as a regular patent application. The examiner may conduct a new search and reexamine the patent claims without deference to the fact that they were previously allowed. To the extent that the claims in the reissue patent are substantially identical to the claims in the original patent, the reissue patent is considered to have effect continuously from the date of the original patent. To the extent that the reissue patent claims subject matter not covered by the claims in the original patent, a court may allow a party to continue to sell such items or perform such processes that were not covered by the original patent but are covered by the reissue patent if the party was doing so or made substantial preparations to do so before the issue date of the reissue patent. See 35 U.S.C. §252. For more details on the procedures, see 37 C.F.R. §§1.171 – 1.178. 3. [1.63] Ex Parte and Supplemental Reexaminations A request to have a patent reexamined under an ex parte reexamination proceeding may be made by any party believing that a prior art patent or printed publication bears on the patentability of a patent. 35 U.S.C. §§302 – 305. The United States Patent and Trademark Office provides an initial review of the request to determine whether the prior art patent or printed publication raises a substantial new question of patentability affecting any claim of the patent. If so, the USPTO may grant a request for a reexamination. In rare situations, usually at the behest of public outcry over the issuance of a patent that seems clearly unpatentable, the Director of the USPTO may request the reexamination. During the reexamination procedure, an examination of the invention based on the prior art submitted with the request is conducted. During ex parte reexamination, only the patent owner participates in responding to the office actions prepared by the examiner. The third-party requestor may obtain copies of the record but may not participate. See 37 C.F.R. §§1.501 – 1.570. A new proceeding was created under the Leahy-Smith America Invents Act, similar to a reissue proceeding, wherein the patent office may consider, reconsider, or correct information relevant to a patent. This new proceeding is called a supplemental examination. 35 U.S.C. §257. A patent owner is the only party that may request a supplemental examination. The patent office first determines if the request raises a substantial question of patentability, and, if so, then a reexamination of the patent is ordered. The reexamination then proceeds following the process similar to an ex parte reexamination, except the patent owner may not file a response to the ordering of the reexamination. The supplemental examination allows a patent owner to bring material information to the USPTO’s attention after the patent grant, and the fact that this information was not brought during the original examination of the patent application then cannot be used as a defense to patent infringement under an allegation of inequitable conduct. 4. [1.64] Post-Grant and Inter Partes Reviews Under the Leahy-Smith America Invents Act, different post-grant inter partes type proceedings have been created: the post-grant review (PGR) and the inter partes review (IPR). A PGR is essentially a new type of proceeding, whereas an IPR is a replacement of the former inter partes reexamination proceeding. Both proceedings are heard by the Patent Trial and Appeal Board.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 45
§1.64
INTELLECTUAL PROPERTY LAW
The PGR has been established to allow third parties to challenge the validity of a patent under broader categories of invalidity shortly after the patent has been granted. 35 U.S.C. §§321 – 329. The PGR is applicable to patents issued for patent applications with an effective filing date on or after March 16, 2013. A petition for a PGR must be filed within nine months of the issue date of a patent. The basis for challenging the validity of a patent includes prior descriptions of the patented invention in printed publications (as is the only basis available for ex parte reexamination proceedings). However, the PGR also allows the patent to be challenged on the basis of any other requirement for patentability, such as prior public use, lack of written support for the claimed invention, or if the claimed invention is not patentable subject matter — such as a natural phenomenon. Thus, a PGR essentially allows a party to challenge the validity of a patent in this proceeding before the PTAB on nearly any basis that could be brought as a defense in a patent lawsuit. Both the patent owner and the party challenging the patent participate in the PGR, which may proceed as a mini-lawsuit with limited discovery available. See generally 37 C.F.R. §§42.200 – 42.224. In addition, a transitional PGR proceeding is allowed for challenging certain business method patents that may already exist or have been filed before March 16, 2013. Effective September 16, 2012 (and for a period of eight years thereafter), any covered business method patent granted before, on, or after this date may be challenged under the transitional PGR proceeding. A petition for a transitional PGR may be brought only if the petitioning party has been sued or threatened under the patent. The basis for a third party challenging the validity of the patent is limited to asserting a lack of novelty or obviousness of the claimed invention. A transitional PGR may be sought any time more than nine months after the patent has issued, which is after the time window for a regular PGR has expired. See generally 37 C.F.R. §§42.300 – 42.304. The IPR proceeding allows for third parties to participate in challenging the validity of a patent on limited grounds in the United States Patent and Trademark Office rather than in court. See 35 U.S.C. §§311 – 319. The IPR proceeding replaced inter partes reexamination; all pending inter partes reexaminations were automatically converted to IPRs, effective September 16, 2012. An IPR can be requested if (a) it has been more than nine months since the patent issued (e.g., past the date in which a PGR can be filed) or (b) any post-grant review instituted regarding the patent has been terminated. The grounds for challenging a patent in an IPR is more limited than in a PGR as the basis for invalidity in an IPR must only be published prior art documents. An IPR is barred if the requesting party has already filed a lawsuit challenging the same patent in court. On the other hand, if an IPR is filed first, a lawsuit filed later asserting the patents will be stayed until the completion of the IPR proceeding. One downside to challenging a patent with an IPR is that the challenging party is estopped from later asserting in court that the patent is invalid on the same ground(s) that were raised or “could have been raised” during the IPR proceeding. During an IPR proceeding, both the patent owner and the third-party requestor of the review participate. Thus, the requestor may rebut all arguments the patent owner makes in an adversarial fashion to try to prove the patent invalid over the newly cited prior art. An IPR proceeds as a mini-lawsuit with limited discovery available. See generally 37 C.F.R. §§42.100 – 42.123. Since the implementation of IPR proceedings in 2012, a total of 3,953 IPR petitions have been filed with 1,737 being filed during 2015. As of December 31, 2015, a total of 2,447 petitions have been completed with 1,243 being dismissed and 1,204 resulting in a trial. Thus, only about 49 percent of the IPR petitions that are filed reach the stage of undergoing a trial. During these trials, an additional 472 petitions were terminated (e.g., settled, dismissed, etc.), leaving only
1 — 46
WWW.IICLE.COM
PATENTING INVENTIONS
§1.66
about 30 percent of the original IPR petitions in which the PTAB reached a decision. For the 732 trials that have been conducted and a final written decision reached, a total of 529 petitions resulted in all of the instituted claims being declared unpatentable, 107 petitions resulted in some of the instituted claims being declared unpatentable, and only 96 petitions resulted in no instituted claims being found unpatentable. See USPTO, Patent Trial and Appeal Board Statistics (Dec. 31, 2015), www.uspto.gov/sites/default/files/documents/2015-12-31%20PTAB.pdf (case sensitive). M. Patent Expiration and Maintenance Fees 1. [1.65] Patent Term Two regimes exist for determining the term of a utility patent. For utility patents that were filed before June 8, 1995, the term of the patent is the longer of either 17 years from the issue date or 20 years from the earliest filing date to which it claims priority. 35 U.S.C. §154(c). For patents filed on or after June 8, 1995, the patent term is 20 years from the earliest filing date to which it claims priority. 35 U.S.C. §154(a). Design patents have a much shorter enforceable term than utility patents: 15 years from their issue date (or 14 years if filed before May 13, 2015). 35 U.S.C. §173; MANUAL OF PATENT EXAMINING PROCEDURE §1502.01(A) (9th ed. rev. Nov. 2015), www.uspto.gov/web/offices/pac/mpep. It is on this date that the provisions implementing the Geneva Act (1999) of the Hague Agreement Concerning the International Registration of Industrial Designs, www.wipo.int/edocs/pubdocs/en/designs/453/wipo_pub_453.pdf, became effective in the United States. See the Patent Law Treaties Implementation Act of 2012, Pub.L. No. 112-211, 126 Stat. 1527. Design patents as used herein include patents that are issued from design applications filed domestically under 35 U.S.C. §111 and those filed internationally under 35 U.S.C. §385. 2. [1.66] Patent Term Adjustment Effective May 29, 2000, the United States Patent and Trademark Office provides for adjustments to extend the term of a patent when the issue of the patent was delayed by the USPTO. Generally, the USPTO will extend the patent term due to its failure to mail a first office action within 14 months after the application is filed or failure to reply to an applicant’s response within 4 months. On top of that, any delay in getting the patent issued within 3 years due to failure of the USPTO will be counted toward the patent term adjustment. Any adjustments due to delays by the USPTO are offset by any delays due to the applicant. The applicant is considered to have delayed when he or she fails to respond to an office action or other request within 3 months. 35 U.S.C. §154(b)(2)(C). See also 37 C.F.R. §§1.701 – 1.705. The patent term adjustment is printed on the face of the issued patent. 37 C.F.R. §1.705(a). However, the adjustment may be appealed by an applicant, so the adjustment appearing on the patent may not be correct. For most patents, the value of the extension may not be significant as many patents are not kept in force their full term. However, for patents covering blockbuster drugs, when every day covered by a patent keeps generic competition off the market, the value of each day may be in the millions of dollars.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 47
§1.67
INTELLECTUAL PROPERTY LAW
3. [1.67] Patent Term Extension Any patent that covers a product or method that is subject to regulatory approval, such as by the Food and Drug Administration, may have its term extended. The length of the patent extension is commensurate with the delay in obtaining the needed regulatory approval to commercially market the product. 35 U.S.C. §156. An official certificate of extension is awarded by the United States Patent and Trademark Office and made of record for the public as though it were part of the original patent. See 37 C.F.R. §§1.710 – 1.791. 4. [1.68] Terminal Disclaimers A patent term may be made coextensive with the term of another related patent as the result of the filing of a terminal disclaimer. This document disclaims the portion of the term of the second patent that extends beyond the term of the related patent and agrees that the second patent is enforceable only as long as it is owned by the same party together with the related patent. It is noted on the face of the patent when a terminal disclaimer has been filed. The terminal disclaimer is filed during the course of examination to remove a so-called obviousness-type “double patenting rejection” over another patent belonging to the same owner when the subject matter claimed in each patent is an obvious variation of the other so as to represent a single inventive concept that could have been covered by a single patent. See 37 C.F.R. §1.321(c). 5. [1.69] Maintenance Fees Utility patents require the payment of regular maintenance fees every four years to keep them in force. The payments are due six months before the fourth, eighth, and twelfth anniversaries of the issuance of the patent. The payment may be made within six months of these anniversary dates if a late fee is also paid. According to the United States Patent and Trademark Office’s Performance and Accountability Report Fiscal Year 2015, see www.uspto.gov/sites/default/files/documents/USPTOFY15PAR.pdf (case sensitive), there had been a marked decrease in patent renewals compared with four years earlier. In 2011, at the fourth-year stage about 100 percent of U.S. patents were renewed, compared to only about 85 percent in 2015. In 2011, at the eighth-year stage about 81 percent of patents were renewed, compared to only about 66 percent in 2015. In 2011, at the twelfth-year stage about 60 percent of patents were renewed, compared to only about 47 percent in 2015. Maintenance fee payments escalate every four years. As of July 2016, the maintenance fees for a large entity patent owner for the fourth-, eighth-, and twelfth-year stages are $1,600, $3,600, and $7,400, respectively. 37 C.F.R. §1.20. A small entity patent owner pays a 50-percent reduced fee. Id. Thus, unless a patent owner is making profitable advantage of a patent, it may not be economically viable to maintain the patent. It is difficult, however, to know and measure the value of a patent that is forcing a competitor to follow a more costly practice.
1 — 48
WWW.IICLE.COM
PATENTING INVENTIONS
§1.70
XI. ISSUED PATENTS A. [1.70] Anatomy of a Patent: Sample Utility Patent The issued U.S. patent is the document that describes the inventor’s creation and includes claims that define the scope of the invention covered by the patent. See §1.49 above. An example of a short U.S. patent is provided below. The front page of the patent includes all the bibliographic data about the patent. Parenthetical reference numbers are provided according to an international system to which most countries adhere that aids in deciphering such information on foreign patents. The patent number (10) and date of issue (45) are listed in the upper right corner. The front page includes the last name of the first listed inventor in the upper left corner. It is common for patents to be colloquially referred to by this name, such as “the Jones patent.” The left column includes the title (54), inventors’ names and residences (75), any assignees (73), whether the patent is subject to a patent term extension or disclaimer (*), the application number (21), the filing date (22), prior publications of the patent application (65), and prior related patent applications (63). The term of the patent is typically 20 years from the earliest filing date of a related patent application (63) plus any term adjustments (*). Additional data in the left column includes technological classifications according to an international classification system (51) and a U.S. classification system (52), as well as the U.S. classes searched by the examiner when trying to locate prior art documents (58). The bottom of the left column continues to the top of the right column with a listing of the prior art documents cited either by the examiner or by the applicant during examination (56). The examiner’s name and the name of the law firm are included (74). The bottom of the right column concludes with the abstract of the invention (57). The abstract is written by the applicants, not the United States Patent and Trademark Office, so it may not precisely coincide with the scope of protection provided by the specific patent claims on the back of the patent. Below the abstract is a list of the number of patent claims and pages of drawings. Usually, a drawing from the application is selected by the applicant to be included on the front page that is supposed to be representative of the main invention protected by the patent claims. After the front page, the drawings pages follow, and then the written portion of the patent is presented. The written portion is in the same sequence as provided in the original patent application. See §1.49 above. As shown in the example, the detailed description of the invention includes a description of the drawings with the reference numerals from the drawings in bold print. Following the written description, the patent claims lead with a transitory phrase such as “I claim,” or, as shown, “What is claimed is.” The numbered sentences following that transition are the patent claims that define the scope of legal protection that a patent provides to its owner. Anything that falls within the definitions provided by any one of the claims is infringing the patent. Therefore, when looking at a patent for the first time, one may read the abstract or the summary of the invention to get a feel for the subject matter to which the invention relates, but one then must read the patent claims that define what is actually protected by the patent. The detailed description and figures provide examples that illustrate preferred embodiments of the invention. The detailed description may also include special definitions of the terms used in the claims or disclaim certain subject matter from the scope of the invention defined by the claims. In other words, the detailed description and figures provide support for the claimed subject matter.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 49
§1.70
1 — 50
INTELLECTUAL PROPERTY LAW
WWW.IICLE.COM
PATENTING INVENTIONS
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
§1.70
1 — 51
§1.70
1 — 52
INTELLECTUAL PROPERTY LAW
WWW.IICLE.COM
PATENTING INVENTIONS
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
§1.70
1 — 53
§1.70
1 — 54
INTELLECTUAL PROPERTY LAW
WWW.IICLE.COM
PATENTING INVENTIONS
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
§1.70
1 — 55
§1.71
INTELLECTUAL PROPERTY LAW
B. [1.71] Sample Design Patent Attached below is a copy of a representative U.S. design patent. This patent protects the ornamental design for a product as shown in the patent drawings. The information on the first page is essentially the same as for a utility patent as shown in §1.70 above, with the addition of the single claim and description of the figures. The figures show the product design from all six sides straight on and at least one perspective angle.
1 — 56
WWW.IICLE.COM
PATENTING INVENTIONS
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
§1.71
1 — 57
§1.71
1 — 58
INTELLECTUAL PROPERTY LAW
WWW.IICLE.COM
PATENTING INVENTIONS
§1.74
C. [1.72] Marking Patent Numbers on Products Marking the issued patent number on the patented product provides certain legal advantages. The patent marking notation may be, e.g., “Patent 1,234,567” or “Pat. 1,234,567” or the word “Patent” followed by an Internet address where the patent numbers are listed. 35 U.S.C. §287(a). If the character of the product does not permit markings for reasons such as the product’s size or because such markings would destroy its aesthetics, the marking may be fixed to the package or on a label in such a way as to provide suitable notice to the public. Id. See, e.g., Rutherford v. Trim-Tex, Inc., 803 F.Supp. 158 (N.D.Ill. 1992). The advantage of providing notice of the patent number to the public is that patent infringement damages may be available to the patent owner from the inception of the infringement. Without such patent marking, damages may be received only after an alleged infringer has been provided actual notice of the infringement. 35 U.S.C. §287(a). The requirement to mark the patented products applies to licensees under the patent as well. If the patent includes only method claims, there is no requirement to mark the patent number of the products made by or used under the patented method. A party that falsely marks a patent number, patent pending status, or a patent owner’s name on a product or in advertising for the purpose of deceiving the public may be subject to civil penalties. See 35 U.S.C. §292(a). The civil penalties may be a fine up to $500 for every offense, but only the United States may sue for civil penalties. Id. Any person who has suffered a competitive injury as a result of this false patent marking may sue for damages adequate to compensate for the competitive injury. 35 U.S.C. §292(b). It is not considered a violation of this statue if a product has been properly marked with a patent number, but the patent has since expired. 35 U.S.C. §292(c).
XII. FOREIGN PATENTS A. [1.73] Foreign Filing Licenses Before an inventor can file a patent application in a foreign country, the inventor must obtain a foreign filing license from the United States Patent and Trademark Office. The license is required to certify that the invention does not represent technology that is important to the national security of the United States that otherwise should be kept secret or not exported to certain countries. 35 U.S.C. §§181 – 188. Filing a U.S. patent application is considered a request for a foreign filing license, and unless specifically denied, the license is automatically granted six months after the U.S. filing date. 35 U.S.C. §184(a). If one files a foreign patent application before receiving the license, the penalty may be a ruling that the U.S. patent is invalid unless the failure to receive the license was through error without deceptive intent and the patent does not disclose subject matter that should otherwise be kept secret as pertaining to national security. 35 U.S.C. §185. Technology pertaining to national security usually relates to nuclear or radioactive materials and technology associated with producing advanced weapons. B. [1.74] Patent Cooperation Treaty International Patent Applications Under the Patent Cooperation Treaty, June 19, 1970 (PCT), www.wipo.int/pct/en/texts/ articles/atoc.htm, a single international patent application may be filed that serves as a delayed entry into the regional or national patent offices in foreign countries. Essentially, by filing a PCT
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 59
§1.75
INTELLECTUAL PROPERTY LAW
international patent application, the decision as to which countries to file the patent application in may be delayed up to 30 months after the filing date of the first application to which the application claims priority. As of June 2016, there are 150 countries that are signatories to the PCT. Thus, all the costs associated with those foreign filings may also be delayed. This allows the patent owner time to determine whether the invention is sufficiently marketable before having to commit the financial resources for many foreign patent filings. For a list of the countries that participate in the PCT, see www.wipo.int/pct/en/pct_contracting_states.html. National patent applications in most industrialized countries of the world, with the exception of Taiwan and many South American and Middle Eastern countries, may be filed that claim priority to a PCT application. For a total cost including fees and expenses of about $4,000, the filing of a PCT application reserves the applicant’s right to file a patent application in all of the member countries. If a person is interested in eventually filing in only one or two countries, the cost for the delay of filing national applications made available by filing a PCT application may not be economical. On the other hand, if the applicant wants to preserve the right to later file in many countries and is not sure which ones to file in or wants to wait until there is a determination by the United States Patent and Trademark Office of whether the invention is patentable before incurring the expense of filing multiple national applications, it may be wise to file a PCT application. C. [1.75] Foreign Priority Rights There are several convention treaties to which the United States is a party that provide reciprocal rights to file patent applications in participating countries and claim the benefit of the earlier filing date of an application filed within the previous year in the patent office of the inventor’s home country. The Paris Convention for the Protection of Industrial Property, discussed in §1.38 above, is one such treaty. As of June 2016, a total of 176 countries have signed the Paris Convention. The countries that participate in the Patent Cooperation Treaty rely on the Paris Convention to be entitled to the earlier filing date. Since Taiwan is not a member of the Paris Convention, the United States has signed a separate agreement conveying reciprocal rights to inventors to claim priority to earlier filed applications in their respective home country. For a complete list of countries and the applicable treaties or agreements, see States Party to the PCT and the Paris Convention and Members of the World Trade Organization (status on 23 September 2016), www.wipo.int/export/sites/www/pct/ en/texts/pdf/pct_paris_wto.pdf. There are only a few countries that are not members of the Paris Convention and that do not have separate reciprocal agreements with the United States. These countries include Angola, Fiji, Kuwait, the Maldives, Myanmar, and the Solomon Islands. D. [1.76] Foreign National and Regional Patent Offices Almost all countries have national patent offices. However, some countries have banded together to create a regional patent office that, as an option, examines patents entering into countries in that region. These regional patent offices, include the European Patent Office (EPO); the Eurasian Patent Organization (EAPO), consisting mainly of former Soviet republics; the Organisation Africaine de la Propriété Intellectuelle (OAPI); and the African Regional Intellectual Property Organization (ARIPO). The EPO is the largest such regional office. Almost
1 — 60
WWW.IICLE.COM
PATENTING INVENTIONS
§1.77
all Eastern and Western European countries allow patent applications to be examined first at the EPO. Upon grant of the patent by the EPO, the European patent is registered in the patent office of each desired European country. This is economical compared to paying the costs to have the application separately examined in three or more patent offices in Europe.
XIII. [1.77] INVENTION PROMOTION COMPANIES Every year, thousands of individual inventors are taken in by fraudulent invention promotion companies. These fraudulent companies offer to help inventors patent their inventions and/or promote and market their inventions to other companies. The fraudulent companies lure inventors by providing a free or low-cost invention analysis that almost always shows that the invention is patentable and that there is a huge market potential for the invention, at which point high-pressure sales tactics may be used to obtain thousands of dollars for promises that rarely come through. Even if the activity is not criminally fraudulent, it may capitalize on the inventor’s ignorance of the patent system and the low level of contractual obligations made with the inventor. In better situations, the invention promotion company may actually contract with a patent attorney or agent and obtain a utility patent covering the precise picture of the prototype or a design patent covering only the ornamental features of the inventor’s prototype. Instead of obtaining a patent for clients, fraudulent companies may only submit a description of the invention to the patent office as a provisional patent application, which inventors can do themselves for $150, and this submission provides only limited patent pending status for one year. Likewise, the marketing efforts put forth by these companies may include an abstract of the inventor’s product in a catalog of hundreds of other products, with the catalog being shown at a trade show exhibit or sent unsolicited to a dozen manufacturers, which very likely discard the catalog as trash. That being said, there may be some invention promotion companies that are worth investigating by inventors. Some of these companies, however, typically invest their efforts and their own money only in inventions they deem of value. Some of the companies work as business incubators and work with inventors to help start a business around a patented product. In the authors’ experience, this latter type of company often works with the inventors only after decent patent protection has been obtained. Companies that operate as invention promotion or development services are governed by both federal and state statutes. See 35 U.S.C. §297 (improper and deceptive invention promotion) and the Illinois Fair Invention Development Standards Act, 815 ILCS 620/101, et seq. The United States Patent and Trademark Office provides information helpful to independent inventors, including information on how to determine whether an invention promotion company is a scam. See the USPTO’s scam prevention webpage at www.uspto.gov/patents-gettingstarted/using-legal-services/scam-prevention. In addition, the Federal Trade Commission has successfully pursued complaints against numerous fraudulent or misleading invention promotion companies. The FTC provides additional information at www.consumer.ftc.gov/articles/0184invention-promotion-firms.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 61
§1.78
INTELLECTUAL PROPERTY LAW
XIV. [1.78] GLOSSARY Anticipation: The prior description or knowledge of a complete invention in a single document or object. See §1.24 above. Applicant: An inventor or other party applying for a patent. In the United States, the inventor is presumed to be the applicant unless another party (e.g., employer, etc.) to whom the inventor has assigned its rights or is under an obligation to assign, requests to be designated as the applicant. In many foreign countries, only the entity that owns the invention and patent application is rightfully considered to be the applicant. Application: The complete document and drawings describing an invention submitted to the United States Patent and Trademark Office for the purpose of applying for a patent. See §1.49 above. Claims: The numbered sentences or paragraphs at the end of an application or patent that define the scope of the invention to be protected by the patent. See §1.49 above. Continuation patent application: A patent application that claims the benefit of an earlier filed patent application and claims a similar or different invention from the invention examined in the prior application. A continuation patent application may not incorporate any new information, but rather relies on the specification and drawings provided in the prior application. Continuation-in-part patent application: A patent application that claims the benefit of an earlier filed patent application and contains new information not described in the earlier filed patent application. The continuation-in-part patent application may claim, but is not required to claim, an invention described by the newly added information. Derivation: A situation in which an invention is based on or derived from the inventor’s knowledge of another person’s creation. A derivation proceeding is a process in which the USPTO allows one inventor to challenge the award of a patent to another inventor on the basis that the latter derived the invention from the former. See §1.60 above. Design patent: A patent protecting the ornamental aspects of a manufactured product or computer displayed image. See §1.20 above. Divisional patent application: A patent application that claims the benefit of an earlier filed patent application but claims an invention that was withdrawn from examination in the prior application as a result of a restriction requirement. See §1.53 above. A divisional application may not incorporate any new information, but rather relies on the specification and drawings provided in the prior application. Effective filing date: The earlier of the actual date a patent application is filed with the USPTO or the filing date of any patent applications to which the application claims priority.
1 — 62
WWW.IICLE.COM
PATENTING INVENTIONS
§1.78
Ex parte reexamination: A procedure in the USPTO in which a granted U.S. patent undergoes additional examination to determine the patentability of the claimed subject matter in view of new prior art documents. Only the patent owner participates in the reexamination. See §1.63 above. Inequitable conduct: The intentional withholding of material information from the USPTO or affirmative misrepresentations to the USPTO that may result in a patent being unenforceable in court. See §1.51 above. Interference: A proceeding between two applications for the same invention in which the first party to invent the invention is determined. See §1.60 above. Inter partes review: A proceeding in the USPTO requested by a third-party more than nine months after a patent is granted to challenge the validity of the patent on the grounds that it is invalid in view of prior art documents. Both the requestor and the patent owner participate adversarially in the proceeding. See §1.63 above. Invention: Conception of a concrete idea coupled with its reduction to practice, i.e., the creation of the inventive ideas in concrete, detailed form and the subsequent actualization of the invention; the filing of a patent application is deemed to be a constructive reduction to practice. Issue date: The date the patent is granted and published by the USPTO. See §1.59 above. Nonobviousness: A condition in which the features of an invention, even if known individually, were not previously described or suggested to be combined together as in the invention; a condition in which an invention is not an obvious combination of known elements or steps. Nonobviousness is a requirement for patentability. See §1.28 above. Novelty: A condition in which the features of an invention were not previously known or described in the same exact combination as in the invention. Novelty is a requirement for patentability. See §1.24 above. See also Anticipation above. Obvious: An invention is considered to be obvious (i.e., lacking inventiveness) when the features of the invention were previously described or suggested in separate written documents or articles that were publicly sold, and a person of ordinary skill in the art would have had a reasonable motivation and the know how to combine those features to create the invention. See also Nonobviousness above. Office action: A written examination report prepared by a patent examiner expressing reasons why an invention in a patent application is not patentable. See §1.54 above. The applicant may file a response to the office action that rebuts the examiner’s reasoning and/or amends the claims in order to place the application in condition for allowance. Patentee: The owner of a patent. See also Applicant above.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 63
§1.78
INTELLECTUAL PROPERTY LAW
Patent Cooperation Treaty international patent application: A patent application that reserves the applicant’s right to file a patent application in any country that is a member of the Patent Cooperation Treaty for a period of 30 months after the filing date of the first application to which the PCT application claims priority. Post-grant review: A proceeding in the USPTO requested by a third-party within nine months after a patent is granted to challenge the validity of the patent under almost any ground that could have been raised in a court lawsuit to challenge the patent. Both the requestor and the patent owner participate adversarially in the proceeding. See §1.64 above. Prior art: Information or documents that were in existence prior to the invention or prior to the filing of the patent application that may describe features of the invention; information and documents that were part of the state of the art or known before the effective filing date of a patent application. Priority date: The date of a prior filed application that a later-filed application may be entitled to claim the benefit of. Prosecution: The activities of a party and its patent attorney in connection with the filing and examination of a patent application. See §§1.47 – 1.60 above. Provisional patent application: A patent application that serves as a place holder for the right to file a nonprovisional patent application on the same invention within one year and claim the benefit of the earlier filing date of the provisional application. See §1.48 above. Reissue: A procedure in the USPTO in which a patent owner may request that a granted U.S. patent undergo additional examination to correct a defect in the granted patent that caused it to be partially or wholly invalid. See §1.62 above. Reexamination: A procedure in which a U.S. patent may undergo examination after being granted. See Ex parte reexamination above, Supplemental reexamination below, and §1.63 above. Supplemental reexamination: A procedure in the USPTO in which a patent owner may request that a granted U.S. patent undergo additional examination to consider, reconsider, or correct information relating to the patentability of the patent in view of new information. Only the patent owner participates in the reexamination. See §1.63 above. Utility: The asserted practical usefulness of an invention. See §1.23 above. Utility patent: A patent protecting the useful or functional aspects of a product, composition, or process. See §1.12 above.
1 — 64
WWW.IICLE.COM
PATENTING INVENTIONS
§1.79
XV. [1.79] APPENDIX — INVENTION DISCLOSURE FORM INVENTION DISCLOSURE FORM CONFIDENTIAL 1. Title of the Invention:
2. Project Name or Number:
3. Inventor(s): Name: Home Address: Citizenship:
Name: Home Address: Citizenship:
(List additional inventors on separate page) 4. What problems are solved or improvements accomplished by this invention?
5. Summary of the invention: How are the above problems solved or improvements accomplished?
6. What is the value or utility of the invention for the company? What other products or industries could benefit from this invention?
7. What was the conception date of the invention? (Attach pertinent log sheets, drawings, written description, etc., to support this date.)
8. What was the date of the first drawing of the invention? (Attach pertinent drawings to support this date. Always attach the earliest drawing to support this date regardless of how rough the drawing may be.)
9. What was the date of the first written description of the invention? (Attach pertinent written documents to support this date. Always attach the earliest written description to support this date regardless of how rough the written description may be.)
10. When did you first do any experimental work toward carrying out the invention? When was the first prototype completed?
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
1 — 65
§1.79
INTELLECTUAL PROPERTY LAW
11. List the date and recipient of the earliest disclosure and subsequent disclosures of this invention. (Attach supporting documents.)
12. What is the first date of testing or production that did or will involve non-secret disclosure or commercial use of the invention? Describe the activity (proposed or completed), including whether any information or samples relating to the invention have been or will be given to customers.
13. If products relating to the invention have already been offered for sale or sold or the process has been used to commercially exploit the invention, give the date of the first offer for sale, sale, or other commercial use of the invention.
14. List the closest known technology (i.e., publications, patents, or commercial products). Describe searches conducted. Provide copies of any nonpatent literature.
15. Provide a detailed description of the invention and its preferred embodiments. Include examples and drawings, if available. Discuss the intended purpose and environment of the invention. What equivalents could be substituted for materials or methods in the invention? Discuss the differences between any known or similar technology and the invention. (Use several sheets, as necessary.) 16. Is further experimental work now under way or contemplated for the near future? If so, give a general summary of such work and an idea of when it will be completed.
17. Signature(s) of Inventor(s): ____________________________
Date: ________________________________
____________________________
Date: ________________________________
18. Witnesses: The witnesses, in signing this form, attest to the fact that they understand the invention.
____________________________ Typed or Printed Name Address:
_____________________________________ Signature Date: ________________________________
____________________________ Typed or Printed Name Address:
_____________________________________ Signature
Date: _______________________________
1 — 66
WWW.IICLE.COM
2
Litigating U.S. Patent Rights in a Changing Landscape
JAFON FEARSON LAURA BETH MILLER Brinks Gilson & Lione Chicago
The contribution of Jeffrey A. Marx to previous editions of this chapter is gratefully acknowledged. ®
©COPYRIGHT 2017 BY IICLE .
2—1
INTELLECTUAL PROPERTY LAW
I. [2.1] Patent Litigation Overview II. Prefiling Considerations A. B. C. D. E. F. G. H. I.
[2.2] Identifying the Business Objectives in Pursuing Litigation [2.3] Identifying the Risks and Costs of Patent Litigation [2.4] Selecting the Litigation Team [2.5] Gathering Evidence and Building the Case [2.6] Retaining Experts or Consultants Early in the Process [2.7] Identifying the Proper Plaintiff [2.8] Investigating the Alleged Infringement [2.9] Identifying the Appropriate Defendant Evaluating the Extent of Potential Damages and Remedies 1. [2.10] Damages Under the Patent Statute a. [2.11] Reasonable Royalty b. [2.12] Lost Profits c. [2.13] Additional Awards Available 2. [2.14] Limitations on Damages Recovery 3. [2.15] Facts To Investigate in Assessing Damages 4. [2.16] Injunctive Relief
III. Initial Filings and Related Issues A. Where To Bring Suit 1. [2.17] District Court Jurisdiction 2. [2.18] Venue 3. [2.19] Joinder 4. [2.20] District Court’s Intellectual Property Track Record 5. [2.21] The United States International Trade Commission B. [2.22] Preliminary Injunction Motions C. [2.23] Elements of the Complaint D. [2.24] Primer on the Law of Infringement 1. [2.25] Direct Infringement a. [2.26] Literal Infringement b. [2.27] Infringement Under the Doctrine of Equivalents (1) [2.28] Limitations on the doctrine of equivalents (2) [2.29] Prosecution history estoppel (3) [2.30] Subject matter disclosed but not claimed
2—2
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
2. [2.31] Indirect Infringement a. [2.32] Elements of Inducement Under 35 U.S.C. §271(b) b. [2.33] Elements of Contributory Infringement Under 35 U.S.C. §271(c) 3. [2.34] Willful Infringement E. [2.35] Responding to Complaint (Answers, Affirmative Defenses, and Counterclaims) 1. [2.36] Defense or Claim of Noninfringement 2. [2.37] Affirmative Defense of Invalidity a. [2.38] Defenses Under 35 U.S.C. §101 b. [2.39] Defenses Under 35 U.S.C. §102 c. [2.40] Defenses Under 35 U.S.C. §103 d. [2.41] Affirmative Defenses Based on the Disclosure Requirements of 35 U.S.C. §112 3. [2.42] Affirmative Defense Based on License Rights and/or Patent Exhaustion 4. [2.43] Affirmative Defense Based on Statutory Bar on Damages, Failure To Mark, and/or Intervening Rights 5. [2.44] Affirmative Defense Based on Laches 6. [2.45] Affirmative Defense of Equitable Estoppel 7. [2.46] Affirmative Defense of Patent Unenforceability a. [2.47] Inequitable Conduct b. [2.48] Patent Misuse F. [2.49] Filing of Jury Demands IV. Case Management Issues and Discovery A. Preliminary Issues 1. [2.50] Protective Orders 2. [2.51] Electronic Discovery 3. [2.52] Case Management Plan B. [2.53] Motions To Bifurcate C. [2.54] Motions To Sever and Transfer D. [2.55] Typical Discovery Sought by Patentee E. [2.56] Typical Discovery Sought by Alleged Infringer V. Claim Construction/Markman Hearings A. [2.57] Court Has Responsibility of Construing Claim Terms B. [2.58] Evidence Considered in Construing Claims C. [2.59] Process of Claim Construction
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2—3
INTELLECTUAL PROPERTY LAW
D. Special Claim Construction Considerations 1. [2.60] Preamble 2. [2.61] Construing Means-Plus-Function Claims VI. [2.62] Summary Judgment, Trial, and Appeal VII. Post-Grant Procedures Under the Leahy-Smith America Invents Act A. [2.63] Brief Overview: Inter Partes Review, Post-Grant Review, and Cover Business Method B. [2.64] Inter Partes Review C. [2.65] Post-Grant Review D. [2.66] Covered Business Methods VIII. Checklists A. B. C. D. E. F. G.
[2.67] [2.68] [2.69] [2.70] [2.71] [2.72] [2.73]
Business Considerations in Bringing a Patent Infringement Suit Facts To Investigate in Assessing Damages Lost Profits Considerations Reasonable Royalty Considerations Complaint Elements Categories of Typical Discovery Sought by Patentee Categories of Typical Discovery Sought by Alleged Infringer
IX. Forms A. B. C. D.
2—4
[2.74] [2.75] [2.76] [2.77]
Sample Complaint for Patent Infringement Sample Affirmative Defenses to Complaint for Patent Infringement Sample Patentee Interrogatories Sample Accused Infringer Interrogatories
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
I. [2.1]
§2.1
PATENT LITIGATION OVERVIEW
The U.S. Constitution empowers Congress to grant patents to inventors in order to “promote the Progress of Science and useful Arts.” U.S.CONST. art. I, §8. While there were some writings debating the value of (and potential abuses of) granting patents at the time of the Constitutional Convention, the concerns expressed then pale in comparison to the concerns raised more recently about whether patents help or hinder the progress of science, or perhaps more accurately, help or hinder commerce and innovation. While the debate has included discussion about the effectiveness of the United States Patent and Trademark Office (USPTO) in reviewing and issuing patents, nowhere has this debase drawn more heated discussion than in the context of patent litigation. A myriad of factors has contributed to the intense focus on patent litigation, including the increased rate of patent litigation filings over the last 20 years, the increased cost of that litigation, and the increased, and perceived uncertainty, in patent damages, particularly in instances in which the litigants were not competitors, but rather alleged infringers being sued by well-financed individuals and companies that had secured the patent rights from the original inventor for the purpose of initiating litigation. To address these concerns, the courts, Congress, and industry leaders have taken various actions in the name of “patent reform.” On September 16, 2011, the Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat. 284 (2011), became law. The AIA was a major piece of patent reform legislation and is probably the most significant change to the U.S. patent system in the last 50 years. Its impact can be seen in the way parties are approaching patent litigation, particularly with respect to the way alleged infringers are challenging the invalidity of asserted patents. For example, the AIA provides alleged infringers (and others) with a mechanism for challenging the validity of patents through quasi-judicial, administrative proceedings. The administrative proceeding typically proceeds more quickly than a court proceeding and applies a lower standard than a court for invalidating a patent, making it a potentially low-cost option for alleged infringers or others seeking to clear the patent landscape before launching or continuing to sell a product in the market. The U.S. Supreme Court also has taken renewed interest in patent cases, granting certiorari petitions in a number of areas, including patent-eligible subject matter and damages. In addition, the federal and district courts have promulgated a number of rulings specifically directed toward patent litigation. In general, these rulings have tended to streamline the patent litigation process and provide clarity on complex substantive issues. In fact, throughout the 1990s, the number of patent infringement cases filed each year increased steadily. See PriceWaterhouseCoopers LLP, 2015 Patent Litigation Study: A change in patentee fortunes, p. 3, Figure 1, www.pwc.com/us/en/forensic-services/publications/assets/2015pwc-patent-litigation-study.pdf (May 2015). After a brief leveling off period between 2004 and 2009, patent filings were again on the rise, peaking in 2013 with over 6,000 cases filed. Id. Since then, however, patent filings have been on the decline; whether this is a permanent change, or just a temporary change as parties adjust their strategies in light of the AIA procedures and court decisions, remains to be seen. Median damage awards also seem to be trending slightly downward, but the range of damage awards remains high. 2015 Patent Litigation Study, p. 4. This
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2—5
§2.2
INTELLECTUAL PROPERTY LAW
slight downward trend in damage awards may be attributable to the steps taken by the courts to bring more predictability into damage awards through demanding more exacting expert testimony and proof on damage claims, as discussed in §§2.10 – 2.16 below. Why all this attention on patent law? Patents provide their owners with a potentially powerful and financially lucrative property right. Patents encourage innovation and provide businesses with a competitive advantage. A legal system that protects those rights, while recognizing the limits of those rights and protecting against abuses, is essential to securing the intended purpose of the patent grant. In that regard, some of the patent reforms initiated over the last decade have hit the mark, while others have fallen short. Counsel of Economic Advisers Issue Brief, The Patent Litigation Landscape: Recent Research and Developments, www.whitehouse.gov/sites/default/files/page/files/201603_patent_litigation_issue_brief_cea.pdf (Mar. 2016). As such, we can expect that the landscape for patent litigation will continue to change and evolve, but it will not go away. Therefore, this chapter identifies the phases of patent litigation and discusses the typical issues facing the patentee and the alleged infringer in each phase. In general, patent litigation can be broken down into the phases or components of prefiling considerations, initial pleadings, discovery, claim construction, summary judgment, trial, and appeal.
II. PREFILING CONSIDERATIONS A. [2.2] Identifying the Business Objectives in Pursuing Litigation As with most litigation, patent litigation is time-consuming and expensive. Depending on the jurisdiction, patent cases can take several months to several years to reach trial; the median time to trial is over two years. PriceWaterhouseCoopers LLP, 2015 Patent Litigation Study: A change in patentee fortunes, p. 14, www.pwc.com/us/en/forensic-services/publications/assets/2015-pwcpatent-litigation-study.pdf (May 2015). A party should expect to spend several million dollars in fees and expenses, including expert fees if a case proceeds through trial. The costs vary depending on the technology, the number of patents and products at issue, the number of disputed issues, and the number of experts needed, as well as the litigation support technology and consultants used to assist in presenting a case. This is but one of the reasons why alleged infringers, with strong invalidity defenses, may opt to challenge the validity of an asserted patent before the Patent Trial and Appeal Board (PTAB). See §§2.63 – 2.66 below. Still, most cases do not proceed to trial. Instead, many cases are often settled, either after the court construes the claim terms through a process referred to as a Markman hearing (see Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed.Cir. 1995), aff’d, 116 S.Ct. 1384 (1996)) or at the summary judgment stage. The claim construction process (discussed in §§2.57 – 2.61 below) provides a framework to interpret the scope of the claims for purposes of infringement and invalidity. Given the substantial costs, time, and uncertainty involved in protracted litigation, it is important to have a firm goal in mind before initiating any patent litigation and to explore whether alternatives to litigation are possible.
2—6
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.2
The patentee (patent owner) should identify its objectives in initiating patent litigation in light of the company’s current and anticipated business needs. For example, objectives may include maintaining exclusivity for the patented technology in the marketplace, obtaining a revenue stream, meeting contractual obligations to other licensees of the patent, and maintaining a business reputation for protecting and enforcing patent rights. The following list of questions, although not exhaustive, may assist the patentee and its attorneys in identifying the business objectives in bringing a patent infringement suit: 1. Is the patentee currently exploiting the patented invention? 2. Does the patentee have plans to exploit the invention? 3. How important is the patented invention to the overall business? 4. Is the patented invention exclusively available from the patentee? 5. Are others licensed to use the patent? 6. How important is it to maintain exclusivity in the marketplace? 7. How easy is it to design around the patented invention? 8. Are there other acceptable noninfringing alternatives to the patented invention already available in the marketplace that the infringer could begin using or selling to avoid future infringement? 9. What obligations does the patentee have to third parties, such as licensees, to take action against infringers? 10. Is the alleged infringer using the patented invention in direct competition with the patentee or expanding the use of the patented invention into additional markets? Are these markets of interest or accessible to the patentee? 11. What is the financial value (long term and short term) of the patent to the alleged infringer? To the patentee? 12. Is there a history of disputes between the patentee and the alleged infringer? 13. Are there other issues currently in dispute between the companies, such as unfair advertising activities relating to the product at issue? 14. What is the value of the potential damage recovery? 15. What are the financial conditions of the patentee and the alleged infringer? 16. Does the alleged infringer have patents that may be of interest or concern to the patentee’s product line?
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2—7
§2.3
INTELLECTUAL PROPERTY LAW
Once the business objectives are identified, the importance of meeting these objectives under the particular circumstances can be compared to the risks and financial costs of bringing a patent infringement claim. B. [2.3] Identifying the Risks and Costs of Patent Litigation Patent litigation is not without risk to the patentee. In most contested patent cases, the validity of the patent will be challenged by the alleged infringer. Often, claims of unenforceability and patent misuse are asserted by alleged infringers. Although the defendant has a high burden of proof on these issues, the risk that these defenses may succeed is real. Moreover, post-grant procedures under the Leahy-Smith America Invents Act impose a lower burden of proof than that imposed by the courts when challenging the validity of an issued patent. See §§2.63 – 2.66 below. These defenses, if successful, will render the patent invalid or unenforceable. This is particularly problematic for a patentee if the patent is generating substantial licensing revenue. Therefore, patentees should consider an invalidity analysis and an analysis for risk of inequitable conduct charges before initiating a patent suit. Another important consideration is whether the patentee has the cooperation of and/or access to the inventors and the attorneys who prosecuted the patent. These individuals can provide information relating to the development of the invention and the state of the industry at the time, as well as the events surrounding the preparation and prosecution of the application. In addition, the alleged infringer may consider bringing an antitrust counterclaim, particularly if the patentee is the dominant player in the market. Antitrust cases, even if not successful, add a layer of complexity and expense to an already complicated litigation process. Therefore, the risk of antitrust counterclaims should be considered prior to the initiation of litigation. The patentee should be aware of any risk that its own product line may have to a claim for patent infringement asserted by the alleged infringer. Such a claim could be asserted as a counterclaim in the suit brought by the patentee, or it could be brought in an entirely separate action before a different court, forcing the patentee to juggle two patent cases in two different forums. In addition to these risks, the financial and human resources investment necessary to successfully pursue patent litigation should not be underestimated. These factors should be considered and balanced against the potential benefits of obtaining injunctive and/or monetary relief for infringement. C. [2.4] Selecting the Litigation Team While companies understand the need to select patent litigation counsel carefully, including counsel that can assist in evaluating options under the Leahy-Smith America Invents Act concerning post-grant procedures, companies often overlook the equally important need to handpick the people within the company who will be responsible for providing the management support and technical assistance necessary for a winning result. Although a company may feel the urge to deliver a case to outside counsel and experts “to handle,” invariably the best results are obtained when the clients are involved in and committed to the litigation process.
2—8
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.6
Who should be involved? In companies with a legal department, in-house counsel plays a key role in formulating litigation strategy decisions, as well as ensuring (1) that key information is disseminated to the decision-makers within the company and (2) that outside counsel has access to the information and resources available within the company. In companies without in-house counsel, someone within management should be identified to fill this role. In addition, it is important to identify a person within the company who can serve as a “technical” resource or liaison to answer questions about the patents and products at issue, the state of the industry, and the general nature of the technology. The person selected should be knowledgeable about the technology and the company’s products, but it is equally important that this person also have good communication skills and be motivated to work with the attorneys to find answers to the questions being asked. This role may require a significant amount of time. Therefore, outside counsel and the company need to work together to make sure that the technical liaison has the support and time necessary to serve in this function without losing focus on his or her primary job responsibilities. D. [2.5] Gathering Evidence and Building the Case At the outset of any prefiling investigation, the patentee and counsel should assess the strength of the patent, evaluate the scope and meaning of the patent claims, and determine what evidence exists within the company and possibly with third parties that bears on the issues likely to be raised during the course of litigation. Some patentees pursue “validity opinions” from their counsel. Even if a formal opinion is not pursued, it is a good practice for an attorney to take a fresh look for prior art that may invalidate the patent, particularly art of which the patentee was unaware at the time the patent was filed. Such steps are particularly useful for patentees that acquired the patent after issuance and were not involved in its prosecution and/or when the patent covers technology areas in which the patentee does not have a strong understanding of the prior art in the field. A patentee should expect that the alleged infringer will look for prior art that can be used to initiate post-grant proceedings under the Leahy-Smith America Invents Act. In addition, efforts should be made to identify and interview the inventors and the prosecuting attorney to see what information they recall regarding the claimed invention and its development. Again, this is particularly useful when the patentee is unaware of the sequence of events leading up to the invention or when the prosecuting attorney is no longer involved in the project. The alleged infringer is likely to seek information on the conception and reduction to practice of the claimed invention, as well as the prosecution of the patent application. Therefore, the patentee should be aware of this information and begin gathering it along with information that may shed light on when the claimed invention was first offered for sale, incorporated into a commercial product, discussed in a written publication, or otherwise made available to third parties or the public. E. [2.6] Retaining Experts or Consultants Early in the Process The retention of an expert early in the evaluation process can be of tremendous benefit. Usually, this means identifying a technical expert familiar with the technology involved in the case. Depending on the needs of the case, it may be helpful to retain an expert who is not
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2—9
§2.6
INTELLECTUAL PROPERTY LAW
expected to serve as a testifying expert. In this way, the expert can be involved in the trial strategy and initial infringement assessment without concern that the meetings, discussions, and information exchanged with the expert will be discoverable. Counsel should keep in mind that if the expert becomes a testifying expert, information exchanged with the expert — including information exchanged prior to initiation of the case — may be discoverable under Federal Rule of Civil Procedure 26 if the expert considered the information in forming an opinion. Fed.R.Civ.P. 26(b)(4). The client, and particularly the scientists and engineers at the company, can be a good source of leads for potential experts. Other sources for identifying experts include published technical literature, college and university websites (these often include detailed bios and resumes of the faculty, many of whom are available and actively solicit for consulting arrangements), and other experts used in the past. Depending on the size and complexity of the case, it also may be helpful to retain, prior to initiation of the lawsuit, a financial, economic, or licensing expert to help identify the relevant market and assess the scope of a potential damage award. Also, if there is a concern that the alleged infringer may assert an antitrust counterclaim, a consultant can provide assistance in assessing that risk. If it is expected that the expert will serve as a testifying expert at trial, Federal Rule of Evidence 702 should be kept in mind and an assessment should be made of the vulnerability of the expert to a successful Daubert challenge. Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 125 L.Ed.2d 469, 113 S.Ct. 2786 (1993). See also 1-20 Donald S. Chisum, CHISUM ON PATENTS §20.07 (2006 ed.). In selecting a testifying expert, the person should have not only excellent academic credentials but also real-world experience in the relevant technology. The expert should be an excellent teacher and communicator. Also, the need for the expert to have a likeable personality while maintaining an attitude of professionalism and confidence should not be underestimated. Finally, the expert must be free from any real or perceived bias. For this reason, former employees of a company, while they may be good technical consultants, may not be the best testifying experts because it will be difficult to overcome the perceived bias in favor of their former employer.
PRACTICE POINTERS
An “expert” with a long résumé that recites dozens of cases in which he or she has testified each year may indeed be an “expert” in testifying, but may not have the credentials that the client needs to credibly evaluate and testify about the patent and products at issue.
A number of services exist to assist in identifying experts. In addition, many universities have professors who are available and have experience providing expert testimony in litigation. When interviewing experts, consider including a member of your client’s technical team in the process. He or she can assist in evaluating the knowledge and communication skills of the proposed expert.
2 — 10
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.7
Also consider the venue when assessing the experience and presentation style of your expert. Not every proceeding may include a jury assessing the credibility of your expert. For example, there are no juries at United States International Trade Commission (USITC) proceedings. Instead, the final hearing or “trial” is held before an administrative law judge. Some ALJs will permit live direct testimony of an expert, but some expert testimony may be presented in the form of a written statement, with live testimony reserved for cross-examination or redirect and possibly questions from the bench.
F. [2.7] Identifying the Proper Plaintiff Who has standing to sue for patent infringement? The answer, similar to other types of property such as real estate, is the patent owner. In the United States, patents are filed in the name of the individual inventor(s), not in the name of a corporation or joint venture. Often, however, the patent or patent application is assigned by the inventor(s) to a corporation or other entity. An assignment is a legal transfer of title to the patent. Assignments must be in writing to be effective. 35 U.S.C. §261. An assignment conveys the right of exclusivity, the right of transfer of ownership, and the right to bring suit for infringement. Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U.S. 24, 67 L.Ed. 516, 43 S.Ct. 254, 256 (1923). Unless expressly stated, however, the assignment does not include the right to sue for past damages (i.e., damages due to the prior owner or assignee of the patent). Interestingly, an assignment may be for the entire patent, for an undivided part or interest in the patent, or for all rights to the patent but only for a specified geographic region of the United States. 35 U.S.C. §261; Enzo APA & Son, Inc. v. Geapag A.G., 134 F.3d 1090, 1093 (Fed.Cir. 1998). Once assigned, a patent may be enforced by the assignee as the “successor[ ] in title to the patentee.” 35 U.S.C. §100(d). As noted above, a patent may be issued to, or assigned to, two or more individuals or entities. In the case of joint ownership of a patent, all joint owners must join in the suit to enforce the patent. If one joint owner refuses to join in the lawsuit, the suit cannot proceed. Therefore, joint venture agreements may include a clause whereby each owner grants the other joint owner the right to bring infringement suits unilaterally and further agrees to submit to the court’s jurisdiction and to join in any infringement suit initiated by the other joint owner. In this way, the recalcitrant owner can be joined as an indispensable party under Fed.R.Civ.P. 19. In addition, an exclusive licensee may join as a coplaintiff in the litigation. Exclusive licensees do not receive all the rights to a patent, but they do receive the right to exclude others from making, selling, using, or importing the products or methods covered by the patent. Since exclusive licensees enjoy the right to exclude others from practicing the patented invention, they have standing to seek relief from patent infringement. STC.UNM v. Intel Corp., 767 F.3d 1351, 1354 (Fed.Cir. 2014) (“Case law indicating that Rule 19 is available to an owner to join a coowner under circumstances in which there is an agreement by the co-owner to join, or available to someone who, by agreement, is an exclusive licensee, only underscores the importance of absent owners’ consent to joinder. Under circumstances in which a plaintiff has a contractual right to unilaterally enforce the patent, Rule 19 unremarkably allows that plaintiff to join involuntary plaintiffs. Without agreement, no precedent has held that a co-owner may be involuntarily joined.” [Emphasis added.]). However, if the license is not exclusive, and the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 11
§2.8
INTELLECTUAL PROPERTY LAW
patentee refuses to join in the patent litigation, it may be possible to join the patentee as an indispensable party. Fed.R.Civ.P. 19. See Abbott Laboratories v. Diamedix Corp., 47 F.3d 1128, 1131, 1133 (Fed.Cir. 1995). A licensee who has less than an exclusive license cannot bring an action for patent infringement. Therefore, in considering whether to bring a patent infringement suit, it is important for a potential plaintiff to confirm that it has all the necessary ownership rights to bring the action against the alleged infringer. If other parties must be brought into the lawsuit as plaintiffs, it is generally best to work out the arrangement with them in advance. In approaching other parties with interests in the patent, it should be considered whether all parties have a “community of interest” such that they can share confidential information and/or be represented by the same counsel. In re Regents of University of California, 101 F.3d 1386, 1390 (Fed.Cir. 1996). Other points to consider are cost-sharing, decision-making authority, and allocation of damage awards. Such arrangements should be fully discussed and confirmed in writing at the outset. From the alleged infringer’s point of view, it is important to consider whether the plaintiff has standing. For example, if only the exclusive licensee or fewer than all of the joint owners are joined as the plaintiff, it may be possible to have the case dismissed for failure to join an indispensable party. In addition, in the case of joint ownership, it may be possible to obtain a license from the non-suing joint owner even after the suit has begun. While all joint owners must be parties to a lawsuit, a joint owner does not need the permission of other joint owners to grant a license (unless the agreement between them states otherwise). A nonexclusive license will protect the licensee from damage claims arising after the grant of the license and will prevent the suing owner from obtaining injunctive relief. It may even be possible, under Ethicon, Inc. v. United States Surgical Corp., 135 F.3d 1456, 1468 (Fed.Cir. 1998), to have the case dismissed if the non-suing owner grants an exclusive license to the defendant. G. [2.8] Investigating the Alleged Infringement A patentee must have a reasonable basis for believing the defendant has violated the plaintiff’s patent rights before a suit can be brought, which means that the patentee must undertake an adequate prefiling investigation. In View Engineering, Inc. v. Robotic Vision Systems, Inc., 208 F.3d 981, 986 (Fed.Cir. 2000), the Federal Circuit said that, at a minimum, the patentee must compare the claims of the asserted patent to the accused device and have “a reasonable basis for a finding of infringement of at least one claim of each patent [being] asserted.” This may be a relatively low burden to meet when the allegedly infringing product is readily available and the presence or absence of the patent limitations can be determined through a visual inspection or other testing of the product. It becomes more difficult, however, to determine whether there is a reasonable basis for finding infringement when the product is difficult to obtain or the patent claims are directed to methods of manufacture, composition percentages, or other features that are not easily detected through inspection or testing of the product. The Federal Circuit recognized this dilemma in Hoffman-La Roche Inc. v. Invamed Inc., 213 F.3d 1359, 1364 (Fed.Cir. 2000). In Hoffman-La Roche, in which it affirmed a denial of a motion for sanctions under Fed.R.Civ.P. 11 based on the defendant’s claim that the patentee had failed to conduct an adequate prefiling investigation. Prior
2 — 12
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.10
to filing the suit, the patentee requested information on the manufacturing process for the product from the defendant. 213 F.3d at 1364. When the defendant refused to provide the requested information, the patentee proceeded to file suit, setting forth the basis for its belief of infringement (the defendant had filed a Food and Drug Administration application seeking to market a generic form of the patentee’s drug), including the efforts it had made to determine infringement, and, finally, indicating that further analysis was not possible without the aid of discovery. After initiation of the suit, the parties reached an agreement whereby the patentee was provided with information necessary to determine whether infringement existed. The patentee concluded that infringement did not occur, and the case was dismissed. Under the circumstances, the district court determined that sanctions were not appropriate, and the Federal Circuit agreed. 213 F.3d at 1366. H. [2.9] Identifying the Appropriate Defendant Once the patentee has determined that there is a reasonable basis for concluding that infringement is occurring, the next step is to identify the proper defendant. As discussed in detail in §§2.24 – 2.34 below, infringement may occur either directly or indirectly, and more than one entity may be involved in the infringement. Therefore, it is important to determine which entities should be sued for infringement, although it is not necessary to sue every entity involved in the infringing activity. For example, if the patent claim covers a manufacturing process, the manufacturer could be liable for direct infringement under 35 U.S.C. §271(a) for using the patented process in manufacturing a product. However, the seller of the product manufactured by the patented process might also be liable for infringement under 35 U.S.C. §271(g). Alternatively, the patent claim may cover a patented product. In that case, the manufacturer could be liable under §271(a) for making the product, the distributor could be liable under the same section for selling the product, and the end user could be liable for using the patented product. I. Evaluating the Extent of Potential Damages and Remedies 1. [2.10] Damages Under the Patent Statute With newspaper headlines touting the award of patent damages in the hundreds of millions of dollars, patentees can have an unrealistic estimate of the value of their case. Winning an infringement case does not guarantee a huge pot of gold at the end of the day. Section 284 of the U.S. patent statutes, 35 U.S.C. §1, et seq., provides for damages “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” The key language is that the damage award shall be “in no event less than a reasonable royalty for the use made of the invention.” Thus, the statute sets a floor for the damage award. The question of what constitutes adequate compensation is a question of fact for the jury to find, but §284 further provides that “[w]hen the damages are not found by a jury, the court shall assess them.” Still, significant damages awards in patent cases do occur. Increasingly, these awards have occurred in litigation between nonpracticing entities and large corporate defendants. As a result, companies have lobbied Congress for patent reform directed toward damages. While a number of
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 13
§2.11
INTELLECTUAL PROPERTY LAW
bills introduced in Congress over the years included damages provisions, the Leahy-Smith America Invents Act did not. However, several court decisions have imposed some “reform” on the approach litigants are taking in the area of patent damages. These cases have focused on the framework that a court or jury should apply in assessing what constitutes adequate compensation. The first of these cases was Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed.Cir. 2009). The Federal Circuit ruled that the jury’s award was not supported by substantial evidence because the damages expert had not sufficiently tied the economic value of the patented feature to the proposed royalty base and royalty rate. The patentee unsuccessfully argued that the patented feature created the demand for the product as a whole, and the royalty rate, therefore, should be applied to the value of the entire accused product rather than only the value added by the patented feature. The following year, in ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 – 870 (Fed.Cir. 2010), the court rejected as improper a damages expert’s reliance on the royalty rates from other licenses in the same general technology area but not specifically tied to the patents-in-suit. Then, in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed.Cir. 2011), the Federal Circuit rejected the damages expert’s reliance on the “25-percent” rule, holding that use of the rule was inadmissible under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 125 L.Ed.2d 469, 113 S.Ct. 2786 (1993), because it is an arbitrary number that had no basis in the relevant facts of the case. Under the 25-percent rule, a reasonable royalty is preliminarily calculated by multiplying the infringer’s profit rate by 25 percent and then applying this percentage to net sales. The Federal Circuit explained that the 25-percent rule is inapplicable because, among other reasons, it cannot account for the unique relationship between the patent and the accused product or between the patentee and the infringer. Uniloc, supra, 632 F.3d at 1313. The court’s rationale for rejecting the 25-percent rule was understandable given the decisions in Lucent, supra, and ResQNet.com, supra, but it was, nonetheless, surprising, given that the Federal Circuit had apparently tolerated use of the 25-percent rule in earlier cases. See, e.g., Fonar Corp. v. General Electric Co., 107 F.3d 1543, 1553 (Fed.Cir. 1997). Following the issuance of these decisions, district court judges have been demanding more concrete proof from patentees on the issue of damages. Two basic models exist when calculating damages in a patent infringement case: reasonable royalties and lost profits. While most cases involve a damages demand for a reasonable royalty, it is possible that a patentee may seek lost profits or a combination of lost profits and a reasonable royalty. However, with the above cases in mind, litigants must give careful attention to the evidentiary proof necessary to establish a damages award. a. [2.11] Reasonable Royalty In 1970, the U.S. District Court for the Southern District of New York identified 15 factors that may be relevant in determining a reasonable royalty. Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970). These factors are referred to as the “GeorgiaPacific factors” and can be generally grouped into three categories: technical factors; financial or business factors; and licensing factors. However, the overriding element of the Georgia-Pacific factors has been the “15th factor,” which is referred to as the “hypothetical negotiation.” 318 F.Supp. at 1121. This factor attempts to answer the question of what a willing and prudent licensor and licensee would have agreed on as a reasonable royalty rate at the time the
2 — 14
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.12
infringement began, taking into consideration the preceding 14 technical, business, and licensing factors. Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1316 – 1318 (Fed.Cir. 2011), confirmed that the Georgia-Pacific factors remain relevant in a reasonable royalty analysis, but reiterated the point that “evidence purporting to apply to [any Georgia-Pacific factors] must be tied to the relevant facts and circumstances of the particular case at issue and the hypothetical negotiations that would have taken place in light of those facts and circumstances at the relevant time.” 632 F.3d at 1317 – 1318. As the Uniloc decision makes clear, not all Georgia-Pacific factors will apply in each case, and they are not given uniform weight. Rather, the facts of each situation dictate their relative utility. In Powell v. Home Depot U.S.A., Inc., 663 F.3d 1221, 1238 (Fed.Cir. 2011), the Federal Circuit held that a patentee’s profit expectation, while a legitimate Georgia-Pacific factor, is not an absolute limit to the amount of the reasonable royalty awarded. Powell awarded the patentee three and one-half times its expected profits based on other Georgia-Pacific factors, such as the infringer’s estimated cost savings resulting from indirect benefits conferred through use of the patented product. The Georgia-Pacific factors are not the only factors that the courts will consider in a damages analysis. The most notable departure from the Georgia-Pacific factors was the move away from a negotiation between willing participants to a “hypothetical negotiation” between unwilling participants. In Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1158 (6th Cir. 1978), the court noted that a “reasonable royalty” did not necessitate some level of profit to the licensee and that the infringer risked little if it were held to pay only what the “routine royalty non-infringers might have paid.” Then, in Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1585 n.13 (Fed.Cir. 1995), the Federal Circuit expressly stated that the concept of a “willing licensor/willing licensee” is an “inaccurate, and even absurd, characterization when, as here, the patentee does not wish to grant a license.” The Federal Circuit concluded that a royalty rate of 50 percent of the patentee’s estimated lost profits was not unreasonable. This rate was more than 75 percent of the infringer’s average net sales price of the infringing product and more than 33 times greater than the infringer’s net profit. It remains to be seen whether this approach will continue to have merit in light of the decision in Uniloc. In other cases, the courts have made an effort to balance the interests of the infringer in this hypothetical negotiation. For example, a patentee should be aware that under the right circumstances an infringer may successfully argue that the availability of noninfringing alternatives should serve as a limit on the hypothetical negotiation. This concept has been acknowledged by the Federal Circuit. Riles v. Shell Exploration & Production Co., 298 F.3d 1302, 1312 – 1313 (Fed.Cir. 2002); Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 1353 (Fed.Cir. 1999). b. [2.12] Lost Profits As indicated in §2.11 above, a reasonable royalty is the minimum amount that the patent statutes consider adequate to compensate a patentee for infringement. In some cases, damages have been based on lost profits. To recover its lost profits, a patentee must show that it is
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 15
§2.13
INTELLECTUAL PROPERTY LAW
reasonably probable that “but for” the infringement the patentee would have made the sales that were made by the infringer. Under this “but for” test, the patentee must prove (1) a demand for the patented product, (2) the absence of acceptable noninfringing substitutes, (3) the ability (in terms of both the patentee’s manufacturing and marketing capabilities) to meet the demand for the patented product, and (4) the amount of profit that the patentee would have made on these sales. Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978). Cf. King Instrument Corp. v. Otari Corp., 767 F.2d 853, 863 – 864 n.9 (Fed.Cir. 1985) (noting that Panduit four-part test is not exclusive test), abrogated on other grounds by Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 142 L.Ed.2d 261, 119 S.Ct. 304, 311 n.11 (1998), as recognized in Medicines Co. v. Hospira, Inc., 827 F.3d 1363, 1372 (Fed.Cir. 2016). Interestingly, lost profits have included lost profits from sales of goods sold by the patentee not covered by the patent. See King Instruments Corp. v. Perego, 65 F.3d 941, 949 (Fed.Cir. 1995); Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1555 – 1556 (Fed.Cir. 1995). In addition, the Federal Circuit in Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 1067 – 1068 (Fed.Cir. 1983), recognized that lost profits could include price erosion, increased expenses, and damage to market growth resulting from the infringement. Still, there are limits on the ability to recover lost profits in patent infringement cases. In Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 1353 – 1354 (Fed.Cir. 1999), the Federal Circuit recognized that the potential availability in a hypothetical marketplace of noninfringing substitutes could be considered before awarding lost profits. However, in Micro Chemical, Inc. v. Lextron, Inc., 318 F.3d 1119, 1122 (Fed.Cir. 2003), the Federal Circuit, in reversing the district court’s finding that a nonmarketed product was “available,” described its decision in Grain Processing as providing guidelines for assessing whether a noninfringing substitute is available. c. [2.13] Additional Awards Available 35 U.S.C. §284 provides for the award of interest and costs. The statute also provides that the damages award may be increased by the court up to three times the amount found by the jury or assessed by the court. This occurs most often when infringement is found to be willful and deliberate. See, e.g., Comark Communications, Inc. v. Harris Corp., 156 F.3d 1182, 1190 – 1191 (Fed.Cir. 1998). In addition, 35 U.S.C. §285 provides that in “exceptional cases” the court may also award reasonable attorneys’ fees to “the prevailing party.” The prevailing party may be the patentee or the alleged infringer. See Comark Communications, supra, 156 F.3d at 1186 (“[P]ursuant to its authority under 35 U.S.C. §§284 – 285 (1994), the district court doubled the damages awarded by the jury . . . in light of the jury's finding of willfulness and also awarded attorney fees.”). 2. [2.14] Limitations on Damages Recovery Notwithstanding the clear mandate for an award of damages following a finding of infringement, the patent statutes also limit the patentee’s rights to such an award in certain instances. First, 35 U.S.C. §286 provides a time limitation on the damages period. It prohibits recovery of damages for infringement committed more than six years prior to filing of the infringement claim.
2 — 16
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.15
In addition, 35 U.S.C. §287 limits the ability of the patentee to recover damages in various instances. For example, §287(a) requires that the patentee who makes a product covered by a product patent (as opposed to a product made by a patented process) must “mark” the product to give notice to the public that the product is patented. If the patented product is not marked, then the patentee cannot recover damages unless there is proof that the infringer was notified of the infringement (not just the patent) and thereafter continued to infringe. Section 287(b) limits the ability of a patentee to recover damages from a party liable for infringement under 35 U.S.C. §271(g). As in discussed in §2.24 below, §271(g) makes a party who imports, offers to sell, or sells a product manufactured by a process covered by a patent in the United States liable for infringement. This extension of patent liability is tempered somewhat by 35 U.S.C. §287(b), which limits the scope of recoverable damages based on notice to the §271(g) infringer of the alleged infringement. The notice provisions of §287(b) are detailed and have not been heavily tested yet. Whether counsel’s client is a patentee or an alleged infringer, particular care should be given to reviewing both §§271(g) and 287(b) in assessing the scope of potential liability and damages. Sections 252 and 307(b) limit the ability of a patentee to assert against another party any claims that were amended or issued during a reexamination or reissue proceeding if the accused activities did not infringe the original claims and the activity began prior to the grant of the reexamination certificate or reissued claims. 35 U.S.C. §§252, 307. An accused infringer does not have to have past knowledge of the patent to take advantage of the “intervening rights” defense, but these intervening rights apply only to the activity that began prior to the grant of the reissue or reexamination certificate, and only if the amended or reissued claims are no longer identical in scope to the original claims. Revival of a patent for failure to pay a maintenance fee may give rise to similar intervening rights under 35 U.S.C. §41 for an accused infringer that begins activity after the six-month grace period following expiration of the patent and prior to the payment of a late fee to reinstate the patent. However, an infringer’s ability to assert an intervening rights’ defense is not absolute and varies based on the specific facts. 3. [2.15] Facts To Investigate in Assessing Damages Whether the case is likely to turn on lost profits or reasonable royalty, there are a few basic damages-related questions that should be considered at the outset. These questions should include the following: a. Over what time period has the alleged infringement occurred? b. What is the scope of the infringement? Is the patented invention a major aspect of the alleged infringer’s product? What is the extent of sales or potential sales? c. What is the remaining life of the patent? d. What is the useful life of the patent — meaning, how likely is it that the patented invention will become outdated or replaced by other technology before the patent expires?
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 17
§2.15
INTELLECTUAL PROPERTY LAW
e. Does the alleged infringer have notice of the patent? f.
Has the infringer been advised of the patent and the infringement?
g. When did the patentee first become aware of the allegedly infringing activity? h. Has the patentee made any effort to contact the alleged infringer and advise the infringer of the patent and the offending activities? i. If the patent at issue is a product patent, does the patentee make, use, or sell the product? If so, is the product marked? j. If the patent at issue is a manufacturing process patent, is the alleged infringement to be asserted under 35 U.S.C. §271(g)? If so, has adequate notice under §287(b) been given to the alleged infringer? k. Do noninfringing alternatives already exist in the marketplace? l. How easy or difficult would it be for the alleged infringer to design around the patented invention? m. What is the value of the injunction regardless of any monetary damage award? In addition to these basic questions, the patentee and its attorneys should assess whether the patentee can establish a basis for claiming lost profits. Questions to consider include the following: a. Is the patentee selling the patented product? b. What is the market for the patented product? c. Has the patentee licensed others to sell the product? d. Are other noninfringing alternatives available or potentially available in the marketplace? e. Is there a market demand for the product? What is driving the patentee’s and alleged infringer’s sales? f.
Can the patentee meet the market demand for the product?
g. Are sales of other products tied to the sale of the patented product? h. Can the patentee meet the “but for” test?
2 — 18
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.15
PRACTICE POINTER
If it appears that there is a potential basis for claiming lost profits, it is helpful to retain the assistance of a financial or economic consultant early in the process. Damages consultants can help identify the evidence that will support a lost-profits case, define the relevant market, and, when discovery begins, evaluate the alleged infringer’s financial information.
Even if the case is more likely to result in a reasonable royalty award, there are some additional facts that should be gathered and evaluated in assessing the size of that potential award. Questions to consider include the following: a. Has the patentee licensed others under this or similar patents? If so, what are the terms of the license? b. Is the patentee aware of other patents covering similar technology? If so, what is the licensing rate? c. Is there an industry source available for reporting of licenses? d. What advantage does the patented invention provide over existing products? e. What costs are associated with using noninfringing alternatives, assuming such alternatives exist or are readily available? For example, significant capital expenditures, retooling costs for the alleged infringer or its customers, or a long customer or government approval process may be real-life barriers to switching to a noninfringing alternative that appears available in theory. f. Is there a commercial relationship between the patentee and licensee, such as competitors for the patented product or other products? g. Is the sale of the infringing product improving the sales of the alleged infringer’s other products? Conversely, is it negatively impacting the sale of the patentee’s nonpatented products? h. Is there an established or anticipated profitability of the patented product? i.
What evidence exists of the commercial success of the patented product?
j. What is the patentee’s ability to exploit or promote the patent? How is that being affected by the alleged infringer’s use of the patented invention?
PRACTICE POINTER
Often, licensing and financial consultants maintain databases of licensing information by the industry that may be helpful in assessing the potential value of a license under the patent.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 19
§2.16
INTELLECTUAL PROPERTY LAW
4. [2.16] Injunctive Relief In addition to monetary awards, a patentee may obtain injunctive relief. 35 U.S.C. §283 provides: The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable. For decades, injunctive relief following a finding of infringement was a foregone conclusion. The assumption was premised in part on the fact that a patent provides a patentee with the right to exclude others from making, using, and selling the patented invention. This right led to the corresponding presumption that a patentee would be irreparably harmed if it could not enforce its right to exclude others. In 2006, the Supreme Court issued a decision in eBay Inc. v. MercExchange LLC, 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006), that rejected this reasoning and put injunctive relief in patent cases on an equal footing with injunctive relief in nonpatent cases by requiring that the district court, in evaluating a request for injunctive relief, apply traditional principles of equity. In eBay, the Supreme Court recognized that traditional principles of equity require that a plaintiff “demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” 126 S.Ct. at 1838. It rejected the Federal Court’s assumption that 35 U.S.C. §283 eliminated the need to weigh equitable factors before granting an injunction. However, the Supreme Court also rejected the district court’s assumption that patentees who did not practice the invention or who were willing to license the patentee could not establish irreparable injury. In practice, however, that has often turned out to be the case following eBay. Among the various factors the courts will consider in evaluating whether to enter an injunction are a. whether the parties are competitors; b. whether the patentee has a pattern of licensing its patent; c. whether the infringing product is a relatively small component in a larger, noninfringing product or system; d. the costs associated with redesigning the accused product; e. whether the patentee is losing market share or there is evidence of price erosion; and f.
whether the patentee delayed in enforcing its patent rights.
Following eBay, a successful patentee can no longer assume that it will obtain injunctive relief and that monetary damages will be the more likely result.
2 — 20
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.18
III. INITIAL FILINGS AND RELATED ISSUES A. Where To Bring Suit 1. [2.17] District Court Jurisdiction Once the decision has been made to bring an action for either patent infringement or declaratory relief on noninfringement and/or patent invalidity, the next question is where should the action be brought? Under 28 U.S.C. §1338(a), U.S. district courts have original and exclusive subject-matter jurisdiction over any civil action “arising under” the patent laws. Patent infringement suits arise under §1338(a), as well as any suit in which a well-pleaded complaint establishes either that (a) federal law “creates the cause of action” or (b) “the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal patent law [when] patent law is a necessary element of one of the well-pleaded claims.” Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 100 L.Ed.2d 811, 108 S.Ct. 2166, 2174 (1988). In addition, 28 U.S.C. §2201 provides the basis for U.S. district courts to hear declaratory judgment actions seeking noninfringement or patent invalidity. Therefore, any federal district court in which the defendant has sufficient minimum contacts to satisfy personal jurisdiction requirements, and in which venue (as discussed in §2.18 below) is proper, is a potential judicial district for these cases. 2. [2.18] Venue 28 U.S.C. §1400(b) is the venue statute that applies specifically to patent infringement cases, while the general venue provision, 28 U.S.C. §1391(b), applies to declaratory judgment actions. Section 1400(b) provides that venue is proper “in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” Given the broad definition of “resides” provided in 28 U.S.C. §§1391(c) and 1391(d) for corporate defendants, there are often numerous judicial districts in which venue would be proper. Moreover, courts tend to view patent infringement as a nationwide activity, particularly if the defendant is selling an allegedly infringing product throughout the country. Given the breadth of the jurisdiction and venue statutes, patentees often have a host of jurisdictions to choose in bringing an action for patent infringement. For this reason, evaluation of the jurisdiction’s patent track record (discussed §2.20 below) becomes important. While jurisdiction and venue may be proper in multiple judicial districts, the defendant may seek to have the court transfer the case under 28 U.S.C. §1404 for the convenience of the parties or witnesses or for other reasons permitted under the statute. Regional circuit law, rather than Federal Circuit law, governs transfer motions. Generally, the plaintiff’s choice of forum is given deference, though less deference is given when the forum is not the plaintiff’s home forum. See In re Link_A_Media Devices Corp., 662 F.3d 1221, 1223 (Fed.Cir. 2011). Additional factors to consider include the convenience of the witnesses and the location of the books and records, as well as public interest factors such as the enforceability of the judgment, judicial economy, and any local interest. 662 F.3d at 1223 – 1224.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 21
§2.19
INTELLECTUAL PROPERTY LAW
Courts tend to respect the plaintiff’s forum selection, but the plaintiff should be cognizant of the risk that a defendant may bring a motion for change of venue.
PRACTICE POINTER
Motions for change of venue can be time consuming and can easily “derail” the case before it even begins moving, giving a defendant time to “catch up” on the learning curve. Therefore, before selecting a judicial district in which the defendant has only minimal contacts, discuss with the patentee whether its forum selection is worth the time and expense of responding to a motion for change of venue, particularly if the patentee is interested in moving the case quickly from the start.
3. [2.19] Joinder The Leahy-Smith America Invents Act added a new statute, 35 U.S.C. §299, regarding joinder of parties in patent litigation. This joinder provision was intended to prevent patentees from litigating infringement actions against numerous, unrelated companies in a single suit. Under §299(a)(1), alleged infringers can be joined in a single action only if the allegations of infringement relate to “the same accused product or process.” Additionally, “accused infringers may not be joined in one action as defendants or counterclaim defendants, or have their actions consolidated for trial, based solely on allegations that they each have infringed the patent or patents in suit.” 35 U.S.C. §299(b). Two exceptions to §299 are cases filed under 35 U.S.C. §271(e)(2) (i.e., Hatch-Waxman cases (see the Drug Price Competition and Patent Term Restoration Act of 1984, Pub.L. No. 98-417, 98 Stat. 1585, commonly known as the HatchWaxman Act)) and cases in which an accused infringer has waived the limitations on joinder. In practice, this patent reform has done little to avoid some of the imbalances created in these “multi-defendant” litigations. Although the patentee is now required to file separate complaints against each alleged infringer, these filings often occur at or around the same time. As a result, the cases are often consolidated at least for discovery purposes. 4. [2.20] District Court’s Intellectual Property Track Record Before making the final decision on where to bring the patent case, counsel should investigate the track record for intellectual property (IP) cases in the district being considered. For example, some patentees or declaratory judgment plaintiffs will file their cases in the District of Delaware because of the depth of experience that the bench has handling patent cases. Other patentees favor judicial districts that have a reputation for having “rocket dockets,” named for the relative speed in which the bench is able to get cases to trial. For example, the Eastern District of Virginia, the Eastern District of Texas, and the Western District of Wisconsin have reputations for quickly and efficiently moving patent cases to trial. In addition to these jurisdictions, some patentees and alleged infringers favor district courts that have standardized procedural rules for patent cases. Among these districts are the Northern and Southern Districts of California, the District of New Jersey, the Northern District of Illinois, the Eastern and Southern Districts of Texas, the District
2 — 22
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.21
of Minnesota, the District of Massachusetts, the Western District of Pennsylvania, the Eastern District of North Carolina, the Northern District of Georgia, and the Western District of Washington. The expectation of the parties is that in these jurisdictions the standardized procedural rules result in fewer discovery disputes and less procedural wrangling. With the advent of post-grant proceedings under the Leahy-Smith America Invents Act, parties also will want to consider the court’s track record concerning the grant of a stay during the pendency of any such proceedings. Some courts may be inclined to grant a stay as soon as a petition is filed, while other courts may prefer to grant a stay only upon institution of a proceeding. Still others may not be inclined to grant a stay at all, or to grant it only if the request is filed at the early stage of the court proceeding. There is a wealth of public information available that reflects the characteristics of each district court. For example, the Administrative Office of the U.S. Courts provides caseload and nature-of-the-case information by court at www.uscourts.gov/statistics-reports/analysis-reports. In addition, there are numerous fee-based, online services (e.g., LEXIS) that provide information about judicial districts and even particular judges within a judicial district. For example, the attorneys may want to review a judge’s reported and unreported patent decisions. In addition, the attorneys may want to pull, through PACER (www.pacer.gov) or similar services, the electronic docket sheets for any patent cases over which a particular judge has presided. These docket sheets may reflect scheduling orders entered by the judge in other patent cases, whether the judge is inclined to hold Markman hearings (Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed.Cir. 1995), aff’d, 116 S.Ct. 1384 (1996)), and the timing of events associated with those hearings; they also may show the judge’s propensity to grant or deny summary judgment motions. This information can be helpful before and after the case is filed. 5. [2.21] The United States International Trade Commission Another potential “venue” for patent infringement cases is the United States International Trade Commission, the administrative agency responsible for administering the Tariff Act of 1930, Pub.L. No. 71-361, 46 Stat. 590. Relief before the USITC can be sought in tandem with a district court action, although the district court case may be stayed pending resolution of the USITC investigation. The relevant portion of the Act is defines as unlawful [t]he importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or consignee, of articles that — (i)
infringe a valid and enforceable United States patent . . . or
(ii) are made, produced, processed, or mined under, or by means of, a process covered by the claims of a valid and enforceable United States patent. 19 U.S.C. §1337(a)(1)(B). There are a number of procedural and substantive requirements that must be met before filing a complaint under 19 U.S.C. §1337 with the USITC. Moreover, once a complaint is filed, there is
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 23
§2.22
INTELLECTUAL PROPERTY LAW
a 30-day period of review, during which time the USITC’s Office of Unfair Import Investigations (OUII) reviews the complaint allegations and makes a recommendation to the USITC whether to institute a formal investigation. In most cases, the complainant works informally with the OUII before filing its complaint to make sure that the complaint will meet the substantive and procedural review of the OUII. Traditionally, the OUII remained involved throughout the investigation as a party protecting the public interest. More recently, the OUII may elect to participate in only selected proceedings or in certain aspects of proceedings. If an investigation is instituted, the case moves quickly to hearing and final ruling. For example, unlike in district court, the parties must respond to discovery requests within 10 days. Hearings are generally set within 9 – 12 months of institution of the investigation, with a target date for resolution of the matter set at 15 months from institution. Therefore, the patentee needs to have its case well organized, its documents gathered, and its experts in place before filing the complaint. A respondent, on the other hand, may be at a significant disadvantage given the time constraints if it has no advance warning of the complaint being filed with the USITC. Some of the elements of proof are different between cases proceeding in district court and the USITC. For example, a USITC action for patent infringement can be brought against only accused imports, not domestic products. 19 U.S.C. §1337(a)(1). In addition, the complainant in a USITC proceeding under §1337 must show that the alleged unfair act (the alleged infringement) is affecting the “domestic industry.” Nevertheless, the USITC has become an increasingly popular forum because the relief available to a successful patent, which is the issuance of an exclusion order prohibiting importation of the accused product and cease-and-desist orders preventing the sale of imported goods from inventory. In 2015, the Federal Circuit made clear that imported goods also may be excluded under an indirect infringement theory. That is, if a seller induces an importer to infringe at the time of importation, and the importer later uses the goods to directly infringe a U.S. patent, those goods will qualify as “articles that infringe” and may be excluded by the USITC. See Suprema, Inc. v. International Trade Commission, 796 F.3d 1338 (Fed.Cir. 2015). Unlike district court cases, §1337 investigations do not have to apply the equitable considerations outlined in the Supreme Court’s decision in eBay Inc. v. MercExchange L.L.C., 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006), before issuing an exclusion order. See discussion of eBay in §2.16 above. There are numerous additional factors that should be evaluated before deciding whether to file a complaint for patent infringement with the USITC. Some patentees choose to proceed in the USITC and at the same time file a district court proceeding (which may be stayed pending resolution of the USITC investigation). The strategy and considerations that go into these decisions are beyond the scope of this chapter. However, more information about USITC proceedings and §1337 actions can be found at www.usitc.gov. In addition, for an informative treatise on USITC practice and procedure, see Donald K. Duvall et al., UNFAIR COMPETITION AND THE ITC (2015). B. [2.22] Preliminary Injunction Motions One question a patentee may ask is whether it is possible to get quick relief through a preliminary injunction. 35 U.S.C. §283 provides the basis for the court’s authority to grant
2 — 24
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.22
preliminary injunctions. Preliminary injunctions, however, are extraordinary relief not routinely granted by the courts. High Tech Medical Instrumentation, Inc. v. New Image Industries, Inc., 49 F.3d 1551, 1554 (Fed.Cir. 1995). In addition to the legal criteria set forth below, a number of practical considerations go into the calculation of whether to seek a preliminary injunction, including whether the patent has been litigated successfully in the past, as each consideration militates against extended discovery prior to a ruling on the motion; whether the parties are direct competitors; and whether there is strong evidence of willfulness. The failure to seek a preliminary injunction may also be a consideration in determining whether a permanent injunction should be granted. The effect of winning a preliminary injunction can give the patentee an enormous advantage throughout the remainder of the litigation. The alleged infringer must contend with the fact that the judge has already decided that the patentee has a strong case and the additional fact that the patentee has, at least initially, overcome some of the defendant’s best arguments for noninfringement and/or invalidity. Conversely, if the patentee loses, not only is its leverage for settlement reduced, but also the alleged infringer has been educated on the patentee’s litigation strategy and how the patentee intends to prove infringement of the patent. In addition, potential competitors may be tempted to use the technology disclosed in the patent without payment or license to the patentee. The factors that the district courts consider in granting or denying preliminary injunctions in patent infringement cases are the same as in other federal cases: 1. Does the moving party have a reasonable likelihood of success on the merits? 2. Will the moving party be irreparably harmed if no injunction issues? 3. Does the balance of hardships, if an injunction were to issue, weigh in favor of one party or the other? 4. What effect will granting an injunction have on the public interest? See, e.g., Reebok International Ltd. v. J. Baker, Inc., 32 F.3d 1552, 1555 (Fed.Cir. 1994) (“The burden is always on the movant to show entitlement to a preliminary injunction.”); Oakley, Inc. v. Sunglass Hut International, 316 F.3d 1331, 1338 – 1339 (Fed.Cir. 2003). In order to answer the first question in the list above — the likelihood of success on the merits — it is necessary for the court to consider the question of infringement and, if raised as an affirmative defense, the questions of patent invalidity and unenforceability. In order to address the questions of infringement and invalidity, the court will need to construe the claims. By now, it should be apparent that a quick resolution of a preliminary injunction motion may not be likely. Both parties are likely to require at least some discovery. Still, there are steps that the patentee can take to increase the likelihood of successfully pursuing a motion for preliminary injunction. First, it is an advantage for the patentee if the patent has been the subject of past litigation in which patent validity was already challenged. This makes it more likely that the patentee will be
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 25
§2.23
INTELLECTUAL PROPERTY LAW
successful on the merits this second time around. Second, the patentee should consider bringing the motion on just one or two of the infringed claims in order to narrow the focus of the motion. Third, the patentee should provide claim charts comparing the claims to the allegedly infringing device and should have a technical expert available and ready to provide an opinion. A defendant facing a preliminary injunction should make an effort not only to challenge the infringement charge but also to challenge the patent’s validity. If no challenge to validity is put forth, the moving party must still make some showing that the patent is valid. However, patents are presumed valid, and this presumption will control the validity issue for purposes of the preliminary injunction if no validity challenge is made. See Canon Computer Systems, Inc. v. NuKote International, Inc., 134 F.3d 1085, 1088 (Fed.Cir. 1998). If the defendant is able to put forth some evidence of patent invalidity, the burden shifts to the patentee to come forth with evidence that the invalidity defense “lacks substantial merit.” See Genentech, Inc. v. Novo Nordisk, 108 F.3d 1361, 1364 (Fed.Cir. 1997). This can be a difficult hurdle to overcome at the preliminary injunction stage. If the patentee cannot show that the invalidity defense lacks substantial merit, then the motion should be denied. See Helifix Ltd. v. Blok-Lok, Ltd., 208 F.3d 1339, 1351 (Fed.Cir. 2000). Finally, the questions of balance of hardship and public interest can be particularly helpful to the defendant. Resolution of these questions is based on the facts that are brought to the court’s attention. Therefore, if a defendant can provide particular detail about the economic effect on the company if an injunction were to issue (in terms of the number of potential layoffs, impact on suppliers, etc.), this information can make the difference when the court begins balancing the respective hardships to each company. C. [2.23] Elements of the Complaint Previously, patent infringement cases required only notice pleading. However, as of December 1, 2015, the Federal Rules of Civil Procedure were amended, abrogating Fed.R.Civ.P. Form 18, Complaint for Patent Infringement, and subjecting patent complaints to the “plausibility” standard of Ashcroft v. Iqbal, 556 U.S. 662, 173 L.Ed.2d 868, 129 S.Ct. 1937 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 167 L.Ed.2d 929, 127 S.Ct. 1955 (2007). Tannerite Sports, LLC v. Jerent Enterprises, LLC, No. 6:15-cv-00180-AA, 2016 WL 1737740, *3 (D.Or. May 02, 2016) (“the salient fact is Twombly/Iqbal dictates directinfringement pleading standards as of December 1, 2015”). Now, rather than requiring only “a statement” that the defendant has infringed its patent, a patentee must “explicitly plead facts to plausibly support the assertion that a defendant ‘without authority makes, uses, offers to sell, or sells any patented invention during the term of the patent.’ ” Ruby Sands LLC v. American National Bank of Texas, No. 2:15-cv-1955-JRG, 2016 WL 3542430, *2 (E.D.Tex. June 28, 2016). In theory, the plausibility standard should subject pleadings of direct infringement to greater scrutiny. In practice, however, district courts have applied the plausibility standard to direct infringement claims with varying degrees of scrutiny, with some courts requiring that a party allege how an accused product relates to each limitation of an asserted claim (see Atlas IP, LLC v. Exelon Corp., No. 15 C 10746, 2016 WL 2866134 (N.D.Ill. May 17, 2016), and RainDance Technologies, Inc. v. 10x Genomics, Inc., No. 15-152-RGA, 2016 WL 927143 (D.Del. Mar. 04, 2016)), and others requiring only a general description of the accused product and an allegation
2 — 26
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.23
that it infringes at least one claim (see InCom Corp. v. Walt Disney Co., No. 15-cv-3011-PSG, 2016 U.S. Dist. LEXIS 7131 (C.D.Cal. Feb. 04, 2016), and Solocron v. Healthstream, No. 2:16cv-00016, Dkt. 81 (E.D.Tex. June 7, 2016)). This pleading standard has many implications for patent litigants. First, a plaintiff should be aware of the various degrees of specificity required for alleging a claim in a particular court. The defendants should also review the level of specificity required for asserting counterclaims, such as invalidity. See RAH Color Technologies LLC v. Ricoh USA Inc., No. 2:15-cv-05203-JCJ, 2016 WL 3632720, *4 (E.D.Pa. July 06, 2016) (plausibility standard not satisfied when alleging that “claims of the [Asserted Patent] are invalid for failure to satisfy one or more of the conditions for patentability specified in Title 35”). Second, requiring a more detailed factual investigation at the outset of the case could be more burdensome on plaintiffs, but could save resources and time for all parties involved. A more detailed investigation may also provide defendants with more opportunities to bring pre-answer motions targeted at dismissing weak or baseless claims. However, whether laid out in detail or more generally, a complaint should include at least 1. an identification of the parties; 2. the court’s jurisdictional basis and venue; 3. an identification of the patent(s) at issue and an identification of at least one claim of each asserted patent allegedly infringed by the defendant; 4. an identification of the patentee’s ownership interest in the patent(s) at issue; 5. an identification of the infringing product or service and a description of what the patent at issue does compared to what the alleged infringing product does; 6. whether there is direct or indirect infringement, or both (and, in the case of indirect infringement, an identification of the direct infringer (particularly if it is not a named defendant)); 7. whether the claims are infringed literally or under the doctrine of equivalents, or both; 8. whether the alleged infringer had actual or constructive notice of the patent(s); 9. whether the infringement is willful and deliberate; 10. whether the case is exceptional under 35 U.S.C. §285; and 11. the type of relief sought, including injunctive or monetary relief, or both, as well as prejudgment interest, any trebling of damages, and/or award of attorneys’ fees as provided by statute.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 27
§2.24
INTELLECTUAL PROPERTY LAW
D. [2.24] Primer on the Law of Infringement While there are many articles and whole treatises that address the substantive issues of patent law, this section and §§2.25 – 2.34 below are intended to provide an overview of the law of infringement to place the remaining sections on discovery and other pretrial and trial procedures in context. The patent statutes provide for three basic forms of infringement: (1) direct infringement under 35 U.S.C. §271(a), (2) inducement to infringe under 35 U.S.C. §271(b), and (3) contributory infringement under 35 U.S.C. §271(c). Determining infringement is a two-step process. North American Container, Inc. v. Plastipak Packaging, Inc., 415 F.3d 1335, 1344 (Fed.Cir. 2005). First, the court interprets the patent claims to determine their scope. Clare v. Chrysler Group LLC, 819 F.3d 1323, 1326 (Fed.Cir. 2016). Second, the fact-finder (court or jury) compares the accused product or process to the properly construed claims to determine whether the claims cover the accused device. Carroll Touch, Inc. v. Electro Mechanical Systems, Inc., 15 F.3d 1573, 1576 (Fed.Cir. 1993). To find infringement, each element of a claim (or its substantial equivalent) must be present in the accused device or process. Lemelson v. United States, 752 F.2d 1538, 1551 (Fed.Cir. 1985). Each patent claim is considered separately, and infringement of a single claim constitutes infringement of the whole patent. Intervet America, Inc. v. Kee-Vet Laboratories, Inc., 887 F.2d 1050, 1055 (Fed.Cir. 1989). 35 U.S.C. §§271(e) – 271(g) further define infringing activities. Section 271(e) covers certain activities related to the U.S. Food and Drug Administration (FDA). Section 271(f) makes a supplier liable for infringement when the act of supplying (all or substantially all of) the components of a patented invention actively induces the combination of the supplied components outside the United States and when the combination within the United States would have constituted infringement. Since §271(a) prevents the making, using, or selling of patented inventions, §271(f) is intended to prevent suppliers from avoiding infringement by making and selling the components of the patented invention in the United States but not assembling them in the United States. Section 271(g) is directed to preventing importation, sale, or offer for sale of products manufactured by a process patented in the United States, whether or not the manufacturing occurs within the United States. Interestingly, this provision is not limited to imported products. Rather, the seller of a product manufactured within the United States may be liable for infringement even if the patentee chooses not to sue the manufacturer. Thus, this section of the patent statutes provides the owner of a manufacturing process patent with a significant right since it basically extends the scope of a process patent to cover the product as well. 1. [2.25] Direct Infringement Under 35 U.S.C. §271(a), “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” Two forms of direct infringement are recognized — literal infringement and infringement under the judicially created doctrine of equivalents.
2 — 28
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.27
a. [2.26] Literal Infringement For a finding of literal infringement, there must be an exact correspondence between the product in question and the limitations of the asserted claim. Frank’s Casing Crew & Rental Tools, Inc. v. Weatherford International, Inc., 389 F.3d 1370, 1378 (Fed.Cir. 2004). In other words, the accused product must include each and every element of a single claim in order to literally infringe that claim. For example, suppose an asserted claim recites “an invention comprising from 5 to 40 percent by weight material X.” An accused product comprised of 30percent material X literally infringes the claim. However, if the accused product is 50-percent material X, then the hypothetical claim is not literally infringed. b. [2.27] Infringement Under the Doctrine of Equivalents If an accused product or process does not literally infringe a patent claim, it still may be found to infringe under the doctrine of equivalents. The doctrine of equivalents is a judicial creation not codified in the patent statutes. The purpose of the doctrine is to adequately protect the patentee’s right to exclude by ensuring that a minor, insubstantial alteration is still actionable as infringement as long as there is equivalence between the accused product or process and the claimed elements of the patented invention. Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605, 94 L.Ed. 1097, 70 S.Ct. 854 (1950). However, the doctrine of equivalents is not intended to expand or broaden the claims themselves. Wilson Sporting Goods Co. v. David Geoffrey & Associates, 904 F.2d 677, 684 (Fed.Cir. 1990). Equivalency is an objective determination to be made by the jury on an element-by-element basis. Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17, 137 L.Ed.2d 146, 117 S.Ct. 1040, 1054 (1997). The perspective for determining equivalency should be that of a person with ordinary skill in the pertinent art, evaluated at the time of infringement. The primary analysis for determining equivalency is the “insubstantial differences” test. Dawn Equipment Co. v. Kentucky Farms Inc., 140 F.3d 1009, 1015 – 1016 (Fed.Cir. 1998). In order to infringe under the doctrine of equivalents, the asserted claim’s elements and the accused products or processes must differ only insubstantially from the asserted claim limitation. Warner-Jenkinson, supra. The courts will also apply a triple-identity test (function/way/result) to assist in determining if the changes are insubstantial. Id. If a product or process “performs substantially the same function, in substantially the same way, to achieve substantially the same result,” infringement under the doctrine of equivalents will be found. Dawn Equipment, supra, 140 F.3d at 1016.
PRACTICE POINTER
Expert testimony is particularly useful in explaining whether the differences between the accused product and the claimed invention are “insubstantial” and in explaining whether the product performs in substantially the same function/way/result as the claimed invention.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 29
§2.28
INTELLECTUAL PROPERTY LAW
(1)
[2.28] Limitations on the doctrine of equivalents
While the doctrine of equivalents affords a patentee greater protection, certain legal limitations may preclude a patentee from relying on the doctrine of equivalents to prove infringement. Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17, 137 L.Ed.2d 146, 117 S.Ct. 1040, 1053 (1997). The primary legal limitations on the doctrine of equivalents identified by the Federal Circuit include prosecution history estoppel, the all-elements rule, prior art, dedication to the public, and vitiation of a claim limitation. Prosecution history estoppel and dedication to the public are discussed in §§2.29 and 2.30 below. (2)
[2.29] Prosecution history estoppel
The most frequently asserted legal limitation to the doctrine of equivalents is prosecution history estoppel. This limitation precludes a patentee from obtaining through litigation a range of equivalency that would encompass subject matter relinquished during prosecution. Southwall Technologies, Inc. v. Cardinal IG Co., 54 F.3d 1570, 1579 (Fed.Cir. 1995). In cases in which an amendment was made to a claim, during prosecution, that narrowed the literal scope of the claim, a rebuttable presumption arises that the narrowing amendment was made for a substantial reason related to patentability. Thus, the patentee has presumably surrendered the particular equivalent at issue. Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722, 152 L.Ed.2d 944, 122 S.Ct. 1831, 1839 (2002). There are some instances, however, when the amendment cannot reasonably be viewed as surrendering a particular equivalent: The equivalent may have been unforeseeable at the time of the application; the rationale underlying the amendment may bear no more than a tangential relation to the equivalent in question; or there may be some other reason suggesting that the patentee could not reasonably be expected to have described the insubstantial substitute in question. 122 S.Ct. at 1842. In other words, the patentee can overcome the presumption of estoppel by showing that, at the time of the amendment, one skilled in the art could not reasonably have been expected to have drafted a claim that would have literally encompassed the alleged equivalent. Id.
PRACTICE POINTER
The parties should consider whether the court will admit, and whether it would be helpful to include, testimony of an expert in patent procedures in support of their assertion that an amendment was or was not made for reasons of patentability. Courts may or may not consider such testimony as usurping the function of the judge. In other cases, the parties may rely on a technical expert to argue whether the equivalent was reasonably foreseeable at the time of the amendment.
(3)
[2.30] Subject matter disclosed but not claimed
Similarly, when the patent discloses but fails to claim certain subject matter, the unclaimed subject matter is considered to be dedicated to the public. Johnson & Johnston Associates Inc. v.
2 — 30
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.32
R.E. Service Co., 285 F.3d 1046, 1054 (Fed.Cir. 2002). Allowing the patentee, through application of the doctrine of equivalents, to recapture the deliberately unclaimed subject matter would conflict with the central role of claims in defining the scope of the patentee’s right to exclude. Id. It also would effectively permit the patentee to avoid a United States Patent and Trademark Office examination of that subject matter. Maxwell v. J. Baker, Inc., 86 F.3d 1098, 1107 (Fed.Cir. 1996). 2. [2.31] Indirect Infringement Even if a defendant does not directly infringe, it may be liable to the patentee for indirect infringement under 35 U.S.C. §§271(b) (inducement) and 271(c) (contributory infringement). However, before a defendant can be found liable for indirect infringement, there must be a showing of direct infringement by some person or entity. Joy Technologies, Inc. v. Flakt, Inc., 6 F.3d 770, 774 (Fed.Cir. 1993). The direct infringer need not be a party to the litigation. Typically, for indirect infringement, an accused infringer encourages others to pursue a course of conduct that leads to direct infringement (inducement) or sells a key part of the overall, infringing device (contributory infringement). These activities are considered infringing because they assist, support, or encourage a direct infringer’s actions.
PRACTICE POINTER
Depending on the facts of the particular case, it may be more effective to sue the indirect infringer rather than the indirect infringer’s numerous customers or end users who are the direct infringers.
a. [2.32] Elements of Inducement Under 35 U.S.C. §271(b) Under 35 U.S.C. §271(b), “[w]hoever actively induces infringement of a patent shall be liable as an infringer.” Induced infringement is a type of indirect infringement by multiple actors. Though §271(b) does not expressly impose a knowledge requirement, the Supreme Court has held that inducement requires that the alleged inducer actively and knowingly aid and abet the direct infringement. Commil USA, LLC v. Cisco Systems, Inc., ___ U.S. ___, 191 L.Ed.2d 883, 135 S.Ct. 1920 (2015). See also ePlus, Inc. v. Lawson Software, Inc., 789 F.3d 1349, 1360 (Fed.Cir. 2015). To satisfy the knowledge requirement, the alleged inducer must have actual knowledge that the induced acts constitute patent infringement. Commil, supra (leading another to engage in conduct that amounts to infringement is not enough; party accused of inducement must know that actions being induced are direct infringement); Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 766, 179 L.Ed.2d 1167, 131 S.Ct. 2060, 2068 (2011). A showing of “deliberate indifference to a known risk” that the induced acts may violate an existing patent is not sufficient to find inducement, whereas a showing of “willful blindness” (i.e., the accused inducer subjectively believes there is a high probability that a patent exists and takes deliberate actions to avoid learning of that fact) could satisfy the knowledge requirement. 131 S.Ct. at 2069 – 2071).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 31
§2.33
INTELLECTUAL PROPERTY LAW
Typically, inducement cases involve one individual (the inducing infringer) providing another (the direct infringer) with information about how to make or use the allegedly infringing product or perform the allegedly infringing process. It is not enough to show that the alleged inducer supplied a product that could be used in an infringing manner or that the defendant provided information or instructions on how to use the product in the infringing manner. In addition, there must be evidence of knowledge and intent to induce the infringement. See Ferguson Beauregard/Logic Controls, Division of Dover Resources, Inc. v. Mega Systems, LLC, 350 F.3d 1327, 1342 (Fed.Cir. 2003) (“[I]t must be established that the defendant possessed specific intent to encourage another’s infringement and not merely that the defendant had knowledge of the acts alleged to constitute infringement.”), quoting Manville Sales Corp. v. Paramount Systems, Inc., 917 F.2d 544, 553 (Fed.Cir. 1990). Direct proof of intent is not necessary; rather, the “requisite intent to induce infringement may be inferred from all of the circumstances.” Warsaw Orthopedic, Inc. v. NuVasive, Inc., 824 F.3d 1344, 1347 (Fed.Cir. 2016). The requirement that the alleged infringer knew or should have known his or her actions would induce infringement includes the requirement that the alleged infringer knew of the patent. DSU Medical Corp. v. JMS Co., 471 F.3d 1293, 1304 (Fed.Cir. 2006). The patentee should also be aware that the scope of relief may be more limited. Injunctive relief should not prevent a party from providing products that can be used in infringing and noninfringing manners. It should only prevent a party from providing instructions or otherwise encouraging others from actually using the product in an infringing manner.
PRACTICE POINTER
Attorneys need to exercise creativity in obtaining relief that will adequately compensate the patentee when the infringer is liable for inducing infringement of others.
b. [2.33] Elements of Contributory Infringement Under 35 U.S.C. §271(c) To prove contributory infringement under 35 U.S.C. §271(c), the patentee must establish (1) that the defendant sold, offered to sell, or imported a component of a patent apparatus or a material or apparatus for use in practicing a patented process; (2) that the component constituted a material part of the patented invention; (3) that the alleged contributory infringer knew the component to be especially adapted for use in the infringement of the patent; and (4) that the component did not constitute a staple article suitable for a substantial noninfringing use. See, e.g., Aro Manufacturing Co. v. Convertible Top Replacement Co., 377 U.S. 476, 12 L.Ed.2d 457, 84 S.Ct. 1526, 1533 – 1534 (1964); Preemption Devices, Inc. v. Minnesota Mining & Manufacturing Co., 803 F.2d 1170, 1174 (Fed.Cir. 1986). Section 271(c) requires that the alleged infringer know that “the combination for which his component was especially designed was both patented and infringing.” Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 179 L.Ed.2d 1167, 131 S.Ct. 2060, 2067 (2011), citing Aro Manufacturing, supra, 84 S.Ct. at 1533.
2 — 32
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.34
3. [2.34] Willful Infringement Under 35 U.S.C. §284, district courts have the discretion to enhance damages up to three times the amount found or assessed for “egregious cases of misconduct beyond typical infringement.” Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1935 (2016). In Halo Electronics, the Supreme Court changed the applicable legal standard for finding willful infringement by overruling the Federal Circuit’s two-part test for determining willful infringement that had an objective and subjective prong. Id. Particularly, the Court overruled the objective prong of the test, declaring that an infringer’s “subjective willfulness [alone], whether intentional or knowing, may warrant enhanced damages.” 136 S.Ct. at 1926. The relevant timeframe for measuring an alleged infringer’s subjective willfulness is “at the time of the challenged conduct.” Id. Further, the Court made clear that willfulness must be proved only by a preponderance of the evidence, rather than the clear and convincing standard that was associated with the Federal Circuit’s objective prong, and that a finding of willfulness is to be reviewed for abuse of discretion, rather than the Federal Circuit’s purported three-part review framework for reviewing the objective, subjective, and award of enhanced damages findings by a district court. 136 S.Ct. at 1926 – 1927. In applying its discretion as to what does and does not constitute egregious misconduct, district courts should consult the “‘sound legal principles developed over nearly two centuries of application and interpretation of the Patent Act.” 136 S.Ct. at 1935. Further, judges are not required to enhance damages just because egregious misconduct is found. Rather, “as with any exercise of discretion, courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount.” 136 S.Ct. at 1933. Halo has largely been seen as a “pro-patent holder” opinion. Particularly, Halo provides greater leverage in litigation for patent holders by providing a more flexible test for willfulness, by lowering the burden of proof, and by simplifying and lowering the standard for appellate review. Patent holders may also be more likely to get their stories heard by a jury, which is important as some courts have interpreted Halo to mean that a judgment of willfulness may be supported by a jury verdict alone, giving juries a much greater role in determining willfulness. See Sociedad Espanola De Electromedicina Y Calidad, S.A. v. Blue Ridge X-Ray Co., No. 1:10:cv-00159-MR, 2016 WL 3661784 (W.D.N.C. July 8, 2016). For accused infringers, however, Halo presents a greater risk for a finding of enhanced damages and highlights the importance of pursuing noninfringement or invalidity opinions sooner, rather than later. Because the timeframe for measuring subjective willfulness is at the time an alleged infringer has knowledge of the challenged conduct, a defense developed during litigation to refute willfulness can no longer be used. The Supreme Court commented that among “the most culpable offenders [are] the ‘wanton and malicious pirate[s]’ who intentionally infringes another’s patent — with no doubts about its validity or any notion of a defense.” [Emphasis added.] Halo Electronics, supra, 136 S.Ct. at 1932, quoting Seymour v. McCormick, 57 U.S. 480, 489, 14 L.Ed. 1024 (1853). Accordingly, potential infringers should review all past
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 33
§2.35
INTELLECTUAL PROPERTY LAW
and present threats of infringement and consider obtaining a legal opinion prior to litigation regarding invalidity or noninfringement to mitigate the risk of an enhanced damages judgement. It may also be wise to consult counsel early on in the development process of new products and carefully consider the costs of getting an early clearance opinion since actual notice is not a prerequisite to filing a suit for infringement. E. [2.35] Responding to Complaint (Answers, Affirmative Defenses, and Counterclaims) A defendant in a patent infringement case has the same rights under Fed.R.Civ.P. 12 as any defendant in federal court. Rules of service, jurisdiction, standing, etc., apply as they would in any federal case. Therefore, options such as motions for judgment on the pleadings, motions to strike or dismiss, and motions for a more definite statement are available, as in any case. A defendant is reminded to review §2.7 above on what constitutes a proper plaintiff in a patent infringement action. In addition, the defendant in a patent infringement case, if answering the complaint, has the same obligation as other defendants involved in federal court litigation to respond to each allegation in accordance with the Federal Rules of Civil Procedure, including Rules 10 and 12. The purpose of this section and §§2.36 – 2.48 below is to focus on patent-specific defenses available to an alleged infringer. In general, these defenses include noninfringement, patent invalidity, patent unenforceability, laches, estoppel, license, and the like, which are explained in these sections. In addition to raising noninfringement, patent invalidity, and patent unenforceability as affirmative defenses, some defendants also assert these claims or defenses in the form of a counterclaim for declaratory judgment of noninfringement, patent invalidity, and/or patent unenforceability. By asserting these issues in the form of a counterclaim, the defendant — who bears the burden on the issues of patent invalidity and unenforceability — positions itself as a plaintiff on these issues. The alleged infringer may also exercise greater control over the patentee’s ability to dismiss the case without prejudice once a counterclaim is filed. In light of the abrogation of Fed.R.Civ.P. Form 18, Complaint for Patent Infringement, defendants asserting invalidity will be held to the same heightened pleading standard of Ashcroft v. Iqbal, 556 U.S. 662, 173 L.Ed.2d 868, 129 S.Ct. 1937 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 167 L.Ed.2d 929, 127 S.Ct. 1955 (2007), faced by plaintiffs asserting infringement. See RAH Color Technologies LLC v. Ricoh USA Inc., No. 2:15-cv-05203-JCJ, 2016 WL 3632720, *4 (E.D.Pa. July 06, 2016) (insufficient pleading of invalidity counterclaim under Iqbal/Twombly when defendant only “assert[ed] that five sections of Title 35 of the [U.S.C.] may make Plaintiff’s asserted patents invalid”). However, even before Form 18’s abrogation, some district courts applied the requirements set forth in Iqbal and Twombly. See Cleversafe, Inc. v. Amplidata, Inc., No. 11 C 4890, 2011 WL 6379300, *2 (N.D.Ill. Dec. 20, 2011) (dismissing invalidity counterclaim when defendant failed to articulate why patents were invalid or provide any factual support). Now, a defendant should anticipate that the previous bare-bones invalidity assertions will no longer be sufficient.
2 — 34
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.38
Form 18’s abrogation may not change much in the specificity required when asserting patent unenforceability that contains an allegation of fraud, which most district courts already required to be supported by more than just notice pleading. Also, the bench views claims of patent unenforceability with great skepticism, particularly when asserted at the outset of a case, because that defense has been overused and sometimes abused in the past. Therefore, a more detailed recitation of facts in support of these defenses substantiates the allegations being made. 1. [2.36] Defense or Claim of Noninfringement Although not technically an affirmative defense because the patentee has the burden of proving infringement, an accused infringer will invariably raise as an affirmative defense the fact that it is not infringing any valid and enforceable claim of the patent. In addition to the claim or defense of noninfringement, the defendant likely will add one or more additional affirmative defenses. 2. [2.37] Affirmative Defense of Invalidity A common affirmative defense of an alleged infringer is that the asserted patent claim is invalid for failure to satisfy one or more of the statutory requirements of patentability, as set forth in 35 U.S.C. §§101 – 103 and 112. Each claim of a patent is presumed valid unless shown invalid by clear and convincing evidence. 35 U.S.C §282; Abbott Laboratories v. Baxter Pharmaceutical Products, Inc., 471 F.3d 1363, 1367 (Fed.Cir. 2006). Because the patent owner benefits from the presumption of validity under 35 U.S.C. §282, the burden rests on the accused infringer to rebut the presumption of validity. The Supreme Court reaffirmed that this burden requires “clear and convincing” evidence of invalidity and that it does not shift to a lesser standard based on the type of evidence presented by the accused infringer. Microsoft Corp. v. i4i Limited Partnership, 564 U.S. 91, 180 L.Ed.2d 131, 131 S.Ct. 2238 (2011). a. [2.38] Defenses Under 35 U.S.C. §101 Under 35 U.S.C. §101, “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor.” Accordingly, three possible invalidity defenses exist under §101: lack of utility; nonpatentable subject matter; and double patenting. Generally, these issues will arise during patent prosecution. See, e.g., In re Comiskey, 554 F.3d 967 (Fed.Cir. 2009); In re Nuijten, 500 F.3d 1346 (Fed.Cir. 2007). Increasingly, however, the issue of nonpatentable subject matter has been raised in the context of litigation and in post-grant proceedings. The Supreme Court has set out a two-part test for determining whether a claim is patent eligible: first, a court should “determine whether the claims at issue are directed to . . . [a] patentineligible concept[ ]” such as (1) abstract ideas, (2) laws of nature, and (3) physical phenomena. Alice Corporation Pty. Ltd. v. CLS Bank International, ___ U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347, 2355 (2014), citing Mayo Collaborative Services v. Prometheus Laboratories, Inc., ___ U.S. ___, 182 L.Ed.2d 321, 132 S.Ct. 1289 (2012). Second, if the claims at issue are directed to a patent-ineligible concept, the court should consider “whether the claim’s elements, considered
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 35
§2.39
INTELLECTUAL PROPERTY LAW
both individually and ‘as an ordered combination,’ ‘transform the nature of the claim’ into a patent-eligible application.” 134 S.Ct. at 2350. If they do not, then the claims will be patent ineligible under §101. The Supreme Court has not explicitly defined “abstract idea.” Enfish, LLC v. Microsoft Corp., 822 F.3d 1327, 1334 (Fed.Cir. 2016) (“The Supreme Court has not established a definitive rule to determine what constitutes an ‘abstract idea’ sufficient to satisfy the first step of the Mayo/Alice inquiry.”). Rather, instead of “labor[ing] to delimit the precise contours of the ‘abstract idea’ category,” the Court compares the claims at issue with those claims that have been found to be abstract ideas in the past. Alice Corp., supra, 134 S.Ct. at 2357 (“It is enough to recognize that there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediated settlement at issue here.”). As a result of these decisions challenging the subject-matter eligibility of patents, particularly in the “business method” and “medical treatment” areas, §101 defenses have increased in popularity and success, both before the district courts and the Patent Trial and Appeal Board. b. [2.39] Defenses Under 35 U.S.C. §102 The Leahy-Smith America Invents Act completely redrafted 35 U.S.C. §102, as discussed below, as a result of the change from a “first-to-invent” to a “first-to-file” system. The changes to §102 went into effect on March 16, 2013. However, because the AIA changes apply only to patent applications filed on or after March 16, 2013, there are still many patents that these provisions may not apply to, including those valid as of March 16, 2013, and those that were pending before March 16, 2013. Accordingly, both the pre-March 16, 2013 (pre-2013) version of §102 and the March 16, 2013 (2013) version of §102 are discussed below. The pre-2013 version of §102 encompassed two basic issues: novelty and loss of the right to a patent. Novelty was covered in the pre-2013 version of §§102(a) and 102(e) – 102(g). Sections 102(b) – 102(d) were commonly referred to as the “statutory bars” and concerned situations in which the right to a patent might be lost even if the invention was novel. Several differences existed between the statutory bars and novelty, the most basic of which was the timing of events necessary to trigger their respective provisions. Novelty was directed only toward events that occurred before the time of invention. Conversely, the statutory bars were triggered by events occurring after the time of invention. If, at the time of invention, the inventor satisfied the pre-2013 version of §§102(a) and 102(e) – 102(g), then the invention was novel and eligible for a patent; the right to the patent could have been subsequently lost if post-invention events triggered one of the statutory bars. Under the pre-2013 version of §102, the primary novelty provision relied on by alleged infringers was 35 U.S.C. §102(a). Under the pre-2013 version of §102(a), an invention was “anticipated” and novelty was destroyed if, prior to the date on invention, the invention was (1) known by others in the United States, (2) used by others in the United States, (3) patented anywhere in the world, or (4) described in a printed publication anywhere in the world. For prior knowledge or use of an invention by others to anticipate and invalidate a patent’s claims, it must
2 — 36
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.39
be knowledge or use that was accessible to the public. Similarly, printed publications, to anticipate, had to be sufficiently accessible to the interested public by customary search aids and disclose the invention adequately enough for a person of skill in the art to put it into practice. In re Hall, 781 F.2d 897, 898 – 899 (Fed.Cir. 1986); Application of Bayer, 568 F.2d 1357, 1359 – 1360 (C.C.P.A. 1978). Secrecy and confidentiality notices on printed publications could negate a finding that the document was accessible to the public. See Northern Telecom, Inc. v. Datapoint Corp., 908 F.2d 931, 936 – 937 (Fed.Cir. 1990). When the testimony of a witness was presented as evidence of public knowledge or use, the testimony had to be corroborated, regardless of the witness’s level of interest in the suit. Finnigan Corp. v. United States International Trade Commission, 180 F.3d 1354, 1366 – 1367 (Fed.Cir. 1999). The pre-2013 version of 35 U.S.C. §102(b) listed four different events that, if they occurred more than one year prior to the application’s filing, barred the right to patent an invention, regardless of its novelty. The four statutory bars were — if more than one year prior to the filing date — that the invention was (1) patented anywhere, (2) described in a printed publication anywhere, (3) in public use in the United States, or (4) on sale in the United States. The policies underlying the statutory bar of the pre-2013 version of §102(b) were (1) discouraging the withdrawal of inventions that had been placed into the public domain, (2) encouraging early filing to promote the prompt and widespread disclosure of inventions, (3) allowing the inventor a reasonable amount of time to determine the potential economic value of a patent, and (4) prohibiting the inventor from commercially exploiting the invention for a period greater than the statutory period. Baxter International, Inc. v. Cobe Laboratories, Inc., 88 F.3d 1054, 1058 (Fed.Cir. 1996). Pre-2013, 35 U.S.C. §102(g) was the foundation for the United States’ first-to-invent system. Under the pre-2013 version of §102(g), a person was entitled to a patent unless the invention was made by another inventor and that inventor did not abandon, suppress, or conceal the invention. The pre-2013 version of 102(g)(2) controlled in litigation and required inventors to establish an invention date prior to all inventions made in the United States by another inventor that had not been abandoned, suppressed, or concealed. The AIA completely revised §102, removing §§102(a) – 102(g) and instead providing that a person shall be entitled to a patent unless: (1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention; or (2) the claimed invention was described in a patent issued under section 151, or in an application for patent published or deemed published under section 122(b), in which the patent or application, as the case may be, names another inventor and was effectively filed before the effective filing date of the claimed invention. 35 U.S.C. §102(a). These 2013 provisions eliminate the distinction between acts occurring in the United States and acts occurring abroad that have long defined prior art under §102. The 2013 version of
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 37
§2.40
INTELLECTUAL PROPERTY LAW
§102(a)(2) defines prior art based on the “first-to-file” standard and also expands the scope of foreign-filed applications as prior art based on their earliest effective filing date, which would be the foreign filing date for such applications. The 2013 version of §102(b) provides exceptions to the prior art recited in the 2013 version of §102(a). The 2013 version of §102(b)(1) permits a one-year grace period for the inventor’s own disclosure or a disclosure by another who directly or indirectly obtained the inventions from the inventor. The 2013 version of §102(b)(2) excludes as prior art disclosures in a patent or patent application if the disclosed subject matter was obtained directly or indirectly from the inventor. c. [2.40] Defenses Under 35 U.S.C. §103 The Leahy-Smith America Invents Act also substantially redrafted 35 U.S.C. §103. As with the changes to 35 U.S.C. §102, the 2013 version of §103 went into effect on March 16, 2013. Accordingly, both the pre-2013 version of §103 and the 2013 version of §103 are discussed below. Under the pre-2013 version of §103, a patent was invalid, even if the invention was not identically disclosed or described elsewhere, if the invention as a whole would have been obvious to a person of ordinary skill in the pertinent art at the time the invention was made. Unlike the test for invalidity based on anticipation, which required strict identity between the elements of the claim at issue and a single piece of prior art, the defense of obviousness allowed the combining of multiple prior art references to show that the patented invention would have been obvious to one skilled in the art at the time the invention was made. Eli Lilly & Co. v. Zenith Goldline Pharmaceuticals, Inc., 471 F.3d 1369, 1377 (Fed.Cir. 2006). The Supreme Court’s landmark opinion Graham v. John Deere Company of Kansas City, 383 U.S. 1, 15 L.Ed.2d 545, 86 S.Ct. 684, 698 (1966), established an analytical framework for determining the issue of obviousness. In 2007, the Supreme Court reaffirmed the Graham framework for the determining obviousness. KSR International Co. v. Teleflex Inc., 550 U.S. 398, 167 L.Ed.2d 705, 127 S.Ct 1727, 1741 – 1742 (2007). Obviousness is ultimately a question of law, but it depends on several underlying factual inquiries. Graham, supra. The following four Graham factors were relevant in an obviousness analysis: (1) the level of ordinary skill in the art; (2) the scope and content of the pertinent prior art; (3) differences between the claimed invention and the prior art; and (4) secondary considerations that serve as objective indicia of nonobviousness. Id. The AIA amended §103 to recite: A patent for a claimed invention may not be obtained, notwithstanding that the claimed invention is not identically disclosed as set forth in section 102, if the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which the claimed invention pertains. Patentability shall not be negated by the manner in which the invention was made. 35 U.S.C. §103.
2 — 38
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.41
Due to the move to a “first-to-file” system, the main differences between the 2013 version of §103 and the pre-2013 version of §103(a) is the timing of the determination of obviousness. The 2013 version of §103 shifts the determination of what was known in the art to “before the effective filing date of the claimed invention.” d. [2.41] Affirmative Defenses Based on the Disclosure Requirements of 35 U.S.C. §112 The disclosure requirements of 35 U.S.C. §112 are intended to fulfill the purpose of the patent system, “to promote the Progress of Science and useful Arts.” U.S.CONST. art. I, §8, cl. 8. The statutory language of §112 has been interpreted as identifying four slightly different but closely related disclosure requirements: (1) written description; (2) enablement; (3) best mode; and (4) definiteness of claims. 35 U.S.C. §112. These requirements pertain to the informative quality of the patent specification, specifically, the written description and drawings. Section 112(a) provides that [t]he specification shall contain . . . the manner and process of making and using [the invention], in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains . . . to make and use the same. Enablement requires that the description teach how to achieve the claimed invention without undue experimentation. Chiron Corp. v. Genentech, Inc., 363 F.3d 1247, 1253 (Fed.Cir. 2004). Any mode of making and using the claimed invention is sufficient, and the inventor need not set forth how or why the invention works. Engel Industries, Inc. v. Lockformer Co., 946 F.2d 1528, 1533 (Fed.Cir. 1991); Newman v. Quigg, 877 F.2d 1575, 1581 (Fed.Cir. 1989). Enablement looks to placing the subject matter of the claims generally in the possession of the public. If, however, the applicant develops specific instrumentalities or techniques that are recognized at the time of filing as the best way of carrying out the invention, then the best mode requirement imposes an obligation to disclose that information to the public as well. SpectraPhysics, Inc. v. Coherent, Inc., 827 F.2d 1524, 1532 (Fed.Cir. 1987). Section 112(a) further provides that the specification “shall set forth the best mode contemplated by the inventor or joint inventor of carrying out the invention.” The best mode requirement is a question of fact and ensures that the public gets a full and fair disclosure of the preferred embodiment of the invention. Dana Corp. v. IPC Limited Partnership, 860 F.2d 415, 418 (Fed.Cir. 1988). Interestingly, the Leahy-Smith America Invents Act eliminated failure to disclose the best mode as a defense for an alleged infringer in a patent infringement action. However, the AIA did not eliminate the best mode requirement under §112, and it might still be used to invalidate a patent in a proceeding in front of the United States Patent and Trademark Office. The final requirement of §112 is that the patent’s specification must also contain a written description of the invention to support the claims that would “reasonably convey to a person skilled in the art that [the inventor] had possession of the claimed subject matter at the time of
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 39
§2.41
INTELLECTUAL PROPERTY LAW
filing.” LizardTech, Inc. v. Earth Resource Mapping, Inc., 424 F.3d 1336, 1346 (Fed.Cir. 2005). The level of detail required “varies with the nature and scope of the invention at issue, and with the scientific and technologic knowledge already in existence.” Capon v. Eshhar, 418 F.3d 1349, 1357 (Fed.Cir. 2005). A written description requirement is a separate requirement from the enablement requirement. See Ariad Pharmaceuticals, Inc. v. Eli Lilly & Co., 598 F.3d 1336, 1344 (Fed.Cir. 2010). “Adequate description of the invention guards against the inventor’s overreaching by insisting that he recount his invention in such detail that his future claims can be determined to be encompassed within his original creation.” Vas-Cath Inc. v. Mahurkar, 935 F.2d 1555, 1561 (Fed.Cir. 1991), quoting Rengo Co. v. Molins Machine Co., 657 F.2d 535, 551 (3d Cir. 1981). The purpose of the written description is to “ensure that the scope of the right to exclude, as set forth in the claims, does not overreach the scope of the inventor’s contribution to the field of art as described in the patent specification.” Ariad, supra, 598 F.3d at 1353 – 1354, quoting University of Rochester v. G.D. Searle & Co., 358 F.3d 916, 921 (Fed.Cir. 2005). The written description requirement is not a demanding standard. Literal support in the specification for the claim language is not required (Blue Calypso, LLC v. Groupon, Inc., 815 F.3d 1331, 1346 (Fed.Cir. 2016)), examples are not required (Falko-Gunter Falkner v. Inglis, 448 F.3d 1357, 1366 (Fed.Cir. 2006)), and an actual reduction to practice in not required (id.). Thus, a defense of invalidity for failure to satisfy the requirement is rarely successful. In some situations, even the drawings alone can provide a satisfactory written description of the invention. Vas-Cath, supra, 935 F.2d at 1564. The most common scenario in which the written description requirement arises is when the patentee is attempting to get an earlier filing date by claiming that the first-filed application (the priority application) contains a disclosure adequate to support the claims in a subsequent patent. The claim definiteness requirement found in 35 U.S.C. §112(b) requires that each patent “shall conclude with one or more claims particularly pointing out and distinctly claiming the subject matter which the inventor or a joint inventor regards as the invention.” Issued patents are difficult to invalidate on the basis of claim indefiniteness. Claim indefiniteness is a purely legal issue that arises if claims, when “read in light of the patent’s specification and prosecution history, fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention.” Nautilus Inc. v. Biosig Instruments, Inc., ___ U.S. ___, 189 L.Ed.2d 37, 134 S.Ct. 2120, 2123 (2014). While absolute clarity is not required to find a claim term definite, there is likely an indefiniteness problem “if the claim language ‘might mean several different things and “no informed and confident choice is available among the contending definitions.” ’ ” Interval Licensing LLC v. AOL, Inc., 766 F.3d 1364, 1371 (Fed.Cir. 2014). The viewpoint for determining claim definiteness is that of a person of ordinary skill in the relevant art. Hybritech Inc. v. Monoclonal Antibodies, Inc., 802 F.2d 1367, 1385 (Fed.Cir. 1986). For example, if the evidence provides “a general guideline and examples” sufficient to enable a person of ordinary skill in the art to determine the scope of the claims, then the claims are not indefinite even though the language of magnitude “not interfering substantially” does not provide reference to a precise numerical measurement. See Enzo Biochem, Inc. v. Applera Corp., 599 F.3d 1325, 1335 (Fed.Cir. 2010), cert. denied, 131 S.Ct. 3020 (2011). In short, “[t]he claims, when read in light of the specification and the prosecution history, must provide objective boundaries for those of skill in the art.” Interval Licensing, supra, 766 F.3d at 12371.
2 — 40
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.42
Lastly, 35 U.S.C. §112(f) allows a patentee to express a claim element by referring to the element’s function (a “means”), rather than its structure (e.g., task X is carried out by a control means). However, functional claims cover only “the structure, materials, or acts described in the specification as corresponding to the claimed function and equivalents thereof” and if a person of skill “would be unable to recognize the structure in the specification and associate it with the corresponding function in the claim, a means-plus-function clause is indefinite.” Williamson v. Citrix Online, LLC, 792 F.3d 1339, 1347, 1352 (Fed.Cir. 2015). One notable exception relates to means-plus-function claims directed to software means. The Federal Circuit, beginning with WMS Gaming, Inc. v. International Game Technology, 184 F.3d 1339, 1358 (Fed.Cir. 1999), and continuing in a number of cases (including Aristocrat Technologies Australia Pty Ltd. v. International Game Technology, 521 F.3d 1328, 1331 – 1332 (Fed.Cir. 2008)) has consistently held that when a claim element requires a “special purpose computer” to be implemented, it is not enough to simply disclose a general purpose computer or microprocessor as structure. Williamson, supra, 792 F.3d at 1352. In such cases, a general purpose computer will not provide sufficient structure for purposes of §112 and will result in a finding of indefiniteness. Id. Instead, when a claim element subject to §112(f) must be implemented in a special purpose computer, the specification must contain an “algorithm for performing the claimed function” that can be expressed “as a mathematical formula, in prose, or as a flow chart, or in any other manner that provides sufficient structure.” Id. 3. [2.42] Affirmative Defense Based on License Rights and/or Patent Exhaustion A defense to infringement may involve the existence of a license agreement permitting otherwise infringing conduct. Studiengesellschaft Kohle, M.B.H. v. Hercules, Inc., 105 F.3d 629, 634 (Fed.Cir. 1997). For example, a patentee may assert that a licensee is infringing when the licensee’s actions are believed to have exceeded the scope of the license. The licensee, in defense, will assert that the license under the patent properly excused its activities, and thus there can be no liability for infringement. Interpretation of the parties’ license agreement is a question of contract interpretation under state law. See Cyrix Corp. v. Intel Corp., 77 F.3d 1381, 1384 (Fed.Cir. 1996). Another defense, similar but distinct to a licensing defense, is patent exhaustion. In Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 170 L.Ed.2d 996, 128 S.Ct. 2109, 2122 (2008), the Supreme Court found that doctrine applies to method patents when “[t]he authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article.” The Court justified its ruling by explaining: The sale of a device that practices patent A does not, by virtue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B. [Emphasis in original.] 128 S.Ct. at 2120.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 41
§2.43
INTELLECTUAL PROPERTY LAW
4. [2.43] Affirmative Defense Based on Statutory Bar on Damages, Failure To Mark, and/or Intervening Rights As discussed in §§2.10 – 2.15 above, there are a number of factors that could extinguish or limit a patentee’s ability to obtain damages following a finding of infringement. For example, no liability for damages can exist if the acts constituting infringement were committed more than six years prior to the commencement of the infringement action. 35 U.S.C. §286 (six-year limitation on recovering damages that occurred prior to filing lawsuit). A patentee’s failure to mark its own products that practice the invention may limit recovery of patent damages for some infringed claims. Also, intervening rights may accrue to the accused infringer if the patent is subject to reexamination or reissue proceedings. 5. [2.44] Affirmative Defense Based on Laches Traditionally, the equitable doctrine of laches has been used to assert an absence of liability under 35 U.S.C. §282(b)(1). Laches targets the patentee’s neglect or delay in bringing the suit due to the potential prejudice to the adverse party resulting from that delay. If proved, the defense of laches does not bar the plaintiff’s action in its entirety but results only in the denial of damages for infringement committed prior to the filing of the lawsuit. Laches does not prevent liability for post-filing damages or injunctive relief. A presumption of laches arises in the defendant’s favor when the patentee has delayed in bringing suit for more than six years. Hemstreet v. Computer Entry Systems Corp., 972 F.2d 1290, 1293 (Fed.Cir. 1992). Common evidence offered by the patentee to justify the delay includes proof of the patentee’s participation in other infringement litigation, ongoing negotiations with the accused infringer, poverty, illness, dispute over ownership of the patent, and the limited extent of the infringement. Material prejudice to the alleged infringer can take the form of either evidentiary or economic prejudice. Evidentiary prejudice arises by reason of the accused infringer’s inability to present a full and fair defense due to the loss of documents, the death of a witness, the loss of memory inherent in the passing of time, or the like. Alternatively, economic prejudice arises when the accused infringer has encountered a change in economic position during the period of delay that would have been prevented by an earlier filing of the suit. For example, if, prior to the patentee’s filing of the suit, the defendant made a substantial investment in equipment necessary to produce the accused product that would not have occurred but for the delay, then laches may bar the infringement action. In A.C. Aukerman Co. v. R.L. Chaides Construction Co., 960 F.2d 1020, 1032 (Fed.Cir. 1992), the Federal Circuit identified two elements that an alleged infringer asserting a laches defense must satisfy: (a) that the patentee’s delay in bringing suit was unreasonable and inexcusable; and (b) that the accused infringer suffered material prejudice or injury due to the delay. The court recognized that despite these criteria, the defense of laches is extremely fact dependent and should remain flexible in its application. Id. (“a determination of laches is not made upon the application of ‘mechanical rules’ ”). In 2015, however, the Federal Circuit, overruled in part what it described as a “bright-line” test established by A.C. Aukerman, in light
2 — 42
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.45
of Petrella v. Metro-Goldwyn-Mayer, Inc., ___ U.S. ___, 188 L.Ed.2d 979, 134 S.Ct. 1962 (2014). See SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, 807 F.3d 1311, 1332 (Fed.Cir. 2015) (“We, accordingly, reject Aukerman’s bright line rule regarding the interplay between laches and injunctive relief.”). Whether the defense of laches will remain a defense to patent infringement is a question pending before the Supreme Court. In 2014, the Supreme Court rejected laches as a defense to copyright infringement. See Petrella, supra. In 2015, the Federal Circuit went en banc in SCA Hygiene Products, supra, to determine whether laches remains a defense to patent infringement in light of Petrella, supra. In affirming laches as a defense to patent infringement claims and distinguishing Petrella, the SCA Hygiene Products court concluded that Congress had codified laches under 35 U.S.C. §282 as a defense to patent infringement suits. 807 F.3d at 1315. The Federal Circuit also noted that, unlike copyright law in which independent creation is a defense, “the calculus is different” under patent law because innocence is not a defense. 807 F.3d at 1330. The Federal Circuit observed that “without laches, innovators have no safeguard against tardy claims demanding a portion of their commercial success.” Id. Regarding ongoing relief, the Federal Circuit rejected a bright-line rule limiting laches to presuit damages and stressed that “[p]aramount in both [the injunction and ongoing royalty analyses] are the flexible rules of equity and, as a corollary, district court discretion.” 807 F.3d at 1333. Regarding injunctive relief, the SCA Hygiene Products court held that the evidence of laches should be considered in conjunction with the four-factor test established in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006). 807 F.3d at 1331. Additionally, the Federal Circuit expanded laches by finding that laches can serve as a defense to injunctions. Id. In its decision granting certiorari, the Supreme Court recounted from Petrella that it “ha[s] never applied laches to bar in their entirety claims for discrete wrongs occurring within a federally prescribed limitations period.” 134 S.Ct. at 1965. The question presented to the Court was whether and to what extent the defense of laches may bar a claim for patent infringement brought within the six-year statutory damages period provided in §286 of the patent statute. As of this writing, laches remains a defense to patent infringement. 6. [2.45] Affirmative Defense of Equitable Estoppel In contrast to laches, equitable estoppel does not require the passage of an unreasonable period of time prior to filing suit. SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, 807 F.3d 1311, 1332 (Fed.Cir. 2015). Additionally, equitable estoppel bars all relief on a claim of infringement, not just prefiling damages. Thus, there is no presumption in favor of the accused infringer, regardless of the delay, but the severity of the penalty for equitable estoppel is considerably more. In establishing a defense of equitable estoppel, the defendant must prove the following required elements: (a) there was misleading conduct by the patentee such that the alleged infringer reasonably inferred that the patentee did not intend to enforce its patent against the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 43
§2.46
INTELLECTUAL PROPERTY LAW
alleged infringer; (b) the defendant relied on that misleading conduct; and (c) due to its reliance, the alleged infringer will be materially prejudiced if the patentee is allowed to proceed with its claim. A.C. Aukerman Co. v. R.L. Chaides Construction Co., 960 F.2d 1020, 1027 (Fed.Cir. 1992). The first element, misleading conduct by the patentee, does not require an affirmative act by the patentee. The conduct can include inaction or silence when there was an obligation to speak. 960 F.2d at 1042. To show the second element, reliance on the misleading conduct, the infringer must have had a relationship or communication with the patentee that “lulls the infringer into a sense of security in going ahead.” 960 F.2d at 1043. Last, establishing material prejudice is similar to laches; the prejudice can be either economic or evidentiary. 7. [2.46] Affirmative Defense of Patent Unenforceability Alleged infringers also have available the affirmative defense of unenforceability. If the defense of unenforceability is proved, the whole patent may be rendered unenforceable, although perhaps not permanently. 35 U.S.C. §282. The two basic unenforceability defenses asserted under §282 are (a) inequitable conduct and (b) patent misuse. These defenses are largely equitable in nature and are applied at the court’s discretion. a. [2.47] Inequitable Conduct The defense of inequitable conduct alleges that the court should refuse to enforce a patent that the patentee procured through improper conduct before the United States Patent and Trademark Office. “Each individual associated with the filing and prosecution of a patent application has a duty of candor and good faith in dealing with the Office, which includes a duty to disclose to the Office all information known to that individual to be material to patentability.” 37 C.F.R. §1.56(a). Inequitable conduct can therefore be based on either a patentee’s omission or affirmative misrepresentation of material information with the intent to deceive. Kingsdown Medical Consultants, Ltd. v. Hollister Inc., 863 F.2d 867, 872 (Fed.Cir. 1988). Both materiality and intent must be proved by clear and convincing evidence. Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245, 1259 (Fed.Cir. 2000). Intent to deceive the USPTO is commonly inferred from circumstantial evidence since direct evidence is unlikely because few inventors will confess to intentionally misleading the USPTO to obtain the patent. The inference is especially strong when the materiality of information is particularly high. “The more material the omission or the misrepresentation, the lower the level of intent required to establish inequitable conduct.” Critikon, Inc. v. Becton Dickinson Vascular Access, Inc., 120 F.3d 1253, 1256 (Fed.Cir. 1997). However, a finding that the particular conduct amounts to “gross negligence” does not by itself justify an inference of intent to deceive. Kingsdown, supra, 863 F.2d at 873. “[T]he involved conduct, viewed in light of all the evidence, including evidence indicative of good faith, must indicate sufficient culpability to require a finding of intent to deceive.” 863 F.2d at 876. If the court determines that the patent was obtained through inequitable conduct, the patent is rendered permanently unenforceable. While both “intent to deceive” and “materiality” were recognized elements of an inequitable conduct charge, a question remained as to whether one element could be assumed if evidence of
2 — 44
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.48
the other element was high. In Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276, 1291 (Fed.Cir. 2011), the Federal Circuit clearly said “no,” and confirmed that evidence of both elements must be present. At the same time, the Federal Circuit narrowed the opportunities for proving inequitable conduct. Id. For a reference to be material, the Federal Circuit concluded that the art would have prevented issuance of the patent; that “but for” the nondisclosure or the misdescription of the reference, the patent would not have issued.
PRACTICE POINTER
The defense of patent unenforceability, and in particular inequitable conduct, is viewed with skepticism by the courts because it has been asserted without a strong basis by many defendants in the past. Therefore, a defendant should consider delaying assertion of this defense until it has had time to gather strong evidence in support of this defense. A court should not deny a motion for leave to amend a complaint based on the fact that a defendant waited to gather additional evidence in discovery before asserting a charge of inequitable conduct, particularly since the facts that would support such a charge are often available only through the patentee.
b. [2.48] Patent Misuse An alleged infringer may also assert an affirmative defense of patent misuse under 35 U.S.C. §282. Patent misuse (broadly defined as preventing a patentee from using its patent in a manner inconsistent with the public interest) is a method of limiting abuse of patent rights separate from, but strongly influenced by, the antitrust laws. The defense of patent misuse requires the accused infringer to prove that the patentee has impermissibly exploited its patent right to exclude beyond the bounds of patent law, thereby harming competition. B. Braun Medical Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426 (Fed.Cir. 1997). The crucial inquiry is whether, by imposing conditions on the sale or license of a patented device or process, the patentee has “impermissibly broadened the ‘physical or temporal scope’ of the patent grant.” Windsurfing International, Inc. v. AMF, Inc., 782 F.2d 995, 1001 (Fed.Cir. 1986). A finding of patent misuse renders the entire patent unenforceable, at least for a period of time. The patentee may regain the right to enforce the patent if it is possible for the patentee to “purge” the misuse. Riker Laboratories, Inc. v. Gist-Brocades N.V., 636 F.2d 772, 777 (D.C.Cir. 1980). The misuse is purged and the patent is considered rehabilitated when “it is made to appear that the improper practice has been abandoned and that the consequences of the misuse of the patent have been dissipated.” H-W Technology, L.C. v. Overstock.com, Inc., 758 F.3d 1329, 1335 (Fed.Cir. 2014), citing Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 86 L.Ed. 363, 62 S.Ct. 402 (1942), abrogated on other grounds by Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 164 L.Ed.2d 26, 126 S.Ct. 1281 (2006). Courts have generally based determinations of patent misuse on a limited number of specific acts by the patentee, such as tying, payment of license fees beyond the scope of the patent, and/or efforts to exclude nonpatented activities. USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 510 (7th Cir. 1982).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 45
§2.49
INTELLECTUAL PROPERTY LAW
Allegations of patent misuse must be viewed in light of the safe harbors created by the 1988 patent misuse reforms, Pub.L. No. 100-703, Title II, 102 Stat. 4676 (1988), which added 35 U.S.C. §§271(d)(4) and 271(d)(5). These provisions address refusals to license and tying, respectively. Section 271(d)(4) gives patentees the right to refuse to license a patent on any terms, even if they are not practicing the invention. Section 271(d)(5) reflects the current trend in antitrust law: permitting tying arrangements and exclusive dealing agreements as long as the patent owner does not have market power in the relevant market for the patented product. F. [2.49] Filing of Jury Demands In a patent dispute, the right to a jury trial is fully protected by the Seventh Amendment whether it occurs in the context of a patent infringement suit or a declaratory judgment action seeking invalidity or noninfringement. Patlex Corp. v. Mossinghoff, 758 F.2d 594 (Fed.Cir. 1985). There are no special rules for patent jury cases; the laws and rules of procedure generally applicable to civil jury cases apply without exception to patent jury cases. Factual patent issues triable before a jury include infringement, willfulness, content and scope of prior art, differences between prior art and patented claims, level of ordinary skill in the art, equivalents, best mode, and damages. In addition, some issues, such as obviousness, raise questions of law but are based on underlying factual inquiries. GNB Battery Technologies, Inc. v. Exide Corp., 78 F.3d 605 (Fed.Cir. 1996). There is no infallible method for determining whether to opt for a jury trial or bench trial in a patent dispute. Some parties are concerned that, when a patent case is given to a jury instead of the court, the problems involved in submission become considerably more complex and require substantially more effort or the jury will have greater difficulty understanding the technology. However, the job of the attorneys and the witnesses is to explain the technology in such a way that it makes sense to the trier of fact, whether that ends up being the judge or the jury. Sometimes cases tried before a judge become overly complex because the parties do not make the “extra” effort that they would make in front of a jury to clearly and simply explain the technology to the judge. Still, a jury, unlike a judge, is approaching the case cold, without any advance knowledge of the nature of the technology, the patent claims, or the parties — issues with which the judge will likely have become familiar through the discovery and pretrial process, particularly if the judge has construed the claims prior to trial. Popular perceptions of jury bias, such as favoring patentees over infringers, individuals over corporations, and local over foreign corporations, may influence the decision to make a jury demand and should not be totally ignored. See Forensic & Litigation Consulting, 2013 Intellectual Property Statistics, (Sept. 22, 2014), www.fticonsulting.com/insights/capabilities/2013-intellectual-property-statistics, for a breakdown of bench and jury patent cases for 2008 – 2013.
2 — 46
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.51
IV. CASE MANAGEMENT ISSUES AND DISCOVERY A. Preliminary Issues 1. [2.50] Protective Orders The parties should agree on the terms of a protective order to protect confidential business information early in the discovery process. The protective order should address whether anyone, in addition to the attorneys and the experts, should have access to the confidential business information. Some courts have very strict requirements on the terms to be included in a protective order. Other courts have standardized protective orders to be used in most cases. The parties should be particularly sensitive to the protection and handling of confidential electronic software and code. For example, a protective order may include a “prosecution bar” limitation, which restricts an attorney’s ability to prosecute patents in a defined area of technology if the attorney accesses highly sensitive technical information under the protective order. Other protective orders contain provisions that address the handling of source code. These provisions can be highly contentious, and the restrictions can affect not just the immediate case, but also subsequent actions. It benefits both sides to address these issues at the outset of the case and to work to a solution that will protect the clients’ interests in maintaining the secrecy of their highly confidential, proprietary information without unduly impeding the attorneys in preparing the case.
PRACTICE POINTER
It is not uncommon for a party to insist on a prosecution bar provision in a protective order. The prosecution bar prevents those attorneys with access to highly confidential technical information from engaging in patent prosecution activities before the United States Patent and Trademark Office (or other patent office) for a period of time after last access to the highly confidential information. With the advent of post-grant proceedings under the Leahy-Smith America Invents Act, attorneys considering prosecution bars should evaluate whether the prosecution bar should extend to (i.e., bar) participation in post-grant proceedings.
2. [2.51] Electronic Discovery Although parties routinely seek discovery of information in electronic form, the cost and time involved in collecting and reviewing electronic data for potential production can be daunting. The parties should reach an agreement early in the case on the scope of a party’s obligation, if any, to search servers, including e-mail servers, for potentially responsive electronic documents. A number of jurisdictions, recognizing the cost and potential discovery abuses that e-discovery can impose on a case, have developed model rules for handling e-discovery.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 47
§2.52
INTELLECTUAL PROPERTY LAW
3. [2.52] Case Management Plan Increasingly, judicial districts, such as the Northern District of Illinois, the Northern District of California, and the Eastern District of Texas, have standardized rules that govern patent cases. These rules set forth the procedure and timing by which the parties must disclose certain basic and detailed information about their case. For example, these rules require that the patentee provide its preliminary infringement contentions to the alleged infringer at the beginning of the case. Following receipt of these contentions, the alleged infringer must provide its preliminary invalidity contentions to the patentee. Since these contentions are often critical information for the parties to receive but also difficult to promptly obtain through discovery, these rules eliminate many of the battles and letter-writing campaigns that can bog down the discovery process. The rules further provide a schedule for identifying the claim terms that the parties believe should be construed by the court and the procedure for briefing the court on the parties’ proposed constructions of these terms. Again, this is information that the parties will inevitably need to exchange but traditionally have been reluctant to provide for fear of having to commit to a particular position in the litigation.
PRACTICE POINTER
Even if a case is not pending in a judicial district with standardized patent rules, the standardized rules of other districts can act as a guide in proposing a case management plan.
B. [2.53] Motions To Bifurcate A defendant should consider moving to bifurcate certain issues for purposes of discovery and/or trial. In patent cases, it is not uncommon to informally or formally delay discovery on the issue of willful infringement and in particular the question of whether the defendant intends to rely on the advice of counsel until late in the discovery process. However, consideration should also be given to advancing certain discovery items, such as production of licensing and settlement agreements, sales numbers, and similar information that may help the parties assess the value of the case, if infringement of a valid claim were to be found. Delaying or bifurcating damages discovery becomes more problematic. The patentee will be interested in learning more financial details about the defendant’s infringing activities in order to better evaluate the potential scope of damages. If the alleged infringer has raised invalidity based on 35 U.S.C. §103 (obviousness) as an affirmative defense, a patentee is likely to argue that information on sales and profits of the patented product is relevant to assessing the commercial success of the patented product. The commercial success of the patented product, whether it is the success of the patentee’s patented product or the alleged infringer’s product, is evidence of “secondary considerations” that may rebut a claim of obviousness. In some cases, the parties are able to reach an agreement, or the court sets a schedule, delaying discovery on detailed financial information until the end of discovery. However, it is unlikely that a court will bifurcate the issue of damages at trial.
2 — 48
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.55
C. [2.54] Motions To Sever and Transfer As noted in §2.19 above, the Leahy-Smith America Invents Act added a new statute, 35 U.S.C. §299, that was intended to prevent patentees from asserting patent infringement against numerous companies in a single suit based only on commonality of the patents in suit or similarities between the products. Given that courts have routinely consolidated separately filed actions, effectively negating the impact of this reform, a defendant still should consider moving to transfer the case to another forum, or at least sever the action for purposes of trial. D. [2.55] Typical Discovery Sought by Patentee The patentee bears the burden of proving by a preponderance of the evidence that the patent claims are infringed. If willful infringement is asserted, the patentee also bears the burden of proof on this issue. Finally, if infringement is proved, the patentee has the burden of proving with reasonable certainty the amount of damages adequate to compensate it for the infringement. Although the patent statutes provide for damages in an amount not less than a reasonable royalty, that damages award cannot be speculative. Therefore, a patentee is likely to have a different set of goals in discovery than the alleged infringer. The patentee should seek at least the following general categories of information through the various methods of discovery available under the federal rules: 1. technical and functional details about the accused product (practice or service); 2. development history of the accused product, including alternatives that were explored and rejected and failed attempts to develop the accused product; 3. commercial success of the accused product, such as increased sales of the product over the competition or the defendant’s prior products and documents tying these sales to the patented features; 4. information showing or suggesting that there was a long-felt need for the accused product or the claimed invention; 5. efforts to copy parts or all of the claimed invention or to design a product that achieves the same results as the claimed invention; 6. marketing and instructional materials relating to the accused product, which may show that the alleged infringer is inducing use of the accused product in an infringing manner and may highlight and promote the patented features; 7. financial information about the product, the market for the product, and other goods sold in combination with the accused product; 8. information showing or suggesting that the alleged infringer had knowledge of the patent and/or that its activities were likely to infringe the patent;
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 49
§2.56
INTELLECTUAL PROPERTY LAW
9. financial information supporting the patentee’s claim for damages as outlined in §§2.10 – 2.16 above; and 10. details, through responses to contention interrogatories and other discovery requests, that elaborate on the facts that support the alleged infringer’s claim construction (including the intrinsic and extrinsic evidence on which the party intends to rely), affirmative defenses, claims of noninfringement, and design-around efforts, if any. E. [2.56] Typical Discovery Sought by Alleged Infringer The alleged infringer bears the burden of proving by clear and convincing evidence that the patent is invalid or unenforceable. It also bears the burden of proving the other affirmative defenses that it has asserted in response to the complaint. In order to meet this burden, the alleged infringer should seek from the patentee, or third parties, discovery of at least the following general categories of information: 1. history of development of the claimed invention, including the date of conception of the invention and reduction to practice and evidence of the inventor’s preferred mode of practicing the invention; 2. state of the industry at the time of the invention, including steps taken by the inventor and/or others within the inventor’s company to keep current on developments within the industry; 3. efforts to commercialize the claimed invention either by the inventor, by his or her company, or by third parties; 4. public use or offers to sell (particularly efforts before commercialization) the claimed invention, including evidence of display, use, or testing of the invention by the inventor or his or her company in connection with customers, potential customers, or other third parties; 5. prior art that may invalidate the patent, including exploration of industry standards and industry publications, meeting records, and governmental information about the industry at the time of the claimed invention; 6. details of the prosecution of the patent application, including prosecution of foreign counterparts, and related applications, including abandoned applications and invention disclosures; 7. acceptable noninfringing alternatives and design-around options; 8. facts that tend to refute the patentee’s claims of commercial success or the patentee’s other evidence of secondary considerations (e.g., evidence refuting claim of long-felt need for the claimed invention, evidence that the alleged inventor was designing around and not copying the claimed invention, etc.);
2 — 50
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.58
9. facts that tend to limit the amount of damages necessary to adequately compensate the patentee for any infringement; and 10. details through responses to contention interrogatories and other discovery requests that elaborate on the facts that support the patentee’s claim construction (including the intrinsic and extrinsic evidence on which the party intends to rely), claims of infringement, and damages.
V. CLAIM CONSTRUCTION/MARKMAN HEARINGS A. [2.57] Court Has Responsibility of Construing Claim Terms Before a determination of patent infringement or invalidity can be made, the scope and meaning of the terms used in the patent claims at issue must be interpreted to define the extent of legal protection available to the patentee. Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed.Cir. 1995), aff’d, 116 S.Ct. 1384 (1996). In a patent case, claim construction is a question of law reserved exclusively for the court. The Federal Circuit (the appellate court to which all patent cases are appealed) reviews a district court’s claim construction de novo, and a number of cases are reversed each year on the ground that the district court applied the wrong claim construction in evaluating the question of infringement or invalidity. Throughout the claim construction process, the viewpoint for interpreting disputed claim terms is that of a hypothetical person having ordinary skill in the relevant art. 52 F.3d at 986. See Interactive Gift Express, Inc. v. Compuserve Inc., 256 F.3d 1323, 1332 (Fed.Cir. 2001). Often, a court’s particular construction of the disputed claims can be dispositive of the patent controversy. Courts have a large degree of flexibility in deciding when and how to construe the claims. Although the term “Markman hearing” has become synonymous with claim construction, the decision in Markman, supra, did not mandate that the court hold a separate hearing at which it hears evidence and/or argument on the scope and meaning of disputed claims terms. Still, many courts and parties are opting to pursue Markman hearings or at least a separate briefing on the issue of claim construction. In cases in which the facts are not disputed and the issue of infringement boils down to a question of claim construction, resolution of the claim construction can provide the parties with some certainty and direction. In other cases, the claim construction is not a hotly contested issue and can be addressed at the summary judgment stage or before trial in connection with the jury instructions. B. [2.58] Evidence Considered in Construing Claims Whether the court holds a separate Markman hearing (Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed.Cir. 1995), aff’d, 116 S.Ct. 1384 (1996)), decides claim construction based on the briefs of the parties, or hears evidence of claim construction at trial, it is important to know what evidence the Federal Circuit has identified as relevant in construing claim terms. In construing claim terms, the Federal Circuit distinguishes between intrinsic and extrinsic evidence. Vitronics Corp. v. Conceptronic, Inc., 90 F.3d 1576, 1582 (Fed.Cir. 1996). “Intrinsic evidence” is
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 51
§2.59
INTELLECTUAL PROPERTY LAW
comprised of the public record of the patent, including (1) the claims, (2) the written description, and (3) the prosecution history, if in evidence. Interactive Gift Express, Inc. v. Compuserve Inc., 256 F.3d 1323, 1331 (Fed.Cir. 2001). “Extrinsic evidence” consists of any evidence external to the patent and its file history, such as technical articles, inventor testimony, expert testimony, and, when relevant, statements made in the prosecution of a related foreign application. Vitronics, supra, 90 F.3d at 1584. When interpreting a disputed claim, the court first looks to the intrinsic record, beginning with the claims themselves followed by the specification and prosecution history, respectively. Phillips v. AWH Corp., 415 F.3d 1303, 1313 (Fed.Cir. 2005). Only if the claim language remains unclear after reference to the intrinsic evidence is it appropriate for the court to consider extrinsic evidence to resolve the lack of clarity. Interactive Gift, supra, 256 F.3d at 1332. Extrinsic evidence may never be used to vary or contradict the clear meaning of the claim language. Vitronics, supra, 90 F.3d at 1582. Although technically extrinsic evidence, dictionaries, treatises, and encyclopedias are often useful to the court to help determine the meaning of claim terms when construing patent claims. Phillips, supra, 415 F.3d at 1321. Dictionaries offer the court objective and reliable sources of information on the established meanings that would have been attributed to the terms of the claim by those of skill in the art at the time of the patent’s issuance. Id. However, dictionaries may not contradict any definition found or ascertained from the intrinsic evidence. 415 F.3d at 1322 – 1323. C. [2.59] Process of Claim Construction Claim construction begins with the words of the claim. Vitronics Corp. v. Conceptronic, Inc., 90 F.3d 1576, 1582 (Fed.Cir. 1996). “In construing claims, the analytical focus must begin and remain centered on the language of the claims themselves.” Brookhill-Wilk 1, LLC v. Intuitive Surgical, Inc., 334 F.3d 1294, 1298 (Fed.Cir. 2003), quoting Interactive Gift Express, Inc. v. Compuserve Inc., 256 F.3d 1323, 1331 (Fed.Cir. 2001). It is the general rule that claim terms be given their plain, ordinary, and customary meaning to one of ordinary skill in the relevant art. Thorner v. Sony Computer Entertainment America LLC, 669 F.3d 1362, 1365 (Fed.Cir. 2012). The Federal Circuit has created a “heavy presumption” in favor of terms receiving their ordinary meaning. CCS Fitness, Inc. v. Brunswick Corp., 288 F.3d 1359, 1366 (Fed.Cir. 2002). In establishing a claim term’s ordinary meaning, the court may initially look to the claim language itself. Phillips v. AWH Corp., 415 F.3d 1303, 1314 (Fed.Cir. 2005). In some cases, the ordinary meaning of claim language may be readily apparent, and claim construction involves little more than application of the widely accepted meaning. 415 F.3d at 1313. However, in many cases that give rise to litigation, determining the ordinary meaning requires examination of terms that have a particular meaning in a field of art. 415 F.3d at 1314. After reference to the claim language, the court will resolve any remaining ambiguities by looking first to the specification, then to the prosecution history. 415 F.3d at 1315 – 1317. The presumption in favor of claim terms receiving their ordinary meaning is overcome only when the party advocating departure from the ordinary meaning has demonstrated that the
2 — 52
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.60
inventor intended to deviate from the ordinary and accustomed meaning of a claim term by (1) acting as his or her own lexicographer and clearly setting forth an explicit definition for a term or (2) characterizing the invention in the intrinsic record in a manner that deviates from the term’s ordinary meaning. 415 F.3d at 1319. For example, in Abbott Laboratories v. Syntron Bioresearch, Inc., 334 F.3d 1343, 1354 (Fed.Cir. 2003), quoting In re Paulsen, 30 F.3d 1475, 1480 (Fed.Cir. 1994), the Federal Circuit explained that, when an inventor acts as his or her own lexicographer in the specification, the inventor must point out “with reasonable clarity, deliberateness, and precision” how these terms differ from their ordinary meaning. Typical phrases found in a patent specification in which the court has determined the patentee acted as his or her own lexicographer include the “structure defined above is,” “as used herein,” and “the invention encompassing not only conventional methods, but also includes.” SciMed Life Systems, Inc. v. Advanced Cardiovascular Systems, Inc., 242 F.3d 1337, 1344 (Fed.Cir. 2001); Cultor Corp. v. A.E. Staley Manufacturing Co., 224 F.3d 1328, 1330 (Fed.Cir. 2000); Kopykake Enterprises, Inc. v. Lucks Co., No. CV 99-354 FMC (CWx), 2000 U.S.Dist. LEXIS 21610 (C.D.Cal. Apr. 26, 2000). After reviewing the specification, a court also will consider the prosecution history to determine whether statements made during the patent’s prosecution affect the claim construction. Phillips, supra, 415 F.3d at 1317; Rexnord Corp. v. Laitram Corp., 274 F.3d 1336, 1343 (Fed.Cir. 2001). For example, a statement in the prosecution history may represent an express disclaimer of a specific claim interpretation. Shire Development, LLC v. Watson Pharmaceuticals, Inc., 787 F.3d 1359, 1365 (Fed.Cir. 2015). Courts, in their discretion, may refer to extrinsic evidence. Phillips, supra, 415 F.3d at 1319. For example, extrinsic evidence may educate the court regarding the field of the invention and may assist the court to determine what a person of ordinary skill in the art would understand claim terms to mean. Id. Extrinsic evidence, though, is unlikely to result in proper claim construction unless considered in the context of the intrinsic evidence. Id. D. Special Claim Construction Considerations 1. [2.60] Preamble In most claims, the preamble is not intended to be limiting. However, this is not always the case. The question of whether to treat the preamble as a claim limitation is determined on a caseby-case basis. The court will look at the claim as a whole and the invention described in the patent in reaching its conclusion. Applied Materials, Inc. v. Advanced Semiconductor Materials America, Inc., 98 F.3d 1563, 1572 – 1573 (Fed.Cir. 1996). A preamble will be treated as a limitation of the claimed invention if it recites essential structure or steps or if it is necessary to give meaning to the claim. Eaton Corp. v. Rockwell International Corp., 323 F.3d 1332, 1339 (Fed.Cir. 2003). For example, “[w]hen limitations in the body of the claim rely upon and derive antecedent basis from the preamble, then the preamble may act as a necessary component of the claimed invention.” Id. If, however, the body of the claim can stand on its own without reference to the preamble, then the language of the preamble should not serve as a limitation.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 53
§2.61
INTELLECTUAL PROPERTY LAW
2. [2.61] Construing Means-Plus-Function Claims Pursuant to 35 U.S.C. §112, claims can be written in what is commonly referred to as “means-plus-function” format. Whether a claim element is written in means-plus-function format is presumed by the presence or absence of the word “means.” Using the word “means” in a claim element creates a presumption that the element is subject to §112(f). To rebut this presumption and fall outside §112, the alleged means-plus-function claim element must be shown to recite a sufficient, definite structure for performing the stated function. Phillips v. AWH Corp., 415 F.3d 1303, 1311 (Fed.Cir. 2005). Conversely, absence of the word “means” in an element creates the presumption that §112(f) does not apply, although this presumption is no longer a “strong” one as clarified by the Federal Circuit in Williamson v. Citrix Online, LLC, 792 F.3d 1339, 1349 (Fed.Cir. 2015). The presumption that §112(f) does not apply in absence of the word “means” can be rebutted “if the challenger demonstrates that the claim term fails to ‘recite sufficiently definite structure’ or else recites ‘function without reciting sufficient structure for performing that function.’ ” 792 F.3d at 1349. Claim interpretation under §112 is a two-step process. The court must (a) identify the function explicitly recited in the claim and (b) identify the corresponding structure set forth in the written description that performs the particular function set forth in the claim. 792 F.3d at 1351. “If the patentee fails to disclose adequate corresponding structure, the claim is indefinite.” 792 F.3d at 1352. The scope of the claimed function is derived from the claim language itself. Transonic Systems, Inc. v. Non-Invasive Medical Technologies Corp., 75 Fed.Appx. 765, 778 (Fed.Cir. 2003). “The corresponding structure to a function set forth in a means-plus-function limitation must actually perform the recited function, not merely enable the pertinent structure to operate as intended.” Asyst Technologies, Inc. v. Empak, Inc., 268 F.3d 1364, 1371 (Fed.Cir. 2001). Likewise, for terms construed under §112, structure disclosed in the specification is the corresponding structure only if the specification or the prosecution history clearly links or associates that structure to the function recited in the claim. Northrop Grumman Corp. v. Intel Corp., 325 F.3d 1346, 1352 (Fed.Cir. 2003). In other words, structural limitations from the written description that are unnecessary to perform the claimed function may not be imported into the claim. Id. Further, “[e]ven if the specification discloses corresponding structure, the disclosure must be of ‘adequate’ corresponding structure to achieve the claimed function.” Williamson, supra, 792 F.3d at 1352. “[T]herefore, if a person of ordinary skill in the art would be unable to recognize the structure in the specification and associate it with the corresponding function in the claim, a means-plus-function clause is indefinite.” Id.
VI. [2.62] SUMMARY JUDGMENT, TRIAL, AND APPEAL Summary judgment is as appropriate in a patent case as in any other case. Most often, the issues of infringement and invalidity are addressed in a summary judgment motion. Summary judgment on the issue of patent unenforceability due to inequitable conduct is more difficult to obtain because the issue of intent to deceive is particularly difficult to resolve on summary judgment. If the case proceeds beyond summary judgment and fails to settle, the parties can expect a trial in a patent case to extend over the course of several days or weeks. It is not unusual for
2 — 54
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.64
patent cases to exceed 20 days of trial. For this reason, a judge is reluctant to bifurcate issues for trial, particularly if it means that a jury would have to return weeks or months later to resolve bifurcated issues. In order to keep the court and the jury interested, and to make sure the technology is fully understood by the fact-finder, most parties find that multimedia presentations are the best means for presenting highly technical evidence.
PRACTICE POINTER
It is advisable to consult with jury or litigation support consultants to get their insights on whether counsel’s presentation of highly technical issues is understandable and meaningful. This may include presentation of the materials or anticipated witness testimony to a jury focus group. To obtain the maximum benefit from this exercise, it is best to undertake these activities well in advance of trial.
Under 28 U.S.C. §1295, the U.S. Court of Appeals for the Federal Circuit has exclusive nationwide jurisdiction over appeals from any case in which the district court’s jurisdiction was based, in whole or in part, on 28 U.S.C. §1338. Prior to 1982, appeals of disputes involving patent law were made to the circuit court in which the district court was located. However, in 1982, amid concerns over forum-shopping and a lack of national uniformity in patent law, Congress formed the Federal Circuit. The result has been the creation of a single, coherent body of patent law on which district courts and litigants can accurately rely.
VII. POST-GRANT PROCEDURES UNDER THE LEAHY-SMITH AMERICA INVENTS ACT A. [2.63] Brief Overview: Inter Partes Review, Post-Grant Review, and Covered Business Method The Leahy-Smith America Invents Act provided several avenues for challenging an issued patent’s validity at the United States Patent and Trademark Office, including inter partes review, post-grant review, and the Transitional Program for Covered Business Method Patents (CBM). These procedures are adjudicative in nature. That is, they are decided before a panel of three judges from the Patent Trial and Appeal Board, and limited discovery (i.e., pretrial discovery, depositions) is available. As of June 30, 2016, there have been over 5,000 AIA petitions (90 percent of petitions for inter partes review). USPTO, Patent Trial and Appeal Board Statistics, www.uspto.gov/sites/default/files/documents/2016-6-30%20PTAB.pdf (June 30, 2016) (case sensitive). AIA procedures may cost less than a challenge to a patent’s validity in a federal district court, may provide tactical advantages, and may have significant effects on any copending litigation regarding the same patent in a district court. See §§2.64 – 2.66 below for a short description of each type of trial. B. [2.64] Inter Partes Review Inter partes review is more frequently used than either post-grant review or the Transitional Program for Covered Business Method Patents and may be instituted only upon a showing that
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 55
§2.65
INTELLECTUAL PROPERTY LAW
there is a “reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition.” 35 U.S.C. §314(a). A patent may be challenged only under either 35 U.S.C. §102 or 35 U.S.C. §103, and only on the basis of prior art consisting of patents or printed publications. See 37 C.F.R. §42.104. Nearly anyone except the owner of a patent has standing to petition the Patent Trial and Appeal Board to institute an inter partes review. 35 U.S.C. §311(a). However, two exceptions exist. First, a petitioner will not have standing if he or she has been served with an infringement complaint relating to the challenged patents more than a year prior to petitioning for review. 35 U.S.C. §315(b). Second, a petitioner will not have standing if he or she has filed a civil action challenging validity of the patent. 35 U.S.C. §315(a)(1). However, raising invalidity as a counterclaim does not affect standing for inter partes review. In addition to these standing constraints, a party must still wait to file an inter partes review petition until nine months after the grant of the patent, issuance of a reissue patent, or, if a post-grant review is instituted, the termination of the post-grant review (whichever is later). See 37 C.F.R. §42.102. As of June 30, 2016, an inter partes review has been instituted in 50 percent of the cases in which a petition was filed. Out of those cases that reached a final decision, 70 percent of the time all of the instituted claims have been held unpatentable. United States Patent and Trademark Office, Patent Trial and Appeal Board Statistics, p. 10 (June 30, 2016) www.uspto.gov/sites/default/files/documents/2016-6-30%20PTAB.pdf (case sensitive). C. [2.65] Post-Grant Review Post-grant review may be instituted only upon a showing that it is more likely than not that at least one of the challenged claims are unpatentable or upon a showing of a novel or unsettled legal question that is important to other patents or patent applications. 35 C.F.R. §42.208. Postgrant review is substantively much broader in scope than inter partes review. Specifically, a petitioner may challenge a claim or patent on any ground that could be raised under 35 U.S.C. §282(b)(2) or 35 U.S.C. §282(b)(3). See 35 U.S.C. §321(b); 37 C.F.R. §42.204. This includes double patenting and §§101, 102, 103, and 112 issues, but does not include patentability due to defects with the best mode. See 35 U.S.C. §321(b); 37 C.F.R. §42.204. A party has standing to file a petition for post-grant review if the patent in question was filed under the post-Leahy-Smith America Invents Act first-to-file system and the petitioner has not already filed an invalidity suit against the patent owner. See 37 C.F.R. §42.201. The petition must be filed within the first nine months after the grant of the patent, unlike inter partes review, which can be filed after the ninemonth window is closed and for the remaining life of a patent. See 37 C.F.R. §42.202. Compared to inter partes review, post-grant review petitions are rare, accounting for only one percent of total AIA petitions filed as of June 30, 2016. United States Patent and Trademark Office, Patent Trial and Appeal Board Statistics, (June 30, 2016), www.uspto.gov/sites/default/ files/documents/2016-6-30%20PTAB.pdf (case sensitive). D. [2.66] Covered Business Methods The Transitional Program for Covered Business Methods is a Patent Trial and Appeal Board trial proceeding instituted in order to review the patentability of one or more claims in a covered
2 — 56
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.67
business method patent. CBM review may be instituted only upon a showing that it is more likely than not that at least one claim of the challenged patent is unpatentable and is available only until September 15, 2020. 35 U.S.C. §324; 37 C.F.R. §42.300(d). Unlike an inter partes review, and similar to post-grant review, a petitioner may challenge a claim or patent on any ground that could be raised under 35 U.S.C. §282(b)(2) or 35 U.S.C. §282(b)(3). See 35 U.S.C. §321(b); 37 C.F.R. §42.304. The standing requirements for filing a CBM petition are more strict than the requirements for filing either an inter partes review or a post-grant review. Specifically, a party has standing to file a CBM petition only if (1) the petitioner, the petitioner’s real party-in-interest, or a privy of the petitioner has been sued for infringement of the patent or has been charged with infringement under that patent; and (2) the petitioner is not estopped from challenging the claims on the grounds identified in the petition; and (3) the petitioner or a real party-in-interest has not yet filed a civil action challenging the validity of a claim of the patent. 37 C.F.R. §42.302. However, if a petitioner meets all the standing requirements, the only timing restriction is that the petition must be filed after the grant of the patent. 37 C.F.R. §42.303. As of June 30, 2016, CBM petitions account for 9 percent of total AIA petitions and have about a 50-percent institution rate. United States Patent and Trademark Office, Patent Trial and Appeal Board Statistics, p. 11 (June 30, 2016), www.uspto.gov/sites/default/files/documents/ 2016-6-30%20PTAB.pdf (case sensitive). Out of those trials that reach a final decision, about 80 percent of the time all instituted claims have been held unpatentable. Id.
VIII. CHECKLISTS A. [2.67] Business Considerations in Bringing a Patent Infringement Suit Is the patentee currently exploiting the patented invention? • Through sale or use of the invention? • Through licensing of others? • Other? Does the patentee have plans to exploit the invention? How important is the patented invention to the overall business goals? How important is the patented invention to the business goals of others in the industry? Is the patented invention exclusively available from the patentee? Are others licensed to use the patent? How important is it to maintain exclusivity in the marketplace?
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 57
§2.68
INTELLECTUAL PROPERTY LAW
How easy is it to design around the patented invention? What alternatives to the patented invention are already available in the marketplace? • Could the defendant begin using or selling these alternatives to avoid future infringement? • Is the consumer willing to accept these alternatives? Under what conditions? Does the patentee have any obligation to third parties, such as licensees, to take action against infringers? Is the alleged infringer using the patented invention in direct competition with the patentee or expanding the use of the patented invention into additional markets? Are these markets of interest or accessible to the patentee? What is the financial value (long term and short term) of the patent to the alleged infringer? To the patentee? Is there a history of disputes between the patentee and the alleged infringer? Are there other issues currently in dispute between the companies, such as unfair advertising activities relating to the product at issue? What is the value of the potential damage recovery? What are the financial conditions of the patentee and the alleged infringer? Does the alleged infringer have patents that may be of interest or concern to the patentee’s product line? B. [2.68] Facts To Investigate in Assessing Damages Over what time period has the alleged infringement occurred? What is the scope of the infringement? Is the patented invention a major aspect of the alleged infringer’s product? What is the extent of sales or potential sales? What is the remaining life of the patent? What is the useful life of the patent (i.e., how likely is it that the patented invention will become outdated or replaced by other technology before the patent expires)?
2 — 58
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.69
Does the alleged infringer have notice of the patent? Has the infringer been advised of the patent and the infringement? When did the patentee first become aware of the allegedly infringing activity? Has the patentee made any effort to contact the alleged infringer regarding the patent and the offending activities? If the patent at issue is a product patent, does the patentee make, use, or sell the product? If so, is the product marked? If the patent at issue is a manufacturing process patent, is the alleged infringement to be asserted under 35 U.S.C. §271(g)? If so, has adequate notice under §287(b) been given to the alleged infringer? Do noninfringing alternatives already exist in the marketplace? How easy or difficult would it be for the alleged infringer to design around the patented invention? What is the value of the injunction regardless of any monetary damage award? C. [2.69] Lost Profits Considerations Is the patentee selling the patented product? What is the market for the patented product? Has the patentee licensed others to sell the product? Are other noninfringing alternatives available or potentially available in the marketplace? Is there a market demand for the product? What is driving the sale of the patentee’s and the alleged infringer’s sales? Can the patentee meet the market demand for the product? Are sales of other products tied to the sale of the patented product? Can the patentee meet the “but for” test?
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 59
§2.70
INTELLECTUAL PROPERTY LAW
D. [2.70] Reasonable Royalty Considerations Has the patentee licensed others under this patent or similar patents? If so, what are the terms of the license? Is the patentee aware of other patents covering similar technology? If so, what is the licensing rate? Is there an industry source available for reporting of licenses? What advantage does the patented invention provide over existing products? What costs are associated with using noninfringing alternatives, assuming such alternatives exist or are readily available? For example, significant capital expenditures, retooling costs and/or retooling costs for the alleged infringer or its customers, or a long customer or government approval process may be real-life barriers to switching to a noninfringing alternative that appears available in theory. Is there a commercial relationship between the patentee and licensee, such as competitors for the patented product or other products? Is the sale of the infringing product improving the sales of the alleged infringer’s other products? Conversely, is it negatively impacting the sale of the patentee’s nonpatented products? Is there an established or anticipated profitability of the patented product? What evidence exists of the commercial success of the patented product? What is the patentee’s ability to exploit or promote the patent? How is that being impacted by the alleged infringer’s use of the patented invention? E. [2.71] Complaint Elements An identification of the parties The court’s jurisdictional basis and venue An identification of the patent(s) at issue and preferably an identification of at least one claim of each asserted patent allegedly infringed by the defendant An identification of the plaintiff (patentee’s) ownership interest in the patent(s) at issue Whether there is direct or indirect infringement, or both Whether the claims are infringed literally or under the doctrine of equivalents, or both
2 — 60
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.72
Whether the alleged infringer had actual or constructive notice of the patent(s) Whether the infringement is willful and deliberate Whether the case is exceptional under 35 U.S.C. §285 The type of relief sought, including injunctive or monetary relief, or both, as well as prejudgment interest, any trebling of damages, and/or award of attorneys’ fees as provided by statute F. [2.72] Categories of Typical Discovery Sought by Patentee Technical and functional details about the accused product (practice or service) Development history of the accused product, including alternatives that were explored and rejected and failed attempts to develop the accused product Commercial success of the accused product, such as increased sales of the product over the competition or the defendant’s prior products and documents tying these sales to the patented features Information showing or suggesting that there was a long-felt need for the accused product or the claimed invention Efforts to copy parts or all of the claimed invention or to design a product that achieves the same results as the claimed invention Marketing and instructional materials relating to the accused product, which may show that the alleged infringer is inducing use of the accused product in an infringing manner and may highlight and promote the patented features Financial information about the product, the market for the product, and other goods sold in combination with the accused product Information showing or suggesting that the alleged infringer had knowledge of the patent and/or that its activities were likely to infringe the patent Financial information supporting the patentee’s claim for damages Details, through responses to contention interrogatories and other discovery requests, that elaborate on the facts that support the alleged infringer’s claim construction (including the intrinsic and extrinsic evidence on which the party intends to rely), affirmative defenses, claims of noninfringement, and design-around efforts, if any
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 61
§2.73
INTELLECTUAL PROPERTY LAW
G. [2.73] Categories of Typical Discovery Sought by Alleged Infringer History of development of the claimed invention, including the date of conception of the invention and reduction to practice and evidence of the inventor’s preferred mode of practicing the invention State of the industry at the time of the invention, including steps taken by the inventor and/or others within the inventor’s company to keep current on development within the industry Efforts to commercialize the claimed invention either by the inventor, by his or her company, or by third parties Public use or offers to sell (particularly efforts before commercialization) the claimed invention, including evidence of display, use, or testing of the invention by the inventor or his or her company in connection with customers, potential customers, or other third parties Prior art that may invalidate the patent, including exploration of industry standards and industry publications, meeting records, and governmental information about the industry at the time of the claimed invention Details of the prosecution of the patent application, including prosecution of foreign counterparts, and related applications, including abandoned applications and invention disclosures Acceptable noninfringing alternatives and design-around options Facts that tend to refute the patentee’s claims of commercial success or the patentee’s other evidence of secondary considerations (e.g., evidence refuting claim of long-felt need for the claimed invention, evidence that the alleged inventor was designing around and not copying the claimed invention, etc.) Facts that tend to limit the amount of damages necessary to adequately compensate the patentee for any infringement Details through responses to contention interrogatories and other discovery requests that elaborate on the facts that support the patentee’s claim construction (including the intrinsic and extrinsic evidence on which the party intends to rely), claims of infringement, and damages
2 — 62
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.74
IX. FORMS A. [2.74] Sample Complaint for Patent Infringement IN THE UNITED STATES DISTRICT COURT District of Delaware ABC, INC., Plaintiff,
) ) ) ) ) ) ) ) )
v. XYZ, INC., Defendant.
Case No. ____________
COMPLAINT FOR PATENT INFRINGEMENT Plaintiff ABC, Inc. (“ABC” or “Plaintiff”) alleges against Defendant XYZ, Inc. (“XYZ” or “Defendant”) as follows: NATURE OF THE ACTION 1. This action arises under the Patent Laws of the United States, 35. U.S.C. §1, et seq., resulting from Defendant’s unauthorized manufacture, sale, and offer to sell of THE WIDGET WONDER (“Infringing Product”) in the United States, which Infringing Product infringes at least claim 1 of United States Patent No. 1,234,567 (the ’567 Patent). A copy of the ’567 patent is attached herewith as Exhibit A. PARTIES 2. Plaintiff ABC is a Delaware corporation with its principal place of business at 123 Main Street, Some City, Delaware. 3. On information and belief, Defendant XYZ is a Delaware corporation with a principal place of business at 123 High Hills, Ski City, Colorado. JURISDICTION 4. This Court has jurisdiction pursuant to 28 U.S.C. §§1331 and 1338(a). VENUE 5. Venue is proper in this judicial district pursuant to 28 U.S.C. §1400.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 63
§2.74
INTELLECTUAL PROPERTY LAW
THE ASSERTED PATENT 6. On April 1, 20__, the ’567 Patent was duly and legally issued by the United States Patent and Trademark Office. 7. Plaintiff is the owner of the ’567 Patent. COUNT I (Infringement of U.S. Patent No. 1,234,567) 8. Paragraphs 1 through 8 are incorporated by reference as if fully restated herein. 9. Defendant manufactures, sells, and offers to sell the Infringing Product in the United States. By manufacturing selling, and offering to sell the Infringing Product, Defendant has and is continuing to infringe at least claim 1 of the ’567 Patent. On information and belief, Defendant’s actions also have and are continuing to infringe claims 2 – 4 of the ’567 Patent. 10. Plaintiff notified Defendant of Plaintiff’s rights in the ’567 Patent and of Defendant’s infringement of those rights and demanded that the infringing conduct cease. 11. With knowledge of Plaintiff’s rights and its own infringing conduct, Defendant willfully ignored Plaintiff’s demand and has continued to infringe the ’567 Patent. 12. Plaintiff has been and continues to be irreparably harmed by Defendant’s infringement of its valuable patent rights. Plaintiff is without adequate remedy at law. 13. Plaintiff also is entitled to recover damages adequate to compensate for the infringement of the ’567 Patent, as well as additional damages for willful infringement, including increased damages under 35 U.S.C. §284, and to attorneys’ fees and costs incurred in prosecuting this action under 35 U.S.C. §285. PRAYER FOR RELIEF WHEREFORE, Plaintiff prays for judgment against Defendant granting Plaintiff relief as follows: A. That this Court adjudge and decree that Defendant has infringed and continues to infringe the ’567 Patent; B. That this Court grant injunctions enjoining the aforesaid acts of infringement by Defendant, Defendant’s officers, agents, servants, employees, subsidiaries, and attorneys, and those acting in concert with Defendant, including related individuals and entities, customers, representatives, original equipment manufacturers, dealers, and distributors;
2 — 64
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.75
C. That this Court enter an award to Plaintiff of such damages as it shall prove at trial against Defendant that are adequate to compensate Plaintiff for said infringement, said damages to be no less than a reasonable royalty together with prejudgment interest and costs; D. That this Court order an award to Plaintiff of up to three times the amount of compensatory damages because of Defendant’s willful infringement, and any enhanced damages provided by 35 U.S.C. §284; E. That this Court render a finding that this case is “exceptional” and award to ABC its costs and reasonable attorneys’ fees, as provided by 35 U.S.C. §285; and F. That this Court grant to Plaintiff such other, further, and different relief as may be just and proper. DEMAND FOR JURY TRIAL Plaintiff demands a trial by jury of all matters to which it is entitled to trial by jury pursuant to Fed.R.Civ.P. 38. Dated: ____________, 20__
Respectfully submitted, ______________________________________
B. [2.75] Sample Affirmative Defenses to Complaint for Patent Infringement IN THE UNITED STATES DISTRICT COURT District of Delaware ABC, INC., Plaintiff,
v. XYZ, INC., Defendant.
) ) ) ) ) ) ) ) )
Case No. ____________
AFFIRMATIVE DEFENSES OF XYZ, INC., TO COMPLAINT FOR PATENT INFRINGEMENT XYZ, Inc., in addition to its Answer to the Complaint for Patent Infringement, sets forth the following affirmative defenses:
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 65
§2.76
INTELLECTUAL PROPERTY LAW
FIRST AFFIRMATIVE DEFENSE 1. Noninfringement. No product of XYZ that is alleged by Plaintiff to infringe the patent in suit infringes that patent, directly or indirectly, either literally or under the doctrine of equivalents. SECOND AFFIRMATIVE DEFENSE 2. Laches. Upon information and belief, Plaintiff is barred by laches from recovering damages for infringement of the patent asserted in this litigation, if any. THIRD AFFIRMATIVE DEFENSE 3. Invalidity. At least claim 1, and to the extent also asserted, claims 2 – 4 of the ’567 Patent, when properly construed, are invalid under at least 35 U.S.C. §102 in light of the ’123 Patent, and are invalid as obvious to one of ordinary skill in the art, under at least 35 U.S.C. §103, in light of the ’123 Patent in view of the ’890 Patent. FOURTH AFFIRMATIVE DEFENSE 4. Failure to mark. Upon information and belief, while it remains the Plaintiff’s burden to prove its damages, Plaintiff’s damages, if any, are limited under 35 U.S.C.A. §287 because Plaintiff failed to mark its products covered by the patent. C. [2.76] Sample Patentee Interrogatories IN THE UNITED STATES DISTRICT COURT District of Delaware ABC, INC., Plaintiff,
v. XYZ, INC., Defendant.
) ) ) ) ) ) ) ) )
Case No. ____________
PLAINTIFF’S FIRST SET OF INTERROGATORIES TO DEFENDANT Pursuant to Rule 33 of the Federal Rules of Civil Procedure (Federal Rules), Plaintiff ABC, Inc., by its undersigned counsel hereby requests that, within 30 days of the date of service of these interrogatories, and in accordance with the following Instructions and Definitions, Defendant XYZ, Inc., answer in writing, under oath, by an officer or duly authorized agent of Defendant, the following interrogatories.
2 — 66
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.76
INTERROGATORY NO. 1: Identify all persons, including, without limitation, all employees, representatives, officers, or agents of Defendant, as well as any third parties, whom Defendant knows, or has reason to believe, have knowledge or information concerning any factual information relevant to the validity or invalidity, enforceability or unenforceability, or infringement or noninfringement of any of the claims of the patent in suit, or of damages issues in this lawsuit, or of factual information relevant to any allegation of the Complaint, and state the nature and substance of each such person’s knowledge or information. INTERROGATORY NO. 2: For each of Defendant’s accused products, using a claim chart, state in detail Defendant’s bases for any assertions of noninfringement of the patent in suit on a claim-by-claim, element-by-element basis. Your answer should include a statement of Defendant’s interpretation of each claim element (including whether the element should be interpreted under 35 U.S.C. §112, paragraph 6, and, if so, identifying the structure in the specification of the patent that corresponds to the recited element), a statement whether Defendant’s products or activities provide(s) such an element or an equivalent, and, if not, an explanation how Defendant’s products or activities are different than the claim element and a particularized statement why a component, feature, or function of Defendant’s products and activities is not a substantial equivalent of the pertinent claim element. INTERROGATORY NO. 3: Describe in detail any and all analyses, investigations, studies, reviews, or considerations by Defendant and/or any person known to Defendant, e.g., an accused infringer or prospective licensee, concerning the patentability, validity or invalidity, enforceability or unenforceability, scope, and/or infringement or noninfringement of the subject matter claimed in any of the claims of the patent in suit, including, but not limited to, any search, investigation, or study for prior patents, publications, literature, systems, processes, or apparatuses pertinent to any of the claims of the patent in suit, providing an identification of all documents constituting, reflecting, referring or relating to, reviewed, or consulted in the course of each such analysis, investigation, or study, an identification of any such prior patents, publications, literature, systems, processes, or apparatuses identified in any such search, investigation, or study, and an identification of all persons who in any way participated in providing information for, preparing, and/or reviewing each such analysis, investigation, or study. INTERROGATORY NO. 4: State in detail all facts and contentions that support or refute Defendant’s allegations, if any, that the patent in suit is invalid under 35 U.S.C. §102 or §103, identifying all prior patents, literature, publications, systems, processes, or devices, including prior knowledge, public uses, sales, and offers for sale, that Defendant contends, either alone or in combination, invalidate one or more claims of the patent in suit, through a claim chart that identifies each element of each claim of the patent asserted to be invalid and explains where each element of the respective claim is shown in such prior patent, literature, publications, system, process, device, public use, sale, or offer for sale. INTERROGATORY NO. 5: State in detail all reasons and identify all facts and documents that support Defendant’s allegations, if any, that Defendant has not directly infringed,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 67
§2.77
INTELLECTUAL PROPERTY LAW
willfully infringed, contributed to the infringement of, or induced infringement of any valid, enforceable claim of the patent in suit and is not presently directly infringing, willfully infringing, contributing to the infringement of, or inducing infringement of any valid, enforceable claim of the patent in suit. INTERROGATORY NO. 6: Identify any and all revenues and the sources thereof derived by Defendant from the accused products, including, without limitation, the unit and dollar volume of gross revenue, on a monthly basis, of products made, used, offered for sale, sold, or imported. INTERROGATORY NO. 7: For each of Defendant’s accused products, on a product-byproduct basis, describe in detail all factual and legal bases, and identify all supporting documents, supporting or relating to Defendant’s allegations, if any, that preclude collection of damages under the patent in suit under the doctrine of laches, including (a) any contention or belief that there has been a delay for any relevant period of time, what this period is, and why Defendant contends it is relevant, (b) any contention or belief that any such delay was intentional, unreasonable, or inexcusable, (c) any contention or belief that Defendant suffered evidential or economic prejudice as a result of such delay, and (d) any other reason why Defendant contends laches should apply or serve as a defense in this case. Dated: ____________, 20__
Respectfully submitted, ______________________________________
D. [2.77] Sample Accused Infringer Interrogatories IN THE UNITED STATES DISTRICT COURT District of Delaware ABC, INC., Plaintiff,
v. XYZ, INC., Defendant.
) ) ) ) ) ) )
Case No. ____________
DEFENDANT XYZ’S FIRST SET OF INTERROGATORIES TO PLAINTIFF Pursuant to Rule 33 of the Federal Rules of Civil Procedure (Federal Rules), Defendant XYZ, Inc., by its undersigned counsel hereby requests that, within 30 days of the date of service of these interrogatories, and in accordance with the following Instructions and Definitions, Plaintiff ABC, Inc., answer in writing, under oath, by an officer or duly authorized agent of Plaintiff, the following interrogatories.
2 — 68
WWW.IICLE.COM
LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE
§2.77
INTERROGATORY NO. 1: If Plaintiff contends that Defendant was put on notice of the patent in suit prior to the filing of this lawsuit, identify in detail the factual basis of when and how Defendant was put on notice, including who put Defendant on notice. INTERROGATORY NO. 2: Identify the factual basis for Plaintiff’s allegation in the complaint that Defendant’s alleged infringement is willful, including all facts that were known prior to the complaint being filed. INTERROGATORY NO. 3: Identify the factual basis for Plaintiff’s assertions of infringement of the patent in suit on a claim-by-claim, element-by-element basis. Your answer should include a statement of Plaintiff’s interpretation of each claim element (including whether the element should be interpreted under 35 U.S.C. §112(f) and, if so, identifying the structure in the specification of the patent that corresponds to the recited element) and a statement whether Defendant’s products or activities provide(s) such an element or an equivalent. INTERROGATORY NO. 4: For each means-plus-function element in each accused claim, describe in detail the range of equivalent structure to which ABC contends the element is entitled. INTERROGATORY NO. 5: Identify whether Plaintiff contends that laches does not bar recovery of damages for infringement of the patent asserted in this litigation, and, if Plaintiff contends that laches does not bar recovery, describe in detail the basis for that contention. INTERROGATORY NO. 6: Identify all efforts undertaken by or on behalf of Plaintiff to investigate whether any of Defendant’s products infringed the patent in suit, including relevant dates. INTERROGATORY NO. 7: Identify the factual bases for Plaintiff’s contention that it has and continues to be irreparably harmed by the Defendant’s actions. INTERROGATORY NO. 8: Identify the factual bases for Plaintiff’s contention that it is entitled to monetary damages, including the bases for any claims of lost profits. Dated: ____________, 20__
Respectfully submitted, ______________________________________
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
2 — 69
3
Patent Antitrust, Misuse, Exhaustion, and Inequitable Conduct
GLEN P. BELVIS Steptoe & Johnson, LLP Chicago
®
©COPYRIGHT 2017 BY IICLE .
3—1
INTELLECTUAL PROPERTY LAW
I. [3.1] Overview II. [3.2] Introduction to Patent Antitrust III. Patent Law from an Antitrust Perspective A. [3.3] Patent “Monopoly” Defined B. [3.4] Patent Infringement C. [3.5] Transferability of the Patent’s Exclusionary Rights IV. [3.6] Antitrust Law in General A. B. C. D. E.
[3.7] Sherman Anti-Trust Act §1 [3.8] Sherman Anti-Trust Act §2 [3.9] Clayton Act [3.10] Federal Trade Commission Act [3.11] Types of Conduct Subject to Antitrust Scrutiny 1. [3.12] Horizontal Agreements 2. [3.13] Vertical Agreements 3. [3.14] Tying Arrangements 4. [3.15] Group Boycotts and Refusals To Deal 5. [3.16] Joint Ventures
V. [3.17] The Interaction of Patent and Antitrust Law A. [3.18] Patent Licensing Activity 1. [3.19] Territory and Field-of-Use Restrictions 2. [3.20] Package License Agreements 3. [3.21] Patent Pooling Agreements 4. [3.22] Grant Back Agreements 5. [3.23] Tying Agreements 6. [3.24] Price Restrictions B. [3.25] Walker Process Fraud on the United States Patent and Trademark Office C. [3.26] Enforcement of a Patent Known To Be Invalid or a Noninfringed Patent D. [3.27] Improper Acquisition of Patents E. [3.28] Standard-Setting Activity and Its Effect on Patent Rights VI. [3.29] Patent Misuse
3—2
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
VII. [3.30] Inequitable Conduct VIII. [3.31] Ability To Cure Inequitable Conduct Under the Leahy-Smith America Invents Act IX. [3.32] Best-Mode Requirement Risks to Practitioners and Clients Under the LeahySmith America Invents Act X. [3.33] First-Sale Doctrine; Exhaustion of Patent Rights
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3—3
§3.1
INTELLECTUAL PROPERTY LAW
I. [3.1] OVERVIEW This chapter addresses activities that are permitted but may come close to the line of prohibited activities, as well as those activities that step outside the bounds of legitimate conduct by patentees (i.e., the persons who control patent rights). The consequences from improperly acquiring, maintaining, or using patent rights range from the loss of these rights to civil damages and criminal penalties. There are three basic areas of law that address and regulate a patentee’s conduct: antitrust law; the doctrine of patent misuse; and the doctrine of inequitable conduct. Patent antitrust issues arise when a patentee extends the scope of a patent beyond that which the law allows in conjunction with other factors, such as antitrust injury and market power. These issues create an independent cause of action against the patentee by private litigants as well as state and federal agencies. Antitrust violations can result in patent unenforceability, civil damages, and criminal penalties. Patent misuse issues arise when a patentee extends the scope of a patent beyond that which the law allows. These issues can be used only as a defense to an infringement action. They do not give rise to an independent cause of action against a patentee. Misuse violations can result in a finding of patent unenforceability. All antitrust violations will necessarily give rise to patent misuse. On the other hand, because the additional factors for an antitrust violation are not required for the defense of misuse, all patent misuse issues will not necessarily give rise to an antitrust violation. Inequitable conduct issues arise when a patentee or its predecessor in interest improperly obtained the patent from the United States Patent and Trademark Office (USPTO). Inequitable conduct is only a defense to patent infringement; it does not give rise to a separate cause of action. In extreme cases of fraud, however, improper conduct before the USPTO can form the basis for an antitrust violation. A finding of inequitable conduct renders the patent unenforceable. The first-sale, or exhaustion, doctrine provides that once a patented article is placed into the stream of commerce, the initial purchaser and all subsequent purchasers are permitted to use and resell that product free from any obligations under the patent. This doctrine can significantly reduce the value of an invention by enabling completion from a patentee’s own products in parallel, new, and downstream markets. These risks can be mitigated by contractually restricting the first-sale doctrine. However, such restrictions can draw challenges based on patent misuse and antitrust theories. Thus, they must be carefully tailored for each particular situation. In addition to the harsh consequences from an ultimate finding of liability under any of these doctrines, there is a further consideration that should guide a patentee in these matters. The conduct that gives rise to an antitrust, misuse, or inequitable conduct allegation usually takes place years before the value for the patented technology materializes. Excluding those persons who set out with a knowing or reckless disregard for the rules, usually the conduct that gives rise to one of these issues involves activity that comes a little close to the line either intentionally or unintentionally coupled with the rationalization that an opponent would “never be able to prove up a violation.”
3—4
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.1
PRACTICE POINTER
By coming close to the line, a patentee can give an infringer a potential defense when it otherwise would have had none. Thus, it is not enough just to position a patentee to win on an antitrust, misuse, or inequitable conduct charge; instead, the patentee should be positioned so that these charges are not raised in the first place.
These rationalizations ignore the reality of patent enforcement and litigation and play into the hands of an infringer, giving the infringer a potential defense that can enable the infringer to delay the litigation, increase the complexity of the litigation, and perhaps have an offensive position, thus resulting in delayed settlements, increased litigation costs, and lower settlement values. Defending an antitrust charge can easily increase litigation cost for a patentee by several million dollars. Defeating an inequitable conduct charge can easily increase the cost of litigation by hundreds of thousands of dollars. Thus, a patentee should be positioned so that these charges either cannot be raised or, if raised, can be dealt with in a summary manner. Licensing, sales, and distribution agreements have similar future risks and consequences. Years after they are entered into, these agreements can give rise to significant competitive harm, through the application of the first-sale doctrine, as the product and its markets grow and evolve. Thus, restrictions on the first-sale doctrine should routinely be considered and must be crafted with an eye to long-term product and market evolutions. At the same time, these forward-looking restrictions should avoid antitrust and misuse challenges.
PRACTICE POINTER
The growth of products and their markets should be carefully evaluated in restricting the application of the first-sale doctrine to avoid inadvertently creating competitors in highvalue markets. At the same time, these restrictions should be crafted to avoid antitrust and misuse issues.
The Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat. 284 (2011), has been fully implemented. The AIA provides many significant changes to the patent laws. One of these changes is to provide a new procedure before the USPTO in which a patent owner can significantly reduce the risk of an adverse finding under these doctrines, reduce the risk of having charges raised under these doctrines, and create a situation for the summary resolution of any such charges. This procedure permits the patent owner to reopen patent prosecution and essentially correct conduct that could form a basis for a charge of inequitable conduct or fraud. The AIA’s changes to invalidity defenses also created substantial risks and uncertainty for patent practitioners and clients. The AIA removed the ability to challenge a patent on the ground that the best-mode requirement of 35 U.S.C. §112 was not meet. The AIA, however, does not remove best mode as a requirement for patentability. Thus, practitioners may still have an ethical obligation to determine and disclose the best mode.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3—5
§3.2
INTELLECTUAL PROPERTY LAW
Further, although failure to disclose the best mode cannot be used for a finding of inequitable conduct under the AIA, the AIA is silent regarding the willful, intentional, or fraudulent concealment of the best mode. Such intentional conduct may still be actionable as unfair competition, fraud, violations of antitrust laws or Federal Trade Commission rules, etc. Moreover, and in part to avoid a preemption argument, these actions may name the patent practitioner, the inventor, and the client as defendants in the litigation.
II. [3.2] INTRODUCTION TO PATENT ANTITRUST There is perhaps no more unique, confusing, and interesting area of the law than the interplay between patent and antitrust laws. A patent is a constitutionally mandated right to exclude others from making, using, selling, offering for sale, or importing the patented invention. U.S.CONST. art. I, §8; 35 U.S.C. §271. Accordingly, the patent right is at times referred to as a “monopoly.” It is perhaps the only tool that allows a company to legally stop competition. Antitrust laws, on the other hand, are intended to foster competition and create a fair playing field on which one competitor cannot overtly stop another from competing. As is often said, the antitrust laws protect competition, not competitors. Thus, there has always been a tension between these two bodies of law and their underlying policies. This tension has developed into anything but a bright line between conduct expressly permitted and encouraged by the patent laws and conduct expressly prohibited, and in fact criminalized, by the antitrust laws. Historically, this area of the law has seen its greatest activity and refinement when new technologies have moved from the workbench or lab into mainstream commerce. Perhaps it is the combination of new technology, new wealth, and the bright, aggressive individuals who make this technology profitable that gives rise to the situations in which the line between patent and antitrust laws is more readily tested. Perhaps it is a belief that the old rules, developed from old technology, no longer apply that creates the mistaken belief that there is nothing to worry about from the antitrust laws. Regardless, if history provides any guidance, as the areas of biotechnology, biopharmaceuticals, software, social networking, and e-commerce continue to move from the lab and desktop to the marketplace, they will become embroiled in the turbulent waters where the patent and antitrust laws meet. To understand this area of law, it is important to have a basic understanding of both patent and antitrust law. There is one key test to apply in determining whether antitrust red flags should be raised in evaluating a patentee’s conduct. A patent provides an exclusionary right, that is, the right to exclude another from doing something. If the agreement or the conduct of the patent extends beyond what the patentee can exclude under the patent, antitrust warning signs should go up. This is not to say that this conduct would violate the antitrust law, only to say that once the agreement or conduct extends beyond what the patent excludes, careful scrutiny should be used because at that point the potential for an antitrust issue is present. This test is also applicable in evaluating restrictions on the first-sale doctrine. If the restrictions prohibit future conduct that otherwise falls within the scope of the patent rights, they
3—6
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.3
will generally not raise antitrust concerns. Similarly, if the restrictions are only limitations on the scope of patent rights accompanying the product (e.g., the purchaser has no rights, or license, to perform a certain activity), then any restrictions on later conduct will necessarily be limited to the scope of the patent rights. In order to understand how to apply this key test, one needs to first understand what a patent excludes. Chapters 1 and 2 of this handbook address in detail what is patentable and how a patent’s right to exclude is enforced through infringement actions. Thus, this chapter only briefly addresses these issues and from a competition standpoint. See §§3.3 – 3.5 below.
PRACTICE POINTER
Antitrust warning flags should go up anytime an agreement or a patentee’s conduct extends to activities that the patent rights could not exclude others from doing. In other words, if the patentee could have prohibited particular conduct of a competitor under the patent, contracts or agreements that do nothing more than permit this conduct to take place should pass antitrust scrutiny.
III. PATENT LAW FROM AN ANTITRUST PERSPECTIVE A. [3.3] Patent “Monopoly” Defined Typically, a patent is defined as providing a right of exclusion, which does not confer any rights to practice the patented invention. Thus, the patent provides the ability for the patentee to exclude others from making, using, selling, offering for sale, or importing the claimed invention. 35 U.S.C. §271(a). There are, however, other definitions of a patent that are perhaps more artfully expressed. For example, Thomas Jefferson stated the following: If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea. . . . Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. . . . Inventions then cannot, in nature, be a subject of property. Society may give an exclusive right to the profits arising from them, as an encouragement to men to pursue ideas which may produce utility. Graham v. John Deere Company of Kansas City, 383 U.S. 1, 15 L.Ed.2d 545, 86 S.Ct. 684, 689 n.2 (1966), quoting VI WRITINGS OF THOMAS JEFFERSON, pp. 180 – 181 (Washington ed. 1907). However, Supreme Court Justice Black, dissenting, took a harsher view of patents: Those who strive to produce and distribute goods in a system of free competitive enterprise should not be handicapped by patents based on a “shadow of a shade of an idea.” Atlantic Works v. Brady, 107 U.S. 192, [27 L.Ed. 428, 2 S.Ct. 225, 231 (1883)]. . . . It is impossible for me to believe that Congress intended to grant
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3—7
§3.3
INTELLECTUAL PROPERTY LAW
monopoly privileges to persons who do no more than apply knowledge which has for centuries been the universal possession of all the earth’s people — even those of the most primitive civilizations. Goodyear Tire & Rubber Co. v. Ray-O-Vac Co., 321 U.S. 275, 88 L.Ed. 721, 64 S.Ct. 593, 595 – 596 (1944). These two diverging definitions illustrate the swing from pro-patent to anti-patent sentiments that has occurred several times over the past years. This swing will likely occur at least once during the next 20 years (i.e., during the life of a patent) and will also directly influence the antitrust implications of a patentee’s conduct. Relying heavily on the right-to-exclude definition of a patent, the Court of Appeals for the Federal Circuit has attempted to cleanse the patent lexicon of the term “patent monopoly”: Nortron begins its file wrapper estoppel argument with “Patents are an exception to the general rule against monopolies . . .”. A patent, under the statute, is property. 35 U.S.C. §261. Nowhere in any statute is a patent described as a monopoly. The patent right is but the right to exclude others, the very definition of “property.” That the property right represented by a patent, like other property rights, may be used in a scheme violative of antitrust laws creates no “conflict” between laws establishing any of those property rights and the antitrust laws. The antitrust laws, enacted long after the original patent laws, deal with appropriation of what should belong to others. A valid patent gives the public what it did not earlier have. Patents are valid or invalid under the statute, 35 U.S.C. It is but an obfuscation to refer to a patent as “the patent monopoly” or to describe a patent as an “exception to the general rule against monopolies.” That description, moreover, is irrelevant when considering patent questions, including the question of estoppel predicated on prosecution history. [Emphasis in original.] Carl Schenck, A.G. v. Nortron Corp., 713 F.2d 782, 786 n.3 (Fed.Cir. 1983). The Federal Circuit’s effort at eliminating the use of the term “patent monopoly” has been rejected by the Supreme Court, which has consistently used and referred to patent rights in the context of a “monopoly”: A patent by its very nature is affected with a public interest. . . . [It] is an exception to the general rule against monopolies and to the right to access to a free and open market. The far-reaching social and economic consequences of a patent, therefore, give the public a paramount interest in seeing that patent monopolies spring from backgrounds free from fraud or other inequitable conduct and that such monopolies are kept within their legitimate scope. [Emphasis added.] Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 89 L.Ed. 1381, 65 S.Ct. 993, 998 (1945). See also Federal Trade Commission v. Actavis, Inc., ___ U.S. ___, 186 L.Ed.2d 343, 133 S.Ct. 2223, 2231 (2013) (“this Court has indicated that patent and antitrust policies are both relevant in determining the ‘scope of the patent monopoly’ ”); Mayo Collaborative Services v. Prometheus Laboratories, Inc., ___ U.S. ___, 182 L.Ed.2d 321, 132 S.Ct. 1289, 1296 (2012) (“the patents
3—8
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.3
satisfied the Circuit’s ‘machine or transformation test,’ which the court thought sufficient to ‘confine the patent monopoly within rather definite bounds’ ”); Bilski v. Kappos, 561 U.S. 593, 177 L.Ed.2d 792, 130 S.Ct. 3218, 3253 – 3255 (2010) (“ ‘The monopoly is a property right.’ . . . On one side of the balance is whether a patent monopoly is necessary to ‘motivate the innovation.’ . . . ‘To give appellant a monopoly, through the issuance of a patent, upon so great an area . . . would in our view impose without warrant of law a serious restraint upon the advance of science and industry.’ ” Quoting Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722, 152 L.Ed.2d 944, 122 S.Ct. 1831, 1837 (2002), Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 142 L.Ed.2d 261, 119 S.Ct. 304, 310 (1998), and Joseph E. Seagram & Sons, Inc. v. Marzall, 180 F.2d 26, 28 (D.C.Cir. 1950).); Festo, supra, 122 S.Ct. at 1835 (“we appreciated that by extending protection beyond the literal terms in a patent the doctrine of equivalents can create substantial uncertainty about where the patent monopoly ends” [emphasis added]), citing WarnerJenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17, 137 L.Ed.2d 146, 117 S.Ct. 1040, 1049 (1997); Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627, 144 L.Ed.2d 575, 119 S.Ct. 2199, 2218 (1999) (“The Patent Remedy Act merely puts States in the same position as all private users of the patent system, and in virtually the same posture as the United States. ‘When Congress grants an exclusive right or monopoly, its effects are pervasive; no citizen or State may escape its reach.’ Goldstein v. California, 412 U.S. 546, 560, 93 S.Ct. 2303, 37 L.Ed.2d 163 (1973) (analyzing Copyright Clause [of U.S. Constitution]).” [Emphasis added.] [Footnotes omitted.]). In Pfaff, supra, 119 S.Ct. at 310, the Court, quoting Elizabeth v. Pavement Co., 97 U.S. (7 Otto) 126, 137, 24 L.Ed. 1000 (1877), stated: It is sometimes said that an inventor acquires an undue advantage over the public by delaying to take out a patent, inasmuch as he thereby preserves the monopoly to himself for a longer period than is allowed by the policy of the law; but this cannot be said with justice when the delay is occasioned by a bona fide effort to bring his invention to perfection, or to ascertain whether it will answer the purpose intended. His monopoly only continues for the allotted period, in any event; and it is the interest of the public, as well as himself, that the invention should be perfect and properly tested, before a patent is granted for it. Setting aside the debate over the propriety of using the term “patent monopoly,” it should not be disputed that a patent provides economic power, pure and simple. A patent is the only legal way to stop a competitor from competing and to punish the competitor for competing. To illustrate this point, consider the often-used example of a patent directed to a pencil. A patent with a claim covering a wood shaft, graphite, and an eraser would give the patentee the right to stop anyone from using a pencil (at least a wood pencil) with an eraser on it. This patent, however, would not give the patentee the right to use such a pencil. For example, if someone else had earlier obtained a patent on a pencil comprising a shaft and graphite, that patent would preclude the patentee of the eraser pencil from practicing its invention. Carrying this example further, although the patentee of the pencil could sell a pencil without an eraser, it could not sell an eraser pencil because of the eraser pencil patent. Thus, in this pencil example, there is a blocking patent — the pencil patent — that keeps all market participants except the patentee out of the market. There is an improvement patent — the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3—9
§3.4
INTELLECTUAL PROPERTY LAW
eraser pencil — that keeps all market participants except the eraser pencil patentee from offering the only commercially acceptable product to the market — the pencil with an eraser. The eraser pencil patentee, however, is blocked from the market because of the pencil patent. Thus, under this scenario, the only way for the public to obtain the product it wants is for some sort of licensing or cross-licensing arrangement to be entered into. See §3.21 below, discussing patent pooling arrangements. As seen in the eraser example, the amount of economic power that is associated with a patent, however, can vary from minimal to substantial and can be contingent on other facts. Thus, depending on the scope of the patent claims, the success of the commercial embodiment of the invention, and the competitors in the industry, a patent either can have little to no economic power or can create a powerful monopoly. A few examples further illustrate this point. In the 1960s a very broad patent on a slide rule would have had substantial economic power because it would have provided an exclusionary right over a product that had substantial market demand. On the other hand, such a patent would have little to no economic power today because there is no market demand or need for the commercial embodiment of such a patent. Conversely, a relatively narrow patent on its face, which nevertheless covers a feature of a product that consumers demand, would create substantial economic power for the patent and a monopoly for the product. The monopoly would arise because the patent would prevent any competitor from having the feature that consumers demand and thus effectively entering the market. Taking this latter example to the next step, innovative and well-funded competitors might design around the patent. In doing so, they might develop a new feature that consumers would prefer over the patented feature. This new feature, or more accurately the market demand for this feature, would neutralize the prior patent’s economic power and break the patent monopoly on the market. See London v. Carson Pirie Scott & Co., 946 F.2d 1534, 1538 (Fed.Cir. 1991) (“[patent] claims must be ‘particular’ and ‘distinct,’ as required by 35 U.S.C. §112, so that the public has fair notice[, which] permits other parties to avoid actions which infringe the patent and to design around the patent”). Moreover, the competitor may obtain a patent on this new feature and thus obtain its own monopoly, at least until the next design around occurs. B. [3.4] Patent Infringement The extent to which a patent provides a legal monopoly, and thus the extent to which a patentee’s conduct is protected from antitrust scrutiny, is directly tied to the patent’s exclusionary rights. These exclusionary rights in turn are defined by the scope of what the patents protect (i.e., what infringes the patent). Infringement is addressed in detail in Chapter 2 of this handbook and thus is only briefly addressed here. A patentee has the right to prevent conduct that is directly or indirectly related to the patent’s exclusionary rights. Conduct that is directly related to the patent’s exclusionary rights is known as “direct infringement.” Direct infringement occurs whenever anyone makes, uses, sells, offers for sale, or imports into the United States a process or product that is covered by the claims of a
3 — 10
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.4
patent. 35 U.S.C. §271(a). Direct infringement requires no intent or knowledge of the patent. It is a strict-liability offense. Thus, returning to the pencil and eraser example from §3.3 above, a store that sold eraser pencils would be a direct infringer of the patent on the eraser pencil and would also be a direct infringer of the blocking patent on the pencil. Conduct that does not directly relate to the patentee’s rights (i.e., the conduct itself is not infringing) but that causes another to infringe can still be prevented by the patentee. This conduct is known as “indirect infringement” and can take two forms: inducement (35 U.S.C. §271(b)); and contributory infringement (35 U.S.C. §271(c)). “Whoever actively induces infringement of a patent shall be liable as an infringer.” 35 U.S.C. §271(b). Unlike direct infringement, which has no knowledge requirement, inducement requires knowledge of the patent and active steps to cause the actions that give rise to a direct infringement. In order to find that one has induced infringement, the inducement must be successful; that is, there must be a direct infringement. Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683, 697 – 700 (Fed.Cir. 2008); DSU Medical Corp. v. JMS Co., 471 F.3d 1293, 1305 – 1307 (Fed.Cir. 2006); Hewlett-Packard Co. v. Bausch & Lomb Inc., 909 F.2d 1464, 1469 (Fed.Cir. 1990). Thus, applying the pencil and eraser example, if a manufacturer made pencils and erasers separately but did not combine them, it would not be a direct infringer of the eraser pencil patent (but would still directly infringe the pencil patent). If this pencil manufacturer then provided these pencils to the store but did nothing more, it would not be liable for inducing infringement. If, however, the pencil manufacturer (1) had knowledge of the eraser pencil patent and (2) gave the store instructions on how to attach the erasers to the pencil, it would be liable for inducing infringement. Contributory infringement, like inducement, requires knowledge of the patent and a direct infringement. Contributory infringement occurs when goods are sold to another and these goods basically can be used only to infringe the patent. Specifically, 35 U.S.C. §271(c) prohibits the sale of “a component of a patented machine, manufacture, combination or composition, or a material or apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially made or especially adapted for use in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial noninfringing use.” See generally Aro Manufacturing Co. v. Convertible Top Replacement Co., 365 U.S. 336, 5 L.Ed.2d 592, 81 S.Ct. 599 (1961); DSU Medical, supra, 471 F.3d at 1302 – 1304. The sale of a good that has both infringing and noninfringing uses will not give rise to liability for contributory infringement, provided the suggested noninfringing uses are not far-fetched, illusory, or impractical. i4i Limited Partnership v. Microsoft Corp., 598 F.3d 831, 850 – 851 (Fed.Cir. 2010); Preemption Devices Inc. v. Minnesota Mining & Manufacturing Co., 630 F.Supp. 463, 471 n.10 (E.D.Pa. 1985), aff’d in pertinent part, vacated in part on other grounds, 803 F.2d 1170 (Fed.Cir. 1986). Thus, using the eraser example, presume that the pencil manufacturer knows about the eraser pencil patent and is providing pencils and erasers separately to the store. If the pencils and the erasers are made to fit easily together and the erasers are too small to be useful without being attached to the pencils, the manufacturer would be liable for contributory infringement. A unique situation regarding contributory infringement occurs in the pharmaceutical and medical device fields as a result of 35 U.S.C. §287(c), which provides that the remedies against
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 11
§3.5
INTELLECTUAL PROPERTY LAW
patent infringement shall not apply to medical practitioners and related health entities for performance of a medical activity. The exception applies only to damages available for the infringement of a surgical or medical technique and applies only to the doctor or technician performing the technique. The exception, however, does not apply to manufacturers of equipment required to perform the medical activity. Because the statute does not exempt a medical technique from infringement but, rather, nullifies the patent holder’s right to obtain damages, a direct infringement of a patent may still occur. Thus, although the patent holder cannot sue the surgeon performing the technique for damages, the patent holder may sue the manufacturer of the equipment for contributory infringement and collect damages from the manufacturer. In medical device fields, as well as others, single-use devices are sold. These single-use devices directly implicate the first-sale doctrine, which can directly affect the profitably of the device. Turning again to the pencil example, if a mechanical pencil was sold with no restrictions, the first purchaser could resell the empty pencil, and the buyer could refill it with lead and resell it in competition with the patentee. In this situation, the patentee would have no ability to enforce the patent against the subsequent seller, who would be a competitor to the patentee. The patentee’s rights regarding that pencil have been exhausted. Moreover, the subsequent seller may have a competitive advantage because it does not need equipment and raw materials to make the pencil body. One the other hand, if the pencil was sold with a single-use restriction, the later refilling and sale would not be protected under the first-sale doctrine, and the patentee could enforce the patent against those activities. (NOTE: The sale of the empty pencil would not be an infringement because the empty pencil would not meet all of the elements of the claim.) Contracts and agreements that touch on activities relating to inducement and contributory infringement issues can raise very complicated antitrust and misuse issues. As discussed in §3.5 below, the patent statutes expressly authorize the patentee to regulate activity that would constitute inducement and contributory infringement. Nevertheless, because these activities are, by their very nature, outside the direct protection of the patent, greater scrutiny will be applied to provisions restricting them, and greater care should be taken in drafting these provisions. C. [3.5] Transferability of the Patent’s Exclusionary Rights As discussed in §3.3 above, patent rights can give rise to a limited and legal monopoly that can have substantial economic power. Patent rights and their associated economic power can be transferred in whole or in part. Specifically, 35 U.S.C. §261 provides: Subject to the provisions of this title, patents shall have the attributes of personal property. . . . Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States. This provision expressly authorizes patentees to divide their patent rights (and thus markets) horizontally, vertically, geographically, and along fields of use. For example, again using the
3 — 12
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.6
eraser pencil example from §§3.3 and 3.4 above, the patentee could grant a license to make the eraser pencils to an East Coast manufacturer and no others. In this way, the patentee keeps the central part of the country and the West Coast markets for itself. Similarly, the patentee could grant a license to a maker of high-end mechanical pencils (i.e., a field of use) and keep all other rights regarding other types of pencils to itself or for future licensing. All of these type of transactions are expressly permitted under §261. Thus, absent other factors, these provisions in an agreement should not give rise to an antitrust violation or patent misuse. In 1988, the patent statutes were amended by Pub.L. No. 100-703, 102 Stat. 4674, Title II of which is popularly known as the Patent Misuse Reform Act, to expand the conduct by a patentee that is considered presumptively permissible and will not in and of itself give rise to an antitrust violation or patent misuse. Specifically, 35 U.S.C. §271(d) provides: No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: (1) derived revenue from acts which if performed by another without his consent would constitute contributory infringement of the patent; (2) licensed or authorized another to perform acts which if performed without his consent would constitute contributory infringement of the patent; (3) sought to enforce his patent rights against infringement or contributory infringement; (4) refused to license or use any rights to the patent; or (5) conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.
IV. [3.6] ANTITRUST LAW IN GENERAL There are three basic statutory provisions that address a patentee’s action with regard to antitrust laws: the Sherman Anti-Trust Act, ch. 647, 26 Stat. 209 (1890); the Clayton Act, ch. 323, 38 Stat. 730 (1914); and the Federal Trade Commission Act, ch. 311, 38 Stat. 717 (1914). See also 16 C.F.R. pts. 1 – 16, relating to FTC procedures and regulations. The Sherman Anti-Trust Act was first adopted into law in 1890 in response to the economic power that the railroads had amassed. Section 1 of the Act, 15 U.S.C. §1, requires concerted action, that is, two or more actors who engage in conduct that decreases competition. Section 2 of the Act, 15 U.S.C. §2, focuses on monopolization, which can involve a single actor or a group of actors whose conduct decreases competition in an unreasonable manner. The Sherman Anti-Trust Act applies to both goods and services. The Clayton Act was first adopted into law in 1914 and prohibits price discrimination between purchasers and sellers of goods. In the patent context, the Clayton Act is principally used to address tying agreements. Unlike the Sherman Anti-Trust Act, the Clayton Act is applicable only to goods and does not apply to services.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 13
§3.6
INTELLECTUAL PROPERTY LAW
The Sherman Anti-Trust Act and the Clayton Act can be enforced by private litigants through civil actions, by the Department of Justice through civil and criminal actions, by the FTC, and by state attorneys general. Civil remedies for a violation of these Acts include injunctive relief, treble damages, and awards of attorneys’ fees. Specifically, with regard to patents, a violation of their antitrust provisions can mean the loss of patent rights for the patentee, with a finding that the patents that were involved in the antitrust violations are unenforceable. The Federal Trade Commission Act established the FTC and gave that agency very broad authority to investigate, comment on, and take action against unfair methods of competition and deceptive trade practices, which would include violations of the Sherman Anti-Trust Act and the Clayton Act. The FTC can obtain injunctive relief but, in general, does not have the ability to assess civil damages. The FTC has interjected itself into all aspects of patent prosecution, enforcement, and licensing. Section 4(a) of the Clayton Act provides that “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor . . . and shall recover threefold the damages by him sustained.” 15 U.S.C. §15(a). The court in Disenos Artisticos E Industriales, S.A. v. Work, 676 F.Supp. 1254, 1276 (E.D.N.Y. 1987), noted: This expansive language has been construed to require a showing that the alleged loss is “of the type the antitrust laws were intended to prevent and that flows from that which makes [a defendant’s] acts unlawful.” Brunswick Corp. v. Pueblo Bowl-OMat, 429 U.S. 477, 489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701 (1977). Thus, a plaintiff must show not only that there is an antitrust violation, but also that there is a causal connection between the violation and the alleged injury and that the defendant’s activities had the effect of stifling competition.
PRACTICE POINTER
Antitrust laws protect competition — not competitors.
Thus, courts have required plaintiffs to establish what is known as “antitrust injury.” See Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 109 L.Ed.2d 333, 110 S.Ct. 1884, 1889 (1990); Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 50 L.Ed.2d 701, 97 S.Ct. 690, 698 (1977). See also In re DDAVP Direct Purchaser Antitrust Litigation, 585 F.3d 677, 688 – 692 (2d Cir. 2009); Axis, S.p.A. v. Micafil, Inc., 870 F.2d 1105, 1108 – 1109 (6th Cir. 1989). To satisfy the requirement of an antitrust injury, the party must allege and prove “injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.” Brunswick, supra, 97 S.Ct. at 697. The purpose of the antitrust injury requirement is to ensure that the harm for which the plaintiff seeks compensation corresponds to the rationale for finding a violation of the antitrust laws in the first place. See Atlantic Richfield, supra, 110 S.Ct. at 1893 – 1894. This antitrust injury requirement further ensures that plaintiffs recover only if the loss is the result of “a competition-reducing aspect or effect of the defendant’s behavior,” rather than a competition-increasing or competition-neutral aspect of that behavior. [Emphasis in
3 — 14
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.7
original.] 110 S.Ct. at 1894. Thus, to establish antitrust injury, a plaintiff must show that the claimed injury reflects either the anticompetitive effects of the alleged violation or the effects of anticompetitive acts made possible by the alleged violation. See HyPoint Technology, Inc. v. Hewlett-Packard Co., 949 F.2d 874, 877 (6th Cir. 1991), citing Brunswick, supra. In addition to showing antitrust injury (i.e., harm to competition), a plaintiff must have antitrust standing to bring a suit. The antitrust standing analysis focuses on who is the proper plaintiff from among those classes of persons who have suffered antitrust injury. See, e.g., Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 74 L.Ed.2d 723, 103 S.Ct. 897 (1983); Blue Shield of Virginia v. McCready, 457 U.S. 465, 73 L.Ed.2d 149, 102 S.Ct. 2540 (1982); DDAVP Direct Purchaser Antitrust Litigation, supra; William H. Page, The Scope of Liability for Antitrust Violations, 37 Stan.L.Rev. 1445, 1484 (1985). In Associated General Contractors, the Court set forth a number of factors to be considered in determining whether a plaintiff has standing: (a) whether there is a causal connection between the antitrust violation and the plaintiff’s harm; (b) whether the defendants intended to cause this harm; (c) whether the injury is of the type intended to be prevented within the meaning of Brunswick; (d) whether the injury is direct or indirect; (e) whether the claim of damages is too speculative; and (f) whether there is a risk of duplicative recoveries and a danger of complex apportionment. 103 S.Ct. at 908 – 912. A. [3.7] Sherman Anti-Trust Act §1 Section 1 of the Sherman Anti-Trust Act prohibits “[e]very contract, combination . . . or conspiracy, in restraint of trade or commerce.” 15 U.S.C. §1. In addition to civil remedies, including treble damages under 15 U.S.C. §15, §1 provides for criminal fines for corporations up to $100 million, criminal fines for individuals up to $1 million, and prison sentences up to ten years. Commercial contracts inherently bind the parties to the contract and so restrain trade to some extent. Accordingly, the broad prohibition of §1 has been construed to apply only to those agreements that “unreasonably” restrain trade. See, e.g., Board of Trade of City of Chicago v. United States, 246 U.S. 231, 62 L.Ed. 683, 38 S.Ct. 242, 244 (1918). A claim under §1 requires a plaintiff to establish that (1) the defendants entered into a contract, combination, or conspiracy and (2) this conduct effected an unreasonable restraint on trade. 15 U.S.C. §1; Standard Oil Company of New Jersey v. United States, 221 U.S. 1, 55 L.Ed. 619, 31 S.Ct. 502 (1911); International Distribution Centers, Inc. v. Walsh Trucking Co., 812 F.2d 786, 793 (2d Cir. 1987). The focus of this provision of the antitrust laws is the existence of a contract, combination, or conspiracy (i.e., concerted action). National Society of Professional Engineers v. United States, 435 U.S. 679, 55 L.Ed.2d 637, 98 S.Ct. 1355, 1364 – 1365 (1978); Standard Oil, supra, 31 S.Ct. at 517 – 518. The concerted action may be explicit (United States v. Trenton Potteries Co., 273 U.S. 392, 71 L.Ed. 700, 47 S.Ct. 377 (1927)) or inferred. Merely coincidental behavior that can be explained on legitimate business grounds does not in itself establish a conspiracy if it is equally indicative of a series of unilateral actions. Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 79 L.Ed.2d 775, 104 S.Ct. 1464 (1984). Thus, §1 of the Sherman Anti-Trust Act has been used to strike down agreements or conduct that amounted to horizontal price-fixing; vertical
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 15
§3.7
INTELLECTUAL PROPERTY LAW
price-fixing; horizontal allocations of territories or customers among actual or potential competitors; vertical allocations of territories, customers, or other non-price restraints involving firms at different levels of the market hierarchy; competitively motivated group boycotts or concerted refusals to deal; tying agreements; and exclusive dealing arrangements in which a supplier agrees to supply only a designated purchaser or a purchaser agrees to buy exclusively from a particular supplier. See William C. Holmes and Melissa H. Mangiaracina, ANTITRUST LAW HANDBOOK, 2012 – 2013 EDITION §2:2 (2012). Two approaches are used in analyzing agreements under §1 of the Sherman Anti-Trust Act: the per se approach and the rule-of-reason analysis. Under the per se approach, certain types of conduct are deemed conclusively unreasonable, and, thus, evidence of any alleged procompetitive effects of this conduct is irrelevant. Under the rule-of-reason analysis, the court will take a detailed look at the accused conduct’s impact on the market and the procompetitive justifications of the conduct. The Supreme Court has long recognized certain restraints to be per se violations of §1. “[B]ecause of their pernicious effect on competition and lack of any redeeming virtue [these restraints] are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” Northern Pacific Ry. v. United States, 356 U.S. 1, 2 L.Ed.2d 545, 78 S.Ct. 514, 518 (1958). Thus, the Court has found horizontal price-fixing, vertical minimum price-fixing, horizontal market division, horizontal division of customers, horizontal group boycotts, and horizontal restrictions on output to be per se violations. The complexity of patent antitrust law is illustrated by the fact that horizontal territorial allocations are per se illegal, yet these agreements, if limited to patent rights, are expressly authorized under the patent laws. See §3.5 above. Guidance to resolve this conflict is provided in §§3.18 – 3.24 below. “Horizontal price-fixing,” which is defined as any agreement between competitors who are at the same level in the market that affects price, can take many forms, all of which are per se illegal: 1. agreement among creditors to eliminate short-term free credit to customers (Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643, 64 L.Ed.2d 580, 100 S.Ct. 1925 (1980)); 2. agreement among doctors setting maximum fees (Arizona v. Maricopa County Medical Society, 457 U.S. 332, 73 L.Ed.2d 48, 102 S.Ct. 2466 (1982)); and 3. agreement among dealers and their distributors to terminate competing dealers to maintain minimum price (see generally Monsanto, supra; Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 99 L.Ed.2d 808, 108 S.Ct. 1515 (1988)).
3 — 16
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.7
PRACTICE POINTER
Sherman Anti-Trust Act §1 — per se approach (conclusively unreasonable) —
•
requires plaintiff only to show that practice occurred
•
does not require plaintiff to show anticompetitive effect
•
precludes defendant from attempting to justify the restraint
Per se violations include
•
horizontal price-fixing
•
vertical minimum price-fixing
•
horizontal market division
•
horizontal division of customers
•
horizontal group boycotts
•
horizontal restriction on output
If an agreement is not per se illegal, it will be evaluated under the rule-of-reason analysis. Under a rule-of-reason analysis, “the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.” Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 53 L.Ed.2d 568, 97 S.Ct. 2549, 2557 (1977). To determine whether an agreement is an unreasonable restraint on trade under the rule of reason, the fact-finder must weigh all the circumstances of the case (id.) and must analyze whether the agreement is anticompetitive in purpose or effect (Oreck Corp. v. Whirlpool Corp., 579 F.2d 126, 133 (2d Cir. 1978)). This analysis “focuses directly on the challenged restraint’s impact on competitive conditions.” National Society of Professional Engineers, supra, 98 S.Ct. at 1363. Accordingly, a plaintiff must prove not only an injury to itself, but also that competition in the relevant market was harmed. Hayden Publishing Co. v. Cox Broadcasting Corp., 730 F.2d 64, 69 – 70 (2d Cir. 1984) (“Proof that the defendant’s activities had an impact upon competition in a relevant market is an absolutely essential element of the rule of reason case.”), quoting Kaplan v. Burroughs Corp., 611 F.2d 286, 291 (9th Cir. 1979). The threshold issue in any rule-of-reason analysis is the definition of the relevant market. See Topps Chewing Gum, Inc. v. Major League Baseball Players Ass’n, 641 F.Supp. 1179, 1189 (S.D.N.Y. 1986). See also Ralph C. Wilson Industries, Inc. v. Chronicle Broadcasting Co., 794 F.2d 1359, 1363 (9th Cir. 1986). Any culpable conduct under the antitrust laws must affect the relevant product market, that is, the “ ‘area of effective competition’ in which competitors generally are willing to compete for the consumer potential.” American Key Corp. v. Cole
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 17
§3.8
INTELLECTUAL PROPERTY LAW
National Corp., 762 F.2d 1569, 1581 (11th Cir. 1985), quoting Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 5 L.Ed.2d 580, 81 S.Ct. 623, 628 (1961). See also AD/SAT, Division of Skylight, Inc. v. Associated Press, 181 F.3d 216, 227 (2d Cir. 1999) (“The relevant market for purposes of antitrust litigation is the ‘area of effective competition’ within which the defendant operates.”), quoting Tampa Electric, supra. In Brown Shoe Co. v. United States, 370 U.S. 294, 8 L.Ed.2d 510, 82 S.Ct. 1502, 1523 (1962), the Court summarized that the relevant market has two dimensions: first, the relevant product market, which identifies the products or services that compete with each other; and second, the geographic market, which may be relevant when the competition is geographically confined. Thus, “[t]he ‘market’ which one must study to determine when a producer has monopoly power will vary with the part of commerce under consideration.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 100 L.Ed. 1264, 76 S.Ct. 994, 1012 (1956).
PRACTICE POINTER
Sherman Anti-Trust Act §1 — rule-of-reason approach —
•
looks at impact on market and procompetitive justifications of arrangement
•
looks at market factors
•
can allow defendants to justify actions as pro-competitive
•
requires complex and expensive proofs
B. [3.8] Sherman Anti-Trust Act §2 Section 2 of the Sherman Anti-Trust Act provides: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine . . . or by imprisonment. 15 U.S.C. §2. Section 2 is subject to the same enforcement mechanism and remedies as §1. Under §2, defendants have been found liable for “actual” monopolization in which a firm acquires or retains actual monopoly power through competitively unreasonable practices, attempted monopolization, joint monopolization, conspiracies to monopolize, leveraging of monopoly power, and predatory pricing. Thus, §2 of the Act reaches both individual conduct and collective action. In Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 86 L.Ed.2d 467, 105 S.Ct. 2847, 2854 n.19 (1985), the Court, quoting United States v. Grinnell Corp., 384 U.S. 563, 16 L.Ed.2d 778, 86 S.Ct. 1698, 1704 (1966), explained that “[t]he offense of monopoly under §2
3 — 18
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.10
of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” Naturally, these proofs play out in what will be defined as the “relevant market,” the definition of which provides a key to understand the rationale of the case. The elements for attempted monopolization are “(1) anticompetitive or exclusionary conduct; (2) specific intent to monopolize; and (3) a ‘dangerous probability’ that the attempt will succeed.” International Distribution Centers, Inc. v. Walsh Trucking Co., 812 F.2d 786, 790 (2d Cir. 1987), quoting Northeastern Telephone Co. v. American Telephone & Telegraph Co., 651 F.2d 76, 85 (2d Cir. 1981). The elements for conspiracy to monopolize are (1) conspiracy, (2) specific intent, and (3) overt acts in furtherance of the conspiracy. Monopoly power or a dangerous probability of success is not needed, only a showing that the conduct will have an appreciable effect on interstate commerce. See United States of America v. Consolidated Laundries Corp., 291 F.2d 563 (2d Cir. 1961). C. [3.9] Clayton Act The Clayton Act addresses price discrimination, tying arrangements, exclusive dealing agreements, requirement contracts, and output contracts. In the patent-antitrust context, §3 of the Clayton Act is most pertinent: It shall be unlawful . . . to lease or make a sale or contract for sale of goods . . . or other commodities, whether patented or unpatented . . . on the condition, agreement, or understanding that the lessee or purchaser thereof shall not use or deal in the goods . . . of a competitor . . . where the effect . . . may be to substantially lessen competition or tend to create a monopoly in any line of commerce. 15 U.S.C. §14. Section 7 of the Clayton Act addresses mergers and acquisitions, specifically prohibiting this activity when “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 15 U.S.C. §18. Thus, §7 has been viewed as addressing “monopolistic tendencies in their incipiency and well before they have attained such effects as would justify a Sherman Act proceeding.” Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 93 L.Ed.2d 427, 107 S.Ct. 484, 496 (1986) (Stevens, J., dissenting), quoting S.Rep. No. 1775, 81st Cong., 2d Sess. 4 – 5 (1950), reprinted in 1950 U.S.C.C.A.N. 4293, 4296. D. [3.10] Federal Trade Commission Act As noted in §3.6 above, the Federal Trade Commission Act established the FTC. The FTC has very broad powers. Section 5(a)(2) of the Federal Trade Commission Act provides that the FTC can prohibit any “[u]nfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. §45(a)(2). This has been interpreted to give the FTC the power to investigate and prohibit antitrust violations, incipient
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 19
§3.11
INTELLECTUAL PROPERTY LAW
antitrust violations, violations of basic policies underlying the antitrust laws, and anticompetitive practices that substantially injure competitors or are inherently unfair. The FTC has become very active in the patent antitrust area. It forced the breakup of the Pillar Point Partners patent pool, which involved a large number of patents in the area of laser eye surgery. It also unsuccessfully tried to invalidate one of the patents in the pool. The FTC has also been quite active in standard-setting activities, which involve the conduct of companies that participate in the establishment of industry standards and then later try to sue for infringement of their patents when someone adopts the standard that the patent owner helped to develop. See §3.28 below. The FTC has moved beyond the anticipative effects of improperly using a patent to comment on the inner workings of the United States Patent and Trademark Office, the patent law, and the patent system. The FTC’s position is essentially anti-patent. See, e.g., Rambus Inc. v. Federal Trade Commission, 522 F.3d 456, 467 (D.C.Cir. 2008) (overturning FTC order against patentee and noting that “[b]ecause of the chance of further proceedings on remand, we express briefly our serious concerns about strength of the evidence relied on to support some of the Commission’s crucial findings regarding the scope of JEDEC’s patent disclosure policies and Rambus’s alleged violation of those policies”). The FTC has an excellent website, www.ftc.gov, that provides a full and clear picture of its actions and policy positions regarding patents. E. [3.11] Types of Conduct Subject to Antitrust Scrutiny In analyzing agreements under the antitrust law, they are generally characterized into four types: (1) horizontal agreements; (2) vertical agreements; (3) agreements that affect price; and (4) agreements that have no effect on price (i.e., non-price agreements). Horizontal agreements arise when the parties are at the same level in the market. For example, an agreement between the suppliers of a raw material would be a horizontal agreement. Vertical agreements arise when the parties are at different levels in the chain of distribution. For example, an agreement between a retail seller and a manufacturer would be a vertical agreement. This difference between these agreements is important in determining the level of scrutiny that will be applied to the restraint. The difference between these types of agreements, however, frequently becomes blurred and often becomes a central issue in the case. For example, in the patent licensing context it is not unusual for the patent licensor and licensee both to be at multiple levels in the chain of distribution (i.e., they are both manufacturers and sellers). Would a license agreement between them be a horizontal agreement or vertical agreement? This is a difficult question to answer, and the answer will depend on the facts underlying the agreement, as well as the scope of the patent that was licensed. 1. [3.12] Horizontal Agreements Horizontal price-fixing occurs when firms at the same level of the market agree to fix or otherwise stabilize the prices that they will charge for their products or services. Horizontal pricefixing is illegal per se. The courts do not care about the reasonableness of these types of
3 — 20
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.13
agreements. Per se illegality applies to agreements fixing either minimum or maximum prices. United States v. Trenton Potteries Co., 273 U.S. 392, 71 L.Ed. 700, 47 S.Ct. 377 (1927). Horizontal agreements can be proved by direct or circumstantial evidence, and they will be held to encompass more than express agreement to set a price. For example, the exchange of price information in a highly concentrated market has been held to be per se illegal. United States v. Container Corporation of America, 393 U.S. 333, 21 L.Ed.2d 526, 89 S.Ct. 510 (1969). Additionally, plaintiffs do not need to prove an express agreement in order to prove a horizontal price-fixing agreement. Interstate Circuit, Inc. v. United States, 306 U.S. 208, 83 L.Ed. 610, 59 S.Ct. 467 (1939). Unlike vertical non-price restraints, which are generally afforded a rule-of-reason analysis, horizontal non-price restraints are still generally subject to a per se illegality analysis. Timken Roller Bearing Co. v. United States, 341 U.S. 593, 95 L.Ed. 1199, 71 S.Ct. 971 (1951), overruled in part by Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 81 L.Ed.2d 628, 104 S.Ct. 2731 (1984). The distinction between using a per se analysis or a rule-of-reason analysis often can be critical to the legality of a restraint. If a court uses a per se analysis, no consideration will be given to justifications or efficiencies that may result from the agreement. Market share does not have to be proved, and an automatic illegal label will attach as soon as the activity is found to fall into this category. The rule-of-reason analysis, on the other hand, allows the defendant to present efficiencies and justifications and prove market share or lack of market power in defense of the allegations. 2. [3.13] Vertical Agreements Vertical price-fixing is a restraint that occurs when prices are fixed between firms at different levels of the market structure. This agreement may be to fix prices at one or both market levels, at a set amount, or within a prescribed range. In general, these types of agreements are considered per se illegal. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 63 L.Ed.2d 233, 100 S.Ct. 937, 941 – 942 (1980). Vertical maximum price-fixing (i.e., agreement that the price shall be no greater than a specified amount), however, is evaluated under the rule of reason. State Oil Co. v. Khan, 522 U.S. 3, 139 L.Ed.2d 199, 118 S.Ct. 275 (1997). A court using a rule-of-reason analysis will look to justifications for the allegedly anticompetitive act and balance the procompetitive against the anticompetitive effects of the action. The distinction between vertical price restraints and non-price restraints is important to the legal analysis. In general, vertical non-price restraints will be examined under the rule-of-reason analysis. Courts have recognized that vertical non-price restraints can serve legitimate business objectives and, therefore, will be accorded greater judicial tolerance. The balance of competitive justifications with the competitive harm will be focused mainly on inter-brand competition as opposed to intra-brand competition. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 53 L.Ed.2d 568, 97 S.Ct. 2549 (1977). Examples of vertical non-price restraints include territorial or customer limitations imposed by a manufacturer on its dealers, assignment to areas of primary responsibility or location clauses, and agreements providing for exclusive dealerships. In terms of vertical restraints, a court will generally determine first what is the specific restraint at issue. Then it will consider the likely anticompetitive effects and the offsetting
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 21
§3.14
INTELLECTUAL PROPERTY LAW
procompetitive effects. Finally, the court will look at whether the parties have sufficient market power to effect competition in the market. California Dental Ass’n v. Federal Trade Commission, 526 U.S. 756, 143 L.Ed.2d 935, 119 S.Ct. 1604, 1618 (1999) (Breyer, J., concurring in part & dissenting in part). When dealing with vertical restraints, it is advisable, though not imperative, to avoid express agreements that specifically deal with price. While courts are very hesitant to impose per se illegality on vertical restraints, they will do so if presented with explicit evidence. 3. [3.14] Tying Arrangements A tying arrangement occurs when the purchase of one item is conditioned on the purchase of another (i.e., tie-in) or the purchase of one item is conditioned on refusal to buy a competitor’s product (i.e., tie-out). See generally Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 119 L.Ed.2d 265, 112 S.Ct. 2072 (1992). Thus, using the pencil and eraser example from §§3.3 – 3.5 above, if the manufacturer of pencils also required a retailer to buy the manufacturer’s note paper in order to get the pencils, there would be a tying agreement. The purchase of the tying product (the pencil) is conditioned on the purchase of the tied product (the paper). Tying agreements are subject to scrutiny under §1 (and at times §2) of the Sherman AntiTrust Act, 15 U.S.C. §§1 and 2, and §3 of the Clayton Act, 15 U.S.C. §14. They are subjected to a watered-down per se analysis. Although tying arrangements may result in significant anticompetitive effects, these arrangements can also result in market efficiencies and procompetitive benefits. See Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 80 L.Ed.2d 2, 104 S.Ct. 1551 (1984). For a tying agreement to violate the antitrust laws, the following elements must be present: a. The tied item must be separate from the tying item. b. The purchase of one item must be conditioned on the purchase of another. c. There must be sufficient economic power in the tying item to appreciably restrain free competition in the tied item’s market. d. There must be a substantial effect on interstate commerce in the tied market. Even if these four elements are present, the defendant can still make competitive reasonableness and business necessity defenses. 4. [3.15] Group Boycotts and Refusals To Deal Group boycotts and refusals to deal come within a changing area of the law. They are also of particular significance to patent antitrust issues because of the superficial similarities between an exclusive license and discriminatory nonexclusive licensing practices by a patentee, which should not violate the antitrust laws. See, e.g., In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322, 1327 – 1328 (Fed.Cir. 2000); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed.Cir. 1992).
3 — 22
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.16
Certain group boycotts or concerted refusals to deal have been deemed to fall within the class of restraints meriting per se treatment under §1 of the Sherman Anti-Trust Act, 15 U.S.C. §1. See Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 86 L.Ed.2d 202, 105 S.Ct. 2613 (1985). The types of concerted refusals to deal that are deemed to be per se violations have been limited by the courts in various ways. The Second Circuit, for instance, has determined that vertical restraints do not fall within the traditional category of group boycott cases characterized as per se violations. See Oreck Corp. v. Whirlpool Corp., 579 F.2d 126, 131 (2d Cir.), cert. denied, 99 S.Ct. 340 (1978). Other circuits have agreed with this conclusion. See, e.g., Lomar Wholesale Grocery, Inc. v. Dieter’s Gourmet Foods, Inc., 824 F.2d 582 (8th Cir. 1987). See also Disenos Artisticos E Industriales, S.A. v. Work, 676 F.Supp. 1254 (E.D.N.Y. 1987). In Northwest Wholesale, supra, the Supreme Court further limited the kinds of refusals to deal that are deemed to be per se illegal, holding that absent a threshold showing that a defendant “possesses market power or exclusive access to an element essential to effective competition,” a restraint should be judged under the rule of reason. 105 S.Ct. at 2614. Accord Federal Trade Commission v. Indiana Federation of Dentists, 476 U.S. 447, 90 L.Ed.2d 445, 106 S.Ct. 2009, 2018 (1986) (“the category of restraints classed as group boycotts is not to be expanded indiscriminately, and the per se approach has generally been limited to cases in which firms with market power boycott suppliers or customers in order to discourage them from doing business with a competitor”). 5. [3.16] Joint Ventures Research joint ventures have greater protection from antitrust scrutiny than other agreements between competitors. Firms may enter into joint ventures for any of a variety of business reasons, for example, to pool resources for product research and development, to jointly manufacture an already developed product, or to share resources in the marketing or distribution of products. See the National Cooperative Research and Production Act of 1993, Pub.L. No. 98-462, 98 Stat. 1815. These types of agreements will be afforded a broad rule-of-reason analysis, balancing the desirability of the joint venture and prohibiting those joint ventures that unreasonably restrict or threaten competition. Generally, the purpose of the venture, the industry structure and relative competitive positions of the venture participants, the scope and duration of the venture, efficiencies and other purported justifications, the impact of the venture on outside competitors, and the nature of any restraints collateral to the venture will be considered when analyzing the antitrust ramifications of a joint venture. United States v. Penn-Olin Chemical Co., 378 U.S. 158, 12 L.Ed.2d 775, 84 S.Ct. 1710 (1964); Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979). Additionally, under the Leahy-Smith America Invents Act, joint research activity agreements can provide strategic and prior-art-based advantages to the patentee. See 35 U.S.C. §§100(h), 102(b)(2)(C), and Chapters 1 and 2 of this handbook. Joint research activity agreements should have the same level of protection from antitrust scrutiny that joint venture and joint development agreements have.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 23
§3.17
V.
INTELLECTUAL PROPERTY LAW
[3.17] INTERACTION OF PATENT AND ANTITRUST LAW
The fact that patents are in essence legal monopolies should not subject them to either greater or lesser antitrust scrutiny. The patentee has the legal right to exclude all others from practicing the claimed invention. Thus, exercising this right to exclude, either in total or by any less restrictive actions, should not violate the antitrust laws. In fact, any restrictive actions that are less restrictive than total exclusion by the patentee should have procompetitive effects. It is only when the patentee’s restrictive actions extend beyond that which it is entitled to exclude under the patent that the risk of an antitrust violation arises. As provided by the Federal Circuit: Should the restriction be found to be reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims, that ends the inquiry. However, should such inquiry lead to the conclusion that there are anticompetitive effects extending beyond the patentee’s statutory right to exclude, these effects do not automatically impeach the restriction. Anticompetitive effects that are not per se violations of law are reviewed in accordance with the rule of reason. Patent owners should not be in a worse position, by virtue of the patent right to exclude, than owners of other property used in trade. [Emphasis added.] Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed.Cir. 1992). This test explains and reconciles the vast majority of cases and provides an important tool for analyzing licensing agreements and other conduct by the patentee. If the patentee could not prevent the conduct through an infringement action, then red flags should go up if it is placing restrictions or conditions on this conduct through an agreement. As discussed in §3.29 below, this same general test is applicable to avoiding misuse issues. These red flag signals have been somewhat moved toward the antitrust violation side, at least in the context of generic drugs and abbreviated new drug application (ANDA) settlement agreements. In Federal Trade Commission v. Actavis, Inc., ___ U.S. ___, 186 L.Ed.2d 343, 133 S.Ct. 2223, 2234 (2013), the Supreme Court found that Noerr-Pennington immunity (see Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 5 L.Ed.2d 464, 81 S.Ct. 523 (1961); United Mine Workers of America v. Pennington, 381 U.S. 657, 14 L.Ed.2d 626, 85 S.Ct. 1585 (1965); §3.26 below) did not protect reverse payment settlements. A reverse payment settlement is a situation in which the patentee pays money to the accused infringer to respect the patent and stay out of the market. See Actavis, supra, 133 S.Ct. at 2227. In addressing this situation, which is somewhat unique to ANDA litigation, the Actavis Court reviewed key patent-antitrust doctrines. The Court then provided a five-part framework for a rule of reason analysis to determine if a reverse payment agreement violated the antitrust laws. 133 S.Ct. at 2234 – 2238. Thus, the Actavis Court took a step back from the clear line of demarcation used by the Federal Circuit in Mallinckrodt, supra. Solvay’s patent, if valid and infringed, might have permitted it to charge drug prices sufficient to recoup the reverse settlement payments it agreed to make to
3 — 24
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.17
its potential generic competitors. And we are willing to take this fact as evidence that the agreement’s “anticompetitive effects fall within the scope of the exclusionary potential of the patent.” 677 F.3d., at 1312. But we do not agree that that fact, or characterization, can immunize the agreement from antitrust attack. . . . The FTC alleges that in substance, the plaintiff agreed to pay the defendants many millions of dollars to stay out of its market, even though the defendants did not have any claim that the plaintiff was liable to them for damages. . . . Given these factors, it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well. . . . To strike that balance, the Court asked questions such as whether “the patent statute specifically gives a right” to restrain competition in the manner challenged; and whether “competition is impeded to a greater degree” by the restraint at issue than other restraints previously approved as reasonable. [Emphasis added.] 133 S.Ct. at 2230 – 2331, quoting United States v. Line Material Co., 333 U.S. 287, 92 L.Ed. 701, 68 S.Ct. 550, 562 (1948). The Actavis Court’s decision can be read as a consistent application of the general red flag signal of Mallinckrodt because the patent monopoly does not extend to paying someone to avoid that monopoly. However, the above language in Actavis could also be read as moving the demarcation line to include as a potential antitrust violation other conduct that falls purely within the scope of the patent monopoly. These red flags, as potentially expanded by Actavis, signal a need for further analysis of the proposed conduct and not that an antitrust violation will necessarily result. As noted in §3.1 above, even if the conduct extends beyond the scope of the patent’s exclusionary rights, all of the other elements of an antitrust violation, such as market power and antitrust injury, must be present before liability could occur. There is certain conduct by the patentee that in and of itself should not give rise to an antitrust violation. Having successful and productive research activities that give rise to a large body of patents that have significant exclusionary power is not an antitrust violation. Refusing to license a patent is not an antitrust violation. Granting a nonexclusive license is not an antitrust violation. See generally In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed.Cir. 2000); Mallinckrodt, supra. On the other hand, conduct that extends beyond the patent’s legitimate exclusionary rights, including the improper assertion of a patent, can give rise to antitrust violations.
PRACTICE POINTERS
Success is not an antitrust violation.
Obtaining patents for one’s own work is not an antitrust violation.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 25
§3.18
INTELLECTUAL PROPERTY LAW
Refusing to license is not an antitrust violation.
Granting a nonexclusive license is not an antitrust violation.
A. [3.18] Patent Licensing Activity Patent licenses by their very nature are agreements that relate to a monopoly and affect trade and commerce. Thus, they can fall under the scrutiny of both the Sherman Anti-Trust Act and the Clayton Act, as well as the FTC. There are several types of licensing practices that raise red flags from antitrust and misuse concerns. Patent misuse is discussed in greater detail in §3.29 below. Although these restrictions are not in and of themselves antitrust violations, their presence will subject the agreement to greater scrutiny during litigation and increases the risk that the agreement may violate the antitrust laws. Thus, a careful analysis, both for the legal and business aspects, should be made before entering into these licensing practices. 1. [3.19] Territory and Field-of-Use Restrictions As discussed in §3.5 above, the patent statutes expressly authorize field-of-use restrictions and territory restrictions. Provided these restrictions are limited to the patent’s exclusionary rights, they will not violate the antitrust laws and will not be patent misuse. To continue with the pencil and eraser patents example from §§3.3 – 3.5 above, the patentee who owned the patent on just the pencil could grant a license to the manufacturer of the eraser pencil to make and sell them in New York, leaving the rest of the country to the patentee. This would be a territorial restriction, and it would not violate the antitrust laws or be considered patent misuse because the territorial restriction is squarely within the exclusionary rights of the patent since the patentee could totally stop the manufacture and sale of eraser pencils. See, e.g., Brownell v. Ketcham Wire & Mfg. Co., 211 F.2d 121, 128 (9th Cir. 1954). Similarly, the patentee who owned the patent on just the pencil could grant a license to a manufacturer of pencils to make and sell pencils that are shorter than four inches (i.e., the little pencils used to score golf). This would be a field-of-use restriction and would not violate the antitrust laws or be considered patent misuse. See, e.g., General Talking Pictures Corp. v. Western Electric Co., 305 U.S. 124, 83 L.Ed. 81, 59 S.Ct. 116 (1938); B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419 (Fed.Cir. 1997). On the other hand, if the patentee who owned the eraser pencil patent granted a license to a manufacturer of pencils and limited this manufacturer’s ability to make and sell pencils without erasers to New York, serious antitrust and misuse issues would arise. In this situation, the patentee has extended a territory restriction to products that are outside the scope of its exclusionary rights. The territorial restriction applies to pencils without erasers, but the patent can exclude only pencils with erasers. Thus, this agreement is beyond the protection afforded by the patent and the patent statutes. This is not to say that there is necessarily an antitrust violation. Monopolization, market power, antitrust injury, and the other elements of an antitrust violation must still be present for a violation to occur. Nevertheless, in the latter situation, these antitrust
3 — 26
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.21
factors would need to be evaluated. In the earlier situation, they are meaningless because the conduct is protected from antitrust and misuse scrutiny by the patent and the patent laws. 2. [3.20] Package License Agreements Package licensing occurs when more than one patent is grouped together in a license agreement. The benchmark test for analyzing this licensing activity is whether the package license was compulsory or for the convenience of the parties. If it is compulsory, serious antitrust issue may arise. For example, assume that a patentee has a large patent portfolio covering many aspects and components of a consumer electronics product. Further, assume that the licensee did not want to pay a royalty on a product-by-product, patent-by-patent basis (that is, on which patent was used in which product) because of accounting or other difficulties. In this situation, the parties could agree to a flat rate for all products sold, regardless of whether they used none, one, or a hundred of the licensed patents. See generally Automatic Radio Mfg. Co. v. Hazeltine Research, Inc., 339 U.S. 827, 94 L.Ed. 1312, 70 S.Ct. 894 (1950), overruled by Lear, Inc. v. Adkins, 395 U.S. 653, 23 L.Ed.2d 610, 89 S.Ct. 1902 (1969); Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 23 L.Ed.2d 129, 89 S.Ct. 1562 (1969). Such an agreement would not violate the antitrust laws or give rise to patent misuse. The duration of the royalty obligation under package licenses is another important consideration. To avoid misuse and antitrust issues, the obligation to pay royalties should expire proportionally with the value of the patents as they expire. In general, however, if for the convenience of the parties it is agreed that the royalty obligations will expire with the last-toexpire patent in the package, the agreement will not be considered an antitrust violation or patent misuse. See generally Brulotte v. Thys Co., 379 U.S. 29, 13 L.Ed.2d 99, 85 S.Ct. 176 (1964). In Kimble v. Marvel Entertainment, LLC, ___ U.S. ___, 192 L.Ed.2d 463, 135 S.Ct. 2401, (2015), the Court reaffirmed the holding of Brulotte that, absent some other consideration, royalty payments could not extend beyond the life of the patent. The Kimble Court set out several ways in which the post-royalty payment prohibition of Brulotte could be circumvented. 135 S.Ct. at 2416. (deferred royalties, amortized royalties, royalties tied to nonpatent intellectual property could all be used to extend royalties beyond expiration of patent). The Kimble Court, however, found that unless these work arounds are expressly set forth in the agreement, an agreement that simply extends royalty payments beyond the life of the patent will end upon the expiration of that patent. Id. 3. [3.21] Patent Pooling Agreements Patent pooling agreements involve a group of patentees who bring their patents together and agree to particular conduct with respect to this collection or “pool” of patents. Patent pools usually involve competitors at the same level in the market. Thus, they are generally viewed as horizontal agreements and are subject to greater scrutiny under the antitrust laws. Additionally, the FTC has shown considerable interest in these types of agreements. For example, as noted in
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 27
§3.22
INTELLECTUAL PROPERTY LAW
§3.10 above, the FTC successfully forced the breakup of Pillar Point Partners, a patent pool that related to the very popular refractive laser eye surgery. The FTC also investigated and approved a patent pool relating to DVD technology. These cases and the FTC’s rational behind them are explained in detail on the FTC’s website, www.ftc.gov. Depending on conditions placed on the pool and the criteria for compiling the pool, these agreements can be either very procompetitive and able to survive all antitrust and misuse scrutiny or no more than a horizontal price-fixing scheme and per se illegal. Pooling agreements can be very procompetitive and at times essential for the commercialization of new technologies. If each entrant into a market for a new technology had to avoid and litigate patent issues that arise from the other potential market participants’ patents, the market might be viewed by all as too difficult and risky to enter. Thus, the chilling effect of a large number of patents held by several potential market participants might prevent the market from obtaining the critical mass necessary for the new technology to be accepted by the consuming public. On the other hand, if a patent pool provides all market entrants with the ability to obtain nonexclusive, reasonable, nondiscriminatory licenses, this barrier to the market’s development is removed. As a general rule, patent pooling agreements will be more likely to pass antitrust and misuse scrutiny if the following apply: a. They contain patents on complementary and blocking technologies rather than patents on competing technologies. b. The patents for the pool were selected by independent experts in the field based on what was essential technology to enter the market. c. They are opened to all potential participants in the market. d. They provide for the licensing of individual patents, as well as the entire pool. e. They provide for reasonable, nondiscriminatory royalty rates. f.
They do not fix the price or place other restrictions on licensed products.
4. [3.22] Grant Back Agreements Grant back agreements occur when the licensee or the licensor places restrictions on future improvements. Typically, the grant back agreement requires the licensee to grant rights on improvements to the licensed technology back to the licensor. If the licensee is required to grant back to the licensor only a nonexclusive license for improvements that directly relate to the originally licensed technology, the grant provision should pass antitrust and misuse scrutiny. Such a grant back clause essentially assures that the licensee will not be able to keep the licensor out of the market by preventing the licensor from using the licensee’s improvements, which may be the only commercially viable form of the invention. In this situation, the scope of the grant back rights is no broader than the original licensed patent rights. In this sense, the improvements could
3 — 28
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.24
not have been made without the originally licensed technology first having been practiced, so, again, there is no improper extension of these patent rights through the grant back clause. See generally Transparent-Wrap Mach. Corp. v. Stokes & Smith Co., 329 U.S. 637, 91 L.Ed. 563, 67 S.Ct. 610 (1947). On the other hand, if the grant back clause required assignment of all improvements or if it required the granting of rights on improvements that were unrelated to the originally licensed technology, red flags should go up. Such an agreement is extending the scope of the originally licensed patent well beyond its boundaries and may not survive antitrust or misuse scrutiny, depending on what other facts are present. 5. [3.23] Tying Agreements As discussed in §3.14 above, a tying agreement occurs when the sale of one item is conditioned on the purchase of another. Using again the pencil and eraser example from §§3.3 – 3.5 above, by tying the sale of the pencil to the purchase of the paper, the manufacturer has created a tying agreement. The fact that the pencil is patented can have a significant impact on the third element of a tying analysis, whether there is sufficient economic power in the tying item (the patented pencil) to appreciably restrain free competing in the tied item’s market. See generally Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 80 L.Ed.2d 2, 104 S.Ct. 1551 (1984). In the antitrust context, the Supreme Court has maintained that there is a presumption of market power if the tying item is patented. 104 S.Ct. at 1560. This, however, must be contrasted with patent misuse, in which the presumption of market power has been legislatively overruled. 35 U.S.C. §271(d). See §3.5 above. Additionally, the Federal Circuit has refused to find that a patent creates a presumption of market power for the patented product. See C.R. Bard, Inc. v. M3 Systems, Inc., 157 F.3d 1340, 1368 (Fed.Cir. 1998) (“It is not presumed that the patent-based right to exclude necessarily establishes market power in antitrust terms.”); Abbott Laboratories v. Brennan, 952 F.2d 1346, 1354 (Fed.Cir. 1991) (“A patent does not of itself establish a presumption of market power in the antitrust sense.”). Section 2.2 of the Antitrust Guidelines for the Licensing of Intellectual Property (Apr. 6, 1995), www.justice.gov/atr/antitrust-guidelineslicensing-intellectual-property, issued by the Department of Justice and the FTC, provides that the agencies will not presume that a patent, copyright, or trade secret necessarily confers market power on its owner. Although misuse and antitrust scrutiny of tying agreements have relaxed, these agreements should nevertheless be avoided. The presence of a tying provision in a license agreement gives a willful infringer a potential defense when none would otherwise have existed. It can create a very costly and problematic sideshow with substantial downside risk. At the same time, it is rare that such a provision is commercially necessary for the deal to go through. 6. [3.24] Price Restrictions As a general rule, patent license agreements that dictate the price of a licensed product should be avoided. Price-setting agreements are problematic, will inevitably attract antitrust scrutiny, and rarely have legitimate commercial justifications.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 29
§3.25
INTELLECTUAL PROPERTY LAW
The Supreme Court, however, has held that a licensing agreement by which the licensee agreed to sell patented products at a certain price did not violate the antitrust laws. United States v. General Electric Co., 272 U.S. 476, 71 L.Ed. 362, 47 S.Ct. 192, 197 (1926), citing E. Bement & Sons v. National Harrow Co., 186 U.S. 70, 46 L.Ed. 1058, 22 S.Ct. 747 (1902). The General Electric Court found that the reasoning of the Bement Court had not been overruled and was still applicable in the case before it. Furthermore, the General Electric Court stated: The very object of [the patent] laws is monopoly, and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the article, will be upheld by the courts. The fact that the conditions in the contracts keep up the monopoly or fix prices does no[t] render them illegal. 47 S.Ct. at 197, quoting Bement, supra, 22 S.Ct. at 755. This holding has been limited to the facts before the court. See generally United States v. Line Material Co., 333 U.S. 287, 92 L.Ed. 701, 68 S.Ct. 550 (1948); United States v. United States Gypsum Co., 333 U.S. 364, 92 L.Ed. 746, 68 S.Ct. 525 (1948). For a while, it was questionable whether the Supreme Court would follow this holding if presented with the same facts today. However, in Federal Trade Commission v. Actavis, Inc., ___ U.S. ___, 186 L.Ed.2d 343, 133 S.Ct. 2223, 2232 – 2333 (2013), the Court expressly reaffirmed both General Electric, supra, and Standard Oil Co (Indiana) v. United States, 283 U.S. 163, 75 L.Ed 926, 51 S.Ct. 421 (1931). In Standard Oil, the Court approved a patent pool between horizontal competitors that set the royalty price for the pool and divided the royalty payments between the participants. Thus, while a prudent licensor may avoid such provisions in its patent licenses, in view of Actavis, these provisions can at least be evaluated and considered. B. [3.25] Walker Process Fraud on the United States Patent and Trademark Office Enforcement of a patent that was obtained through fraud on the United States Patent and Trademark Office can give rise to an antitrust violation. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 15 L.Ed.2d 247, 86 S.Ct. 347 (1965). The issue in Walker Process was whether the maintenance and enforcement of a patent obtained by fraud on the USPTO provides the basis for an action under §2 of the Sherman Anti-Trust Act, 15 U.S.C. §2. See §3.8 above for a discussion of §2. Additionally, the Walker Process Court considered whether a patentee could be subject to a treble damage claim by an injured party under the Clayton Act. The Court held that the enforcement of a patent procured by fraud on the USPTO may violate §2 of the Sherman Anti-Trust Act, provided the other elements necessary for a §2 case are present. The Court also held that if the patentee had violated §2, the patentee would be subject to treble damages under the Clayton Act. 86 S.Ct. at 349. Inequitable conduct, discussed in §3.30 below, is insufficient for an antitrust violation. Rather, common-law fraud must be established. In Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (Fed.Cir. 1998), the Federal Circuit addressed the relationship between Noerr-Pennington immunity and a Walker Process claim. Noerr-Pennington immunity protects a party’s right to petition the government and to take
3 — 30
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.26
action in the courts without having this conduct subjected to antitrust scrutiny. See Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 5 L.Ed.2d 464, 81 S.Ct. 523 (1961); United Mine Workers of America v. Pennington, 381 U.S. 657, 14 L.Ed.2d 626, 85 S.Ct. 1585 (1965). Thus, unless this conduct is an objectively baseless sham, it will be immune from antitrust liability. See Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, 123 L.Ed.2d 611, 113 S.Ct. 1920 (1993). In Nobelpharma, the Federal Circuit held that Noerr-Pennington immunity did not apply to Walker Process fraud in the USPTO claims. 141 F.3d at 1071 – 1072. See also Glass Equipment Development, Inc. v. Besten, Inc., 174 F.3d 1337, 1343 (Fed.Cir. 1999). Walker Process causes of action have been extended to provide a direct purchaser of a patented article the ability to sue the patentee for an antitrust violation. As discussed in §3.33 below, under the first-sale doctrine, a direct purchaser of a patent article cannot be sued for patent infringement and would have no apprehension of an infringement suit. Thus, a direct purchaser, absent some other circumstances, could not bring a declaratory judgment action against the patentee. In spite of this, Ritz Camera & Image, LLC. v. Sandisk Corp., 700 F.3d 503, 506 – 508 (Fed.Cir. 2012), held that a direct purchaser of a patent article had standing to sue the patent for a Walker Process-based antitrust violation. This opens up an interesting possibility in which a direct purchaser may establish the but-for standard of materiality through invalidating the patent in an inter parties review and then leverage that finding to recover antitrust damages in a Walker Process-based suit if the other elements of a Walker Process violation are present. C. [3.26] Enforcement of a Patent Known To Be Invalid or a Noninfringed Patent The enforcement of a patent that is known to be invalid or a noninfringed patent can give rise to antitrust liability, provided the other elements of an antitrust claim are established. See generally Handgards, Inc. v. Ethicon, Inc., 743 F.2d 1282 (9th Cir. 1984). These claims, however, unlike a Walker Process claim, are subject to Noerr-Pennington immunity. See the discussion of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 15 L.Ed.2d 247, 86 S.Ct. 347 (1965), Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 5 L.Ed.2d 464, 81 S.Ct. 523 (1961), and United Mine Workers of America v. Pennington, 381 U.S. 657, 14 L.Ed.2d 626, 85 S.Ct. 1585 (1965), in §3.25 above. Thus, it is not enough that the asserted patent is found to be invalid, unenforceable, or noninfringed. Rather, the bringing of the infringement lawsuit in the first instance must have been an objectively baseless sham. See C.R. Bard, Inc. v. M3 Systems, Inc., 157 F.3d 1340, 1368 – 1369 (Fed.Cir. 1998); Glass Equipment Development, Inc. v. Besten, Inc., 174 F.3d 1337, 1343 (Fed.Cir. 1999). The tests and requirements for establishing sham litigation to circumvent Noerr-Pennigton immunity were further refined by the Supreme Court in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, 123 L.Ed.2d 611, 113 S.Ct. 1920, 1928 (1993). Thus, in Professional Real Estate Investors, the Court held that sham litigation requires both an objective and a subjective component. 113 S.Ct. at 1927. The Professional Real Estate Investors Court then set out a two-part test for determining whether sham litigation or conduct was present and thus whether Noerr-Pennigton immunity was
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 31
§3.27
INTELLECTUAL PROPERTY LAW
circumvented. First, the underlying activity must be objectively baseless in the sense that no reasonable person could reasonably expect to win the suit. Second, and only after this threshold level of objective unreasonableness is established, a court will look to the subjective intent of the actor. Under this second prong of the test, a court looks to see if the actor had a subjective intent to interfere directly with the business relationship of a competitor. Only if both of these factors are met will a court then find that the subject activity was a sham, waive Noerr-Pennigton immunity, and permit the antitrust action based on the underlying activity to proceed. 113 S.Ct. at 1928 n.5. These types of cases are very difficult to bring successfully against a patentee, as noted by the Federal Circuit: Neither the bringing of an unsuccessful suit to enforce patent rights, nor the effort to enforce a patent that falls to invalidity, subjects the suitor to antitrust liability. . . . The law recognizes a presumption that the assertion of a duly granted patent is made in good faith. [Citations omitted.] C.R. Bard, supra, 157 F.3d at 1369. D. [3.27] Improper Acquisition of Patents Patents have the attributes of personal property. 35 U.S.C. §261. They are also property that can have significant economic power. See §3.3 above. Thus, their improper acquisition through purchase or merger could give rise to antitrust liability, provided the other elements of an antitrust claim are established. See, e.g., Rex Chainbelt Inc. v. Harco Products, Inc., 512 F.2d 993 (9th Cir. 1975); Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir. 1952). See also Eastman Kodak Co. v. Goodyear Tire & Rubber Co., 114 F.3d 1547, 1556 – 1558 (Fed.Cir. 1997), overruled in part on other grounds by Cybor Corp. v. FAS Technologies, Inc., 138 F.3d 1448, 1454 (Fed.Cir. 1998). In this context, care should be taken that a grant back provision is not viewed as a means to improperly acquire patent rights. See §3.22 above. E. [3.28] Standard-Setting Activity and Its Effect on Patent Rights The intersection of standard-setting activity and patent strategies can result in the loss of rights in a patent or even antitrust liability for the patent owner. Standard-setting organizations are usually groups of competitors who join together to develop technical standards for their industry in an attempt to develop the market for their technology and provide benefits to consumers. In simple terms, standard-setting organizations are the reasons why our electronic devices communicate with each other, and we have moved away from a world of incompatible technologies, such as Beta and VHS video of the 1980s. Examples of such groups are the American National Standards Institute (ANSI), which developed standards for magnetic tape, and the Joint Electronic Devices Engineering Council (JEDEC), which developed standards for single in-line memory modules (SIMMs) and for dynamic random access memory (DRAM). Although the majority of caselaw in this area has been in the electronics industry, there is no reason that these doctrines would not apply to other business segments, such as accounting and tax services. See generally Rambus Inc. v. Federal Trade Commission, 522 F.3d 456 (D.C.Cir. 2008).
3 — 32
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.28
PRACTICE POINTER
Openness is the best policy in dealing with standard-setting organizations.
Standard-setting issues arise when a patent owner is a member of a standard-setting organization and that organization develops standards that relate to the patent owner’s patents and pending patent applications. Depending on the degree of involvement of the patent owner in the creation of the standards, the closeness of the standards to the patents, and the rules of the standard-setting organization, the patent owner will have to identify relevant patents and potentially agree to license these patents under reasonable and nondiscriminatory (RAND) terms. The caselaw in this area addresses the situation in which patent owners fail to disclose patents and patent applications to a standard-setting organization with which they are associated. Id. The concern and potential harm that flow from a failure to identify patents are that the patent owner, through its efforts in shaping a particular standard, could drive an entire industry to infringe its patents. Some courts have referred to this as a “patent hold-up” or “patent ambush.” Hynix Semiconductor Inc. v. Rambus Inc., 527 F.Supp.2d 1084, 1098 (N.D.Cal. 2007). Liability for the patent in this situation flows from well-established legal doctrines such as equitable estoppel, implied license, fraud, federal antitrust laws, and FTC law. A review of some of these cases shows the substantial risks facing patent owners when they participate in these organizations. The standard-setting patent body of law traces its origins to Potter Instrument Co. v. Storage Technology Corp., 207 U.S.P.Q. (BNA) 763, 1980 WL 30330 (E.D.Va. 1980), aff’d on other grounds, 641 F.2d 190 (4th Cir. 1981). In Potter, the standard at issue was proposed by IBM, which did not own the patent, but only had a license under it. The patent owner, Potter, did not propose the standard and did not advocate for its adoption. Potter, however, did have a representative at one of the subcommittee meetings when the standard was discussed. 1980 WL 30330 at *3. On these facts, the court found that Potter, the patent owner, was estopped from bringing an infringement action against a defendant that was practicing the standard: Potter actively participated with the ANSI Subcommittee in developing GCR as the industry standard — it intentionally failed to bring its ownership of the ’685 patent to the committee’s attention notwithstanding the committee’s policy to the contrary. By so doing, Potter has gained a monopoly on the GCR industry standard without any obligation to make its use available on reasonable terms to competitors in the industry. 1980 WL 30330 at *7. In Stambler v. Diebold Inc., 11 U.S.P.Q.2d (BNA) 1709, 1988 WL 95479 (E.D.N.Y. 1988), the patent owner had no involvement in the development of the standard and did not in any way influence the committee into proposing this particular standard. The patent owner, however, believed that practicing the proposed standard would infringe its patent but did not disclose this belief or the identity of its patent to the committee. The patent owner then left the committee before the standard was formally adopted. 1988 WL 95479 at *6. Under these facts, the court, using an equitable estoppel theory, held that the patent was unenforceable:
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 33
§3.28
INTELLECTUAL PROPERTY LAW
Under these circumstances, plaintiff had a duty to speak out and call attention to his patent. . . . Plaintiff could not remain silent while an entire industry implemented the proposed standard and then when the standards were adopted assert that his patent covered what manufacturers believed to be an open and available standard. Id. Lucas Aerospace, Ltd. v. Unison Industries, L.P., 899 F.Supp. 1268 (D.Del. 1995), is not a national standard-setting case. Rather, in Lucas, the patent owner had encouraged a customer to adopt an internal standard that made the customer infringe. In this situation, the court declined to extend the rationale of the national standard-setting cases, such as Potter and Stambler, to solely private activity. 899 F.Supp. at 1294 – 1295. In Wang Laboratories, Inc. v. Mitsubishi Electronics America, Inc., 103 F.3d 1571 (Fed.Cir. 1997), a customer “coaxed” a supplier into the SIMMs market. The customer then had these SIMMs, which were covered by the customer’s patent, designated as a JEDEC standard. 103 F.3d at 1575 – 1576. Thus, the customer-patent owner used its patents and the standard to capture a supplier. Under this scenario, the court did not find that equitable estoppel prevented the customer-patent owner from enforcing its patent against the supplier. 103 F.3d at 1581. Rather, the court found that an implied license existed between the customer and the supplier. 103 F.3d at 1582. The primary difference between an estoppel analysis and an implied-license analysis is that in an implied-license analysis the focus is on whether the patent owner provided an affirmative grant of consent or permission to use the invention. An equitable-estoppel analysis, on the other hand, focuses on whether through misleading conduct the patent owner suggested that it would not enforce its patent. 103 F.3d at 1581. The distinction between a finding of equitable estoppel and implied license is not insignificant. Under an estoppel theory, the patent owner in Wang would have been barred from enforcing its patent against anyone who practiced the JEDEC standard. Under an implied-license theory, the patent owner was barred from enforcing its patents only against the particular supplier that it had induced into making the SIMMs. Thus, the patent owner was free to enforce its patent against anyone else who sold SIMMs meeting the JEDEC standard that also infringed. 103 F.3d at 1581 – 1582.
PRACTICE POINTERS
Obtain and understand the patent policy of the standard-setting organization.
Educate the employees who participate in the standard-setting organization about its patent policy.
Have internal review procedures in place to evaluate compliance with any patent policy.
Fully disclose to the standard-setting organization your understanding of patent policy.
Fully disclose what you will and will not license under that policy.
3 — 34
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.29
Townshend v. Rockwell International Corp., 55 U.S.P.Q.2d (BNA) 1011, 2000 WL 433505 (N.D.Cal. 2000), illustrates the importance of open and full disclosure to the standard-setting body. In this case, the patent owner identified that it had pending patent applications that related to its proposed standard and expressly provided to the standard body the terms under which it would license these applications should they issue as patents. 2000 WL 433505 at *16. These terms were very favorable to Townshend, requiring that the licensee pay relatively high royalties and grant licenses back on any improvements to the technology. Id. Under these facts, the court rejected the infringer’s arguments that the patents were unenforceable. Id. Thus, the issuance of the standard was at a minimum an acknowledgment that the terms and conditions of the license were reasonable. Moreover, full disclosure, such as this, to the standard-setting body prevents any of the legal theories that are used to find the patents unenforceable from being applicable.
VI. [3.29] PATENT MISUSE Misuse developed as a common-law equitable defense to accusations of patent infringement. Misuse is only a defense to an infringement charge; it does not give rise to an independent cause of action and does not give rise to damages. The sanction for a finding of misuse is that the patent is rendered unenforceable until such time as the misuse has been cured. B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1427 (Fed.Cir. 1997). Misuse was developed by courts to address situations in which a patentee improperly extended its patent rights to gain an unfair anticompetitive advantage. Misuse covers conduct far broader than that which gives rise to an antitrust violation. However, the licensing practices discussed in §§3.11 – 3.16 and §§3.18 – 3.24 above that raise antitrust issues also raise misuse issues. In particular, a licensing practice may avoid antitrust liability because the other elements of an antitrust case are absent yet still render the patent unenforceable for misuse. See generally Princo Corp. v. International Trade Commission, 616 F.3d 1318 (Fed.Cir. 2010); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 704 – 705 (Fed.Cir. 1992). The same general test for antitrust scrutiny, however, applies to misuse. An agreement should not give rise to misuse provided any restrictions in the agreement fall within the scope of the patent’s exclusive rights.
PRACTICE POINTERS
Contractual restrictions within the scope of exclusive rights should not give rise to patent misuse.
The time of the agreement should not extend beyond the last-to-expire patent.
The goods and services covered should not extend beyond the scope of the claim.
Noncoerced provisions extending rights for the mutual convenience of the parties should not constitute misuse.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 35
§3.29
INTELLECTUAL PROPERTY LAW
In 1988, Congress passed Pub.L. No. 100-703, 102 Stat. 4674, Title II of which is popularly known as the Patent Misuse Reform Act, which identified types of conduct that cannot be deemed misuse. The Act specifically provides that a patentee can refuse to license its patent or any of its individual rights associated with the patent. 35 U.S.C. §271(d). It also allows a patentee to condition the license or sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product. Id. However, the approval of this conduct is contingent on whether the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned. Id. If the patentee is shown to have market power in one of these areas, the patentee may still be subject to a finding of misuse. Thus, in Country Materials Corp. v. Allan Block Corp., 502 F.3d 730, 734 – 735 (7th Cir. 2007), the court summarized the law of misuse as follows: While at one time this argument might have had traction, in certain circumstances, it is at least disfavored today, if not entirely rejected. Today, the concept of patent misuse is cabined first by statute, 35 U.S.C. §271(d), which essentially eliminates from the field of “patent misuse” claims based on tying and refusals to deal, unless the patent owner has market power, and second by case law. As the Federal Circuit explained in Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860 (Fed.Cir. 1997), there are certain practices that court identified as “constituting per se patent misuse,” including “arrangements in which a patentee effectively extends the term of its patent by requiring post-expiration royalties.” Id. at 869; see also Brulotte v. Thys Co., 379 U.S. 29, 32, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964) (holding that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se”). The practices identified in §271(d), in contrast, may not be branded “misuse.” Va. Panel Corp., 133 F.3d at 869. If a practice is not per se unlawful nor specifically excluded from a misuse analysis by §271(d) a court must determine if that practice is reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims. If so, the practice does not have the effect of broadening the scope of the patent claims and thus cannot constitute patent misuse. If, on the other hand, the practice has the effect of extending the patentee’s statutory rights and does so with an anti-competitive effect, that practice must then be analyzed in accordance with the rule of reason. Under the rule of reason, the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect. Id. (internal citations and quotation marks omitted). The remedy resulting from a finding of misuse is unenforceability of the patent. Thus, a court of equity in a patent infringement suit may refuse to grant damages or an injunction to the
3 — 36
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.30
patentee. Misuse of a patent, however, can be cured. Misuse merely suspends the owner’s right to recover for infringement of a patent. Senza-Gel Corp. v. Seiffhart, 803 F.2d 661, 668 n.10 (Fed.Cir. 1986). In order to cure, the improper practice must have been fully abandoned and the consequences of the misuse must have been fully dissipated. Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 86 L.Ed. 363, 62 S.Ct. 402, 405 (1942).
VII. [3.30] INEQUITABLE CONDUCT All persons associated with an inventor who is seeking to obtain a patent are under an uncompromising duty of candor and good faith to the United States Patent and Trademark Office. 37 C.F.R. §1.56 sets forth this duty: (a) A patent by its very nature is affected with a public interest. The public interest is best served, and the most effective patent examination occurs when, at the time an application is being examined, the Office is aware of and evaluates the teachings of all information material to patentability. Each individual associated with the filing and prosecution of a patent application has a duty of candor and good faith in dealing with the Office, which includes a duty to disclose to the Office all information known to that individual to be material to patentability. . . . (b) [I]nformation is material to patentability when . . . (1) It establishes, by itself or in combination with other information, a prima facie case of unpatentability of a claim; or (2) It refutes, or is inconsistent with, a position the applicant takes [before the Office].
PRACTICE POINTER
All persons have an uncompromising duty to disclose material information to the USPTO. The rule of thumb in dealing with this duty is — if in doubt, disclose it.
In Therasense, Inc. v. Becton Dickenson & Co., 649 F.3d 1276 (Fed.Cir. 2011) (en banc), the Federal Circuit revisited the doctrine of inequitable conduct and significantly narrowed its reach. The court, in evaluating the history of the doctrine, focused on the fact that during its early development inequitable conduct was only found in situations in which there was “ ‘deliberately planned and carefully executed scheme[s] to defraud’ not only the PTO but also the courts.” 649 F.3d at 1287, quoting Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 88 L.Ed 1250, 64 S.Ct. 997, 1001 (1944). The Therasense court went on to note that this doctrine evolved into a “plagu[e] not only [for] the courts but also [for] the entire patent system [b]ecause allegations of inequitable conduct are routinely brought on ‘the slenderest grounds.’ ” 649 F.3d at 1289 quoting Burlington Industries, Inc. v. Dayco Corp., 849 F.2d 1418, 1422 (Fed.Cir. 1988).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 37
§3.30
INTELLECTUAL PROPERTY LAW
Thus, the Federal Circuit “tighten[ed] the standards for finding both intent and materiality in order to redirect a doctrine that has been overused to the detriment of the public.” 649 F.3d at 1290. Thus, the court held that to establish inequitable conduct the accused infringer must prove, by clear and convincing evidence, that the “patentee acted with the specific intent to deceive the PTO.” Id. In cases involving nondisclosure of information, the evidence must show that the patentee made a “deliberate decision to withhold a known material reference.” Id. Intent to deceive must be “the single most reasonable inference able to be drawn from the evidence.” Id. “Hence, when there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found.” 649 F.3d at 1290 – 1291. The court also significantly tightened the materiality standard, holding that “the materiality required to establish inequitable conduct is but-for materiality.” 649 F.3d at 1291. In so holding, the court expressly rejected using the USPTO’s definition of material, which is set out above in 37 C.F.R. §1.56. Id. These changes will greatly reduce the chances of an inequitable conduct finding. A finding of inequitable conduct will still render the entire patent unenforceable. Of equal importance, coming close to the line in this area will provide an infringer with a potential defense when it might otherwise have had none. Defending an inequitable conduct charge, even a meritless one, can be very time consuming, stressful, and costly. Thus, in dealing with the duty of candor, the rule of thumb should always be “if in doubt, disclose it to the USPTO.” Inequitable conduct had evolved to be broader and more inclusive than common-law fraud, but the Therasense court has limited it to common-law fraud. Thus, inequitable conduct requires a showing by clear and convincing evidence of two separate and distinct elements: a. deliberate intent to deceive the USPTO; and b. the patent would not have issued but for the deceptive conduct.
PRACTICE POINTER
Greatly heighted requirements to find inequitable conduct.
Must show by clear and convincing evidence actual intent to deceive the USPTO.
If any reasonable explanation exists, intent to deceive cannot be found.
Materiality is now but-for materiality — the patent would not have issued but for the deceptive conduct.
The court then balances these two elements to determine whether inequitable conduct has occurred. However, under the new heighted standards of actual deceptive intent and but-for materiality, it is unlikely that, once these two factors are found, a court would not reach the
3 — 38
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.30
conclusion that inequitable conduct has occurred. A finding of inequitable conduct renders the entire patent unenforceable and, in rare situations, may render an entire portfolio of patents unenforceable. See, e.g., Keystone Driller Co. v. General Excavator Co., 290 U.S. 240, 78 L.Ed. 293, 54 S.Ct. 146 (1933). Unlike a Walker Process claim, inequitable conduct, to date, is only a defense to a claim of infringement and not an affirmative cause of action. See the discussion of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 15 L.Ed.2d 247, 86 S.Ct. 347 (1965), in §3.25 above. However, a finding of inequitable conduct can form a basis for an award of attorneys’ fees against the patentee. Moreover, in light of Ritz Camera & Image, LLC. v. Sandisk Corp., 700 F.3d 503, 506 – 508 (Fed.Cir. 2012) (holding that direct purchaser of patent article has standing to sue patentee for Walker Process-based antitrust violation), inequitable conduct could readily be extended to permit a competitor or consumer to sue for unfair competition if the patentee concealed the best mode. This may very likely be the case because inequitable conduct has returned to being closely aligned with common-law fraud. The majority of prior inequitable conduct findings will not be sustainable under the test set out in Therasense. The following summary of these scenarios in which inequitable conduct was found under the old test provides guidance as to how significant this change in the law will be: a. Failure to name a coinventor gave rise to inequitable conduct in Frank’s Casing Crew & Rental Tools, Inc. v. PMR Technologies, Ltd., 292 F.3d 1363 (Fed.Cir. 2002). Under Therasense, supra, this conduct would probably not meet the deceptive intent requirement and would not meet the but-for materiality requirement. See 35 U.S.C. §§116(c), 256, which provide that errors in naming inventors can be corrected and will not invalidate a patent, and which remove the preLeahy-Smith America Invents Act requirement that the error be without deceptive intent. b. Writing prophetic (hypothetical) examples in the past tense was found to be inequitable conduct in Hoffman-La Roche, Inc. v. Promega Corp., 323 F.3d 1354 (Fed.Cir. 2003). Under Therasense, this conduct would not meet the deceptive intent requirement and would not meet the but-for materiality requirement. c. Providing only a partial translation of a prior art reference met the materiality element of inequitable conduct in LNP Engineering Plastics, Inc. v. Miller Waste Mills, Inc., 275 F.3d 1347 (Fed.Cir. 2001). However, there was no finding of inequitable conduct because of a total absence of intent. Under Therasense, the same outcome is likely. d. Submitting false affidavits to establish small entity status for the purpose of paying lower maintenance fees was found to meet the materiality element of inequitable conduct even though the activity occurred after the patent issued. Ulead Systems, Inc. v. Lex Computer & Management Corp., 351 F.3d 1139 (Fed.Cir. 2003). Under Therasense, this conduct would not meet the deceptive intent requirement and would not meet the but-for materiality requirement. Under Therasense, bad lawyering and gross negligence do not give rise to inequitable conduct. e. Failure to disclose references that cast doubt on the enablement of the invention gave rise to inequitable conduct in Bristol-Myers Squibb Co. v. Rhone-Poulenc Rorer, Inc., 326 F.3d 1226
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 39
§3.31
INTELLECTUAL PROPERTY LAW
(Fed.Cir. 2003). Under Therasense, this conduct would probably not meet the deceptive intent requirement, and only if the references established that the invention would not work, would they meet the but-for materiality requirement. f. Failure to cite an examiner’s rejection in one case to the examiner in a different case that involved the same issues and art met the materiality element of inequitable conduct in Dayco Products, Inc. v. Total Containment, Inc., 329 F.3d 1358 (Fed.Cir. 2003). Under Therasense, this conduct would probably not meet the deceptive intent requirement and would not meet the but-for materiality requirement. g. Failure to disclose a material prior art reference gave rise to inequitable conduct in Driscoll v. Cebalo, 731 F.2d 878 (Fed.Cir. 1984), and J.P. Stevens & Co. v. Lex Tex Ltd., 747 F.2d 1553 (Fed.Cir. 1984). Under Therasense, this conduct would probably not meet the deceptive intent requirement and may not meet the but-for materiality requirement. In nondisclosure cases, there will generally be too many passable explanations to establish deceptive intent. h. Failure to disclose the patentee’s own sales and use of the invention, which occurred more than a year before the filing date, gave rise to inequitable conduct in Gardco Manufacturing, Inc. v. Herst Lighting Co., 820 F.2d 1209 (Fed.Cir. 1987). Under Therasense, this conduct may likely not meet the deceptive intent requirement and would meet the but-for materiality requirement. i. Falsely stating in a “petition to make special” that a patent search was conducted gave rise to inequitable conduct in General Electro Music Corp. v. Samick Music Corp., 19 F.3d 1405, 1407 (Fed.Cir. 1994). Under Therasense, this conduct would probably not meet the deceptive intent requirement and would not meet the but-for materiality requirement.
PRACTICE POINTER
Although the risk of an inequitable conduct charge and finding have been significantly reduced, the rule of thumb in dealing with the duty of disclosure should still be — if in doubt, disclose it. This rule will always provide for a stronger patent and only serve to further reduce any risk of an inequitable conduct charge.
VIII. [3.31] ABILITY TO CURE INEQUITABLE CONDUCT UNDER THE LEAHY-SMITH AMERICA INVENTS ACT The Leahy-Smith America Invents Act added 35 U.S.C. §257, which gives patent owners the ability to seek supplemental examination of an issued patent. This section took effect September 16, 2012, and applies to all patents, whenever issued. See AIA §12(c). Section 257(c)(1) provides that
3 — 40
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.31
[a] patent shall not be held unenforceable on the basis of conduct relating to information that had not been considered, was inadequately considered, or was incorrect in a prior examination of the patent if the information was considered, reconsidered, or corrected during a supplemental examination of the patent. This section further provides that making or not making a request for supplemental examination “shall not be relevant to enforceability” of the patent. Id. Notably, this provision does not limit a patent challenger’s ability to use a patentee’s failure to make a supplemental examination request as a basis to establish an exceptional case, or as evidence in an antitrust case, unfair competition case, or FTC action. Thus, under §257 a patent owner will be able to correct (i.e., cure) accidental and potentially even intentional prior prosecution mistakes and wrongdoing. Raising these issues through supplemental examination will prevent them from being raised during patent litigation. There are, however, important timing considerations. The ability to effectively cure prior prosecutorial mistakes and misconduct will not apply to issues that have been alleged in a civil action or an abbreviated new drug application filing before they were raised in a request for supplemental examination. 35 U.S.C. §257(c)(2)(A). Significantly, for International Trade Commission (ITC) proceedings, the supplemental examination must be completed, not just requested, before the commencement of the ITC action in order to take advantage of the ability to cure prior prosecutorial mistakes and misconduct under §257(c)(1). 35 U.S.C. §257(c)(2)(B). Section 257 has two additional exceptions that may turn out to be important. The first exception provides that the Director of the United States Patent and Trademark Office is not restricted and may pursue evidence that fraud was committed in the underlying prosecution. 35 U.S.C. §257(e). This provision suggests that fraud cannot be cured under §257(c)(1).
PRACTICE POINTERS
Supplemental examination under §257 raises complex and important timing, ethical, and privilege issues.
To cure prior prosecutorial mistakes or misconduct, the request should be filed before litigation commences.
Supplemental examination may have no effect on fraud, unfair competition, antitrust, and FTC actions.
Privileged material may have to be disclosed in the supplemental examination requests.
Additionally, the fraud provision creates situations in which very complex ethical, client relations, and privilege issues may arise and converge. For example, trial counsel discovers potential fraud in preparing for litigation, e.g., (a) an invoice for the sale of an item that may constitute an on-sale bar or (b) an e-mail from in-house counsel to the prosecuting lawyer, at the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 41
§3.32
INTELLECTUAL PROPERTY LAW
litigator’s law firm, rationalizing or planning on how to hide the potential on-sale activity, depending on the reader’s viewpoint. Clearly, to cure the potential inequitable conduct, the invoice must be disclosed in the supplemental examination request. The e-mail should also be disclosed to cure the potential inequitable conduct and also to meet the requester’s duty-ofdisclosure obligations. However, the disclosure of the e-mail raises complex ethical, waiver of privilege, and client relations issues.
IX. [3.32] BEST-MODE REQUIREMENT RISKS TO PRACTITIONERS AND CLIENTS UNDER THE LEAHY-SMITH AMERICA INVENTS ACT The Leahy-Smith America Invents Act amended 35 U.S.C. §282(b)(3)(A) to remove failure to comply with the best-mode requirement as “a basis on which any claim of a patent may be canceled or otherwise held invalid or unenforceable.” This change to the law took effect September 16, 2011, and applies to all proceedings pending on and after that date. AIA §15(c). The AIA, however, does not remove the best-mode requirement from the patent laws. See 35 U.S.C. §112(a) (“The specification . . . shall set forth the best mode contemplated by the inventor or joint inventor of carrying out the invention.”). Thus, patent practitioners will still have an ethical obligation to determine and disclose the best mode. The disclosure of the best mode must be made even in situations in which an inventor or client would prefer not to do so. Maintaining the best mode as a requirement for patentability opens practitioners up to the risk of collateral accusations of wrongdoing for failing to meet that requirement and potentially being named as defendants in antitrust, unfair competition, and FTC actions.
PRACTICE POINTERS
The AIA does not remove the best-mode requirement from §112.
Patent practitioners are still ethically obligated to determine and disclose the best mode.
Under the AIA, failure to disclose the best mode may still result in
•
fraud accusations against practitioners, inventors, and patent owners;
•
reduced damages;
•
inability to obtain injunctive relief; and
•
antitrust, unfair competition, and FTC actions.
Moreover, the AIA’s restriction on defenses based on a failure to meet the best-mode defense is limited to 35 U.S.C. §282. Thus, it does not appear that the AIA excuses the intentional or fraudulent withholding of the best mode from rendering the patent invalid or unenforceable. Such
3 — 42
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.33
a defense would focuses on, and be based on, the fraudulent intent and the defrauding of the United States Patent and Trademark Office rather than a failure to meet the best-mode requirement. Thus, the AIA may have the exact opposite effect of what was desired, moving bestmode defenses into more vitriolic, fraud-based claims. Further, the AIA does not restrict evidence of a failure to meet the best-mode requirement from being considered in other contexts, such as damages, injunctions, exceptional case, antitrust laws, FTC actions, and unfair competition laws. For example, the rationale of Ritz Camera & Image, LLC v. Sandisk Corp., 700 F.3d 503, 506 – 508 (Fed.Cir. 2012), holding that a direct purchaser of a patent article has standing to sue the patentee for a Walker Process-based antitrust violation, could readily be extended to permit a competitor or consumer to sue for unfair competition if the patentee concealed the best mode. Thus, in the damages context, the failure to meet the best-mode requirement could provide a basis for substantially reduced damages. For example, there are at least two theories for this approach. First, it can be argued that it would be unfair to permit the patent owner to have full recovery under the patent since it did not live up to its half of the bargain and disclose to the public the best way of practicing the invention. Second, it can be argued that by withholding the best mode, the patentee was attempting to extend its monopoly, or get two monopolies for a single invention, by keeping the best way to use the invention as a trade secret. Thus, these arguments could be framed around the theme that substantially lower damages would be appropriate because the patentee has kept the best (i.e., most valuable) part of the invention out of the patent. In the context of an injunction, the failure to meet the best-mode requirement may prevent preliminary and permanent injunctions from issuing. The same arguments as to damages are easily, and perhaps even more appropriately, cast into equitable considerations.
X.
[3.33] FIRST-SALE DOCTRINE; EXHAUSTION OF PATENT RIGHTS
Basically, when a patentee sells a patented article, all patent rights on that article are exhausted, and the patentee cannot enforce those rights against the first or subsequent purchasers. Thus, this doctrine has become known as the first-sale doctrine or the exhaustion doctrine. The doctrine applies to all sales by the patentee, its licensees, and other authorized sellers. See, e.g., Lexmark International, Inc. v. Impression Products, Inc., 816 F.3d 721, 726 (Fed.Cir. 2016). This doctrine can pose significant risks to the patentee if downstream products or parallel markets have higher value or are significant to the patentee. In these situations, the doctrine can significantly reduce the value of an invention by permitting competitors to use the patentee’s own articles to compete against the patentee in the high value or parallel market. These risks can be significant in areas such as seeds and crops, raw materials, disposable devices and parts, and component parts for larger systems.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 43
§3.33
INTELLECTUAL PROPERTY LAW
PRACTICE POINTERS
The first-sale doctrine, if not restricted, permits purchases to sell, use, reuse, and resell the purchased item in any manner.
The first-sale doctrine applies on an item-by-item basis.
The first-sale doctrine applies to all domestic sales.
The first-sale doctrine does not apply to foreign sales.
While a patentee may wish to sell its patented products into one market at a lower price, it might not want to see those same products resold into a higher priced and more profitable market in competition with its own sales. It is important for patentees to recognize this issue early in a product’s life cycle and identify any risks to price, profit, and their competitive situation. If such risks exist, the patentee should place restrictions on all products that it authorizes to be placed into the stream of commerce. These restrictions, however, can draw challenges based on patent misuse and antitrust theories. Thus, they must be carefully tailored for each particular situation. However, if properly drafted, these restrictions are generally upheld and enforced, permitting the patentee to effectively control the movement of its products through the stream of commerce. In Bowman v. Monsanto Co., __ U.S. __, 185 L.Ed.2d 931, 133 S.Ct. 1761, 1764 (2013), the Court addressed whether a patentee could prohibit a farmer who bought patented seeds from reproducing the seeds by planting and harvesting them in order to regrow additional crops. The Court held that the patent could prohibit such use of the newly grown seeds. Id. The Court in Bowman first articulated the doctrine: The doctrine of patent exhaustion limits a patentee’s right to control what others can do with an article embodying or containing an invention. Under the doctrine, “the initial authorized sale of a patented item terminates all patent rights to that item.” . . . And by “exhaust[ing] the [patentee’s] monopoly” in that item, the sale confers on the purchaser, or any subsequent owner, “the right to use [or] sell” the thing as he sees fit. [Citations omitted.] 133 S.Ct. at 1766. Thus, the Bowman Court noted that the patentee could not enforce the patent against the farmer to stop the farmer from planting the seeds, feeding them to livestock, and then selling the livestock or reselling the seeds. Id. In Bowman, the patentee had not placed any contractual limits on resale. The Court, however, expressly noted that the first-sale doctrine only applies to the particular item sold. Thus, it did not apply to, and did not give the farmer the right to create (i.e., grow and reuse) new patented seeds. 133 S.Ct. at 1767 – 1768. In Lexmark, supra, the Federal Circuit evaluated the type of contractual restrictions, and other restrictions, that can be placed on an article to limit the application of the first-sale doctrine.
3 — 44
WWW.IICLE.COM
PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT
§3.33
First, the court reaffirmed the nature of the first-sale doctrine and that it applies to all authorized sales. “The doctrine of patent exhaustion (or ‘first sale’ doctrine) addresses the circumstances in which a sale of a patented article (or an article sufficiently embodying a patent), when the sale is made or authorized by the patentee, confers on the buyer the ‘authority’ to engage in acts involving the article, such as resale, that are infringing acts in the absence of such authority.” 816 F.3d at 726. Lexmark then went on to expressly hold that restrictions on the first-sale doctrine are permitted to a patentee. Thus, “a patentee, when selling a patented article subject to a singleuse/no-resale restriction that is lawful and clearly communicated to the purchaser, does not by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied.” Id.
PRACTICE POINTERS
The first-sale doctrine results in the patentee’s loss of all control over all downstream activities with the patented item.
The first-sale doctrine can result in a patentee unknowingly establishing its own competitor.
Contractual restrictions on the first-sale doctrine are permissible, but they must be clearly communicated to the purchaser.
To protect long-term value of a patented invention, the patentee must take a long-term and broad view of the invention’s value proposition and restrict the first-sale doctrine to protect that value proposition.
The ability to restrict downstream activity can be placed on licensees and authorized sellers, as well as direct purchasers. Id. It is significant, however, that these restrictions are not really restrictions in the sense of enforceable rights to stop activity. They instead are carveouts, in which the patentee is reserving the right to enforce the patent against certain stated activities. Thus, it is not the contract or terms of sale that are enforced against the downstream purchaser, but, rather, it is the patent itself. 816 F.3d at 727 (viewing restrictions on first-sale doctrine as way for patentee to “preserve its §271 rights”). Additionally, a sale abroad does not trigger the first-sale doctrine as to U.S. patent rights, even if there are no restrictions placed on that sale. Id. A significant risk to a patentee can come early in a patented invention’s product life cycle or in the growth of the company. In these early stages of commercial activity, there can be considerable pressure to get sales quickly and to show increasing sales numbers. This drive for quickly increasing sales can result in the patentee signing longer-term sales contracts, distributorship agreements, and licenses for its first-generation product. The problem that may not be foreseen is that these first-generation products, having the benefit of the first-sale doctrine, can be resold or reused in their original markets as well as other markets that directly compete
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
3 — 45
§3.33
INTELLECTUAL PROPERTY LAW
with the patentee’s later sales of high profit second- and third-generation products. In essence, to get quick sales early, and because of its failure to restrict the first-sale doctrine, the patentee has unwittingly established a long-term competitor. To avoid this problem, it is important that the patentee takes a very long-term and broad (e.g., across may markets and applications) view of its invention’s value. With this long-term value proposition in mind, the patentee should carefully place restriction on later downstream activity for any high-volume direct sales, long-term sales agreements, distributorship agreements, and licensee agreements it enters into. The patentee, especially early in an invention’s product life cycle, must protect and control the long-term value proposition for that invention. A key element in this protection is clearly communicated and carefully drafted restrictions on the first-sale doctrine that accompany the sale of any patented product.
3 — 46
WWW.IICLE.COM
4
The Attorney-Client Privilege and the Work-Product Immunity Doctrine
GLEN P. BELVIS Steptoe & Johnson LLP Chicago
®
©COPYRIGHT 2017 BY IICLE .
4—1
INTELLECTUAL PROPERTY LAW
I. [4.1] Introduction II. Attorney-Client Privilege in General A. B. C. D.
[4.2] Elements of and Policies Behind the Attorney-Client Privilege [4.3] Confidentiality Requirement [4.4] Facts and Business Advice Are Not Protected [4.5] Application of the Attorney-Client Privilege to Corporations 1. [4.6] The Control-Group Test 2. [4.7] The Subject-Matter Test
III. [4.8] Work-Product Immunity in General IV. [4.9] Waiver V. Controlling Law and Standards A. [4.10] Choice of Law B. [4.11] Burden of Proof C. [4.12] Appellate Review VI. Patent Prosecution A. B. C. D.
[4.13] [4.14] [4.15] [4.16]
In General Patent Agents Foreign Patent Prosecution Work-Product Protection for Patent Prosecution Activities
VII. [4.17] Typical Patent Department Communications A. B. C. D. E. F. G. H.
4—2
[4.18] [4.19] [4.20] [4.21] [4.22] [4.23] [4.24] [4.25]
Invention Submission Forms Draft Patent Applications Inventor Sign-Off Forms Internal Patent Department Checklists Attorney Notes Invention Review Committees Draft Agreements Invalidity Opinions and Noninfringement
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
VIII. [4.26] Commonality of Interest Doctrine A. B. C. D. E.
[4.27] [4.28] [4.29] [4.30] [4.31]
Multiple Accused Infringers Manufacturer-Buyer Indemnitor-Indemnitee Licensor-Licensee Mergers and Acquisitions
IX. Reliance on Opinion of Counsel and Waiver A. [4.32] Enhanced Damages B. [4.33] Knorr-Bremse 1. [4.34] No Presumption of Willfulness for Asserting the Attorney-Client Privilege 2. [4.35] No Presumption of Willfulness for Failing To Seek the Advice of Counsel 3. [4.36] No Presumption of Willfulness in a Close Case C. [4.37] EchoStar D. [4.38] Seagate and Its Overruling by Halo E. [4.39] 35 U.S.C. §298 X. [4.40] Federal Rule of Evidence 502 A. [4.41] Federal Rule of Evidence 502(a) — Intentional Disclosure and the Scope of Waiver B. [4.42] Federal Rule of Evidence 502(b) — Inadvertent Disclosure and the Scope of Waiver C. [4.43] Federal Rules of Evidence 502(c) – 502(f) — State Proceedings and Private Agreements
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4—3
§4.1
I. [4.1]
INTELLECTUAL PROPERTY LAW
INTRODUCTION
The attorney-client privilege is the oldest privilege for confidential communications in the common law. In re Seagate Technology, LLC, 497 F.3d 1360, 1372 (Fed.Cir. 2007) (en banc). Nevertheless, the application of the attorney-client privilege and the work-product immunity doctrine to the practice of patent law is highly complex and fraught with conflicting and irreconcilable caselaw. In fact, because of fundamental misunderstandings by several lower courts, it was not until 1963 that the U.S. Supreme Court resolved the issue of whether practicing before the United States Patent and Trademark Office (USPTO) constituted the practice of “law” and was entitled to the protection of the attorney-client privilege. Sperry v. State of Florida ex rel. Florida Bar, 373 U.S. 379, 10 L.Ed.2d 428, 83 S.Ct. 1322 (1963). Fortunately, the Supreme Court held that practicing before the USPTO was the practice of law. Nevertheless, the highly complex nature of practicing patent law before the USPTO and in litigation, the complex subject technologies, and the global business strategies that a patent lawyer must address make the proper application and evaluation of the attorney-client privilege in patent-related matters problematic. Although it may not be the rule, it certainly is not the exception that communications that on their face appear to be and were believed to be protected by the attorney-client privilege are found to be unprotected and disclosed in litigation. Additionally, until the mid-2000s patent law was one of the few areas of law in which parties were forced to waive their attorney-client privilege or face punitive damages. This Hobson’s choice created a greater likelihood that privileged communications would lose their protection and be disclosed in litigation. From 2004 to 2007, the caselaw regarding privilege, waiver, and punitive damages in patent cases substantially changed. It is now much less likely that a party will need to waive the attorney-client privilege to avoid punitive damages in patent litigation. See §§4.32 – 4.38 below. This change in the law continued with the adoption of a 2008 amendment to the Federal Rules of Evidence that greatly strengthened the attorney-client privilege and reduced the cost of protecting that privilege in litigation. See §§4.40 – 4.43 below. Further, the Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat. 284 (2011), to a certain extent codifies the changes made by the caselaw. See §4.39 below. This chapter reviews the law and pragmatic efforts of attorney-client privilege and workproduct immunity as they apply to patent-related matters. It is important, however, to remember that the law in this area is sui generis and that those communications that are believed to be privileged and thus protected from discovery may not be. Thus, the practice of patent law requires that greater care be taken than in most areas of the law when committing positions to writing. Thus, in spite of Sperry, supra, and In re Queen’s University at Kingston, 820 F.3d 1287 (Fed.Cir. 2016) (express finding patent agent privilege), a Texas state appellate court came to an entirely difference conclusion, finding that patent agent-client communications were not privileged. In re Silver, 119 U.S.P.Q.2d (BNA) 1758, 2016 WL 4386004 (Tex.App. 2016).
4—4
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.2
II. ATTORNEY-CLIENT PRIVILEGE IN GENERAL A. [4.2] Elements of and Policies Behind the Attorney-Client Privilege The attorney-client privilege protects communications between lawyers and their clients. The privilege belongs to the client, not the lawyer. It provides the client the right to refuse to disclose and to prevent others from disclosing confidential communications made while seeking or rendering legal advice. In re Seagate Technology, LLC, 497 F.3d 1360, 1372 (Fed.Cir. 2007) (en banc); In re EchoStar Communications Corp., 448 F.3d 1294, 1300 – 1301 (Fed.Cir. 2006); American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 745 (Fed.Cir. 1987); In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 383 (D.D.C. 1978); Handgards, Inc. v. Johnson & Johnson, 413 F.Supp. 926, 929 (N.D.Cal. 1976). The privilege balances competing policies of the need for the client to obtain fair and frank advice and the need to find relevant information: To induce clients to make such communications [of pertinent facts], the privilege to prevent their later disclosure is said by courts and commentators to be a necessity. The social good derived from the proper performance of the functions of lawyers acting for their clients is believed to outweigh the harm that may come from the suppression of the evidence in specific cases. United States v. United Shoe Machinery Corp., 89 F.Supp. 357, 358 (D.Mass. 1950), quoting Comment to American Law Institute Model Code of Evidence Rule 201. Thus, the attorney-client privilege serves the important public policy of fostering “full and frank communication between attorneys and their clients and thereby promote[s] broader public interest in the observance of law and administration of justice.” Upjohn Co. v. United States, 449 U.S. 383, 66 L.Ed.2d 584, 101 S.Ct. 677, 682 (1981). See EchoStar, supra, 448 F.3d at 1300 – 1301 (“We recognize the privilege in order to promote full and frank communication between a client and his attorney so that the client can make well-informed legal decisions and conform his activities to the law.”). See also Seagate, supra; American Standard, supra; Vardon Golf Co. v. Karsten Manufacturing Corp., 213 F.R.D. 528, 531 (N.D.Ill. 2003). These benefits, however, come at a cost: When the privilege shelters important knowledge, accuracy declines. Litigants may use secrecy to cover up machinations, to get around the law instead of complying with it. Secrecy is useful to the extent it facilitates the candor necessary to obtain legal advice. The privilege extends no further. In re Feldberg, 862 F.2d 622, 627 (7th Cir. 1988). See also Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 522 (S.D.N.Y. 1992). In Nishika, Ltd. v. Fuji Photo Film Co., 181 F.R.D. 465, 468 (D.Nev. 1998), the court, quoting Pearse v. Pearse, 1 DeG. & Sm. 28-9, 16 L.J.Ch. 153 (1846), eloquently summarized these conflicting policies: Truth, like all other good things, may be loved unwisely — may be pursued too keenly — may cost too much. And, surely the meanness and the mischief of prying into a man’s confidential consultations with his legal advisor, the general evil of
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4—5
§4.2
INTELLECTUAL PROPERTY LAW
infusing reserve and dissimulation, uneasiness, and suspicion and fear, into those communications which must take place, and which unless a condition of perfect security, must take place uselessly or worse, are too great a price to pay for the truth itself. The attorney-client privilege protects all types of communications, whether written or oral, provided that the requirements to maintain the privilege have been met. EchoStar, supra, 448 F.3d at 1301; Handgards, supra.
PRACTICE POINTER
To be subject to the attorney-client privilege and thus shielded from discovery, the communication 1. must be confidential; 2. must request legal advice; and 3. must be made to a legal professional.
As a general rule, a communication is privileged if three primary factors are present: (1) the communication is or relates to a request for legal advice; (2) the communication is made to a professional legal adviser in his or her capacity as such for the purpose of obtaining legal advice; and (3) the communication is made in confidence. See In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 805 (Fed.Cir. 2000) (“central inquiry is whether the communication is one that was made by a client to an attorney for the purpose of obtaining legal advice or services”); Genentech, Inc. v. United States International Trade Commission, 122 F.3d 1409, 1415 (Fed.Cir. 1997) (“The attorney-client privilege protects the confidentiality of communications between attorney and client made for the purpose of obtaining legal advice.”); American Standard, supra, 828 F.2d at 745 (privilege “protects communications made in confidence by clients to their lawyers for the purpose of obtaining legal advice”); Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 534 (N.D.Ill. 2000) (“the question is: does the document in question reveal, directly or indirectly, the substance of a confidential attorney-client communication”). Many cases and commentators have expanded this test into eight or more factors by subdividing these factors or adding other factors regarding the effect of the privilege, such as that the client controls the privilege. See, e.g., Cavallaro v. United States, 284 F.3d 236, 245 (1st Cir. 2002), in which the court, quoting 8 John Henry Wigmore, WIGMORE ON EVIDENCE §2292 (McNaughton rev. 1961), set out an eight-factor test: (1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) except the protection be waived.
4—6
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.4
See also McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 251 (N.D.Ill. 2000); Radiant Burners, Inc. v. American Gas Ass’n, 320 F.2d 314, 318 – 319 (7th Cir. 1963); Smithkline, supra; Vardon Golf, supra. Regardless of the additional factors or the way in which they are subdivided, the three primary factors (with confidentiality being the most critical and problematic) must always be present before a communication can be privileged. B. [4.3] Confidentiality Requirement It is the communication with the lawyer that must be confidential, not the subject matter of the communication. Thus, a confidential communication with a lawyer about facts that are generally known (e.g., the prior art) nevertheless meets the confidentiality requirement for privilege to apply. In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 388 – 390 (D.D.C. 1978). The privilege historically has been applied to protect confidences that the client communicated to the lawyer (i.e., client-to-lawyer communications): Strictly speaking, the privilege applies only to communications made by the client to the lawyer, but in practice it is generally impossible to separate those communications from the ones made by the attorney to the client, particularly when the attorney communications will reveal the substance of the ones made by the client that are privileged. Ampicillin, supra, 81 F.R.D. at 388 n.20. The same cannot be said for lawyer-to-client communications, which may or may not be privileged. It is the client confidences that are central to the privilege, not the advice that the lawyer may render. Thus, legal advice that does not in itself disclose, directly or indirectly, the substance of the confidential communication by the client is not privileged. American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 745 (Fed.Cir. 1987); Vardon Golf Co. v. Karsten Manufacturing Corp., 213 F.R.D. 528, 531 (N.D.Ill. 2003); Ampicillin, supra, 81 F.R.D. at 394. As discussed in §4.25 below, this rule can have significant effects on legal opinions that address the invalidity of a competitor’s patents. Similarly, the eight-part test from 8 John Henry Wigmore, WIGMORE ON EVIDENCE §2292 (McNaughton rev. 1961) (see §4.2 above), on its face would apply only to communications from the client to the lawyer and not to the advice that the lawyer rendered back to the client. Courts, however, have generally held that the advice rendered by the lawyer in response to a privileged communication is also protected, usually under the rationale that the advice expressly or inherently reflects the confidential communication from the client to the attorney. See, e.g., Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 517 (S.D.N.Y. 1992). C. [4.4] Facts and Business Advice Are Not Protected The factor requiring that the communication be made to a lawyer in his or her capacity as a lawyer for the purpose of obtaining legal advice has given rise to the corollary rule that the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4—7
§4.4
INTELLECTUAL PROPERTY LAW
attorney-client privilege does not protect business communications and advice. In particular, the privilege does not apply to the activities of in-house counsel when counsel is making business decisions or providing business advice. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 253 – 254 (N.D.Ill. 2000); Sneider v. Kimberly-Clark Corp., 91 F.R.D. 1, 4 (N.D.Ill. 1980). See also Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 538 (N.D.Ill. 2000) (agendas for meetings that were authored by lawyers did not implicate legal advice and thus were not privileged). Thus, the privilege would not apply to a business report that categorized and analyzed the competitors and their patents in a particular industry. McCook Metals, supra. This corollary rule is significant to the manner in which corporate patent department communication and meetings are structured. See §§4.17 – 4.25 below. The privilege protects communications seeking legal advice, not facts, from being discovered: [T]he privilege should protect only the client’s communications to the attorney . . . and not facts or other Information contained in the communication. In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 389 (D.D.C. 1978). The Ampicillin court elaborated on this point with the following example: Thus, a status report on the corporation’s activities does not become immune from discovery merely because a copy is transmitted to counsel with no accompanying request for legal advice. Nor do minutes of meetings become privileged by the mere presence of counsel. 81 F.R.D. at 385 n.9. Similarly, providing an otherwise nonprivileged document to an attorney will not prevent the document from being discovered. McCook Metals, supra, 192 F.R.D. at 254 (letter from competitor forwarded to lawyer not privileged); Sneider, supra, 91 F.R.D. at 4 (“the courts will not permit the corporation to merely funnel papers through the attorney in order to assert the privilege”).
PRACTICE POINTER
Things that are not protected by the attorney-client privilege and thus not shielded from discovery include 1. business documents in the lawyer’s possession; 2. business advice; 3. technical advice; and 4. underlying facts.
The facts underlying a privileged communication, separate from the communication itself, also are not protected by the privilege and should always be discoverable. Sneider, supra, 91
4—8
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.7
F.R.D. at 4 (“the well-established rule [is] that only the communications, not underlying facts, are privileged”). Thus, while the communications from an inventor to a patent lawyer for the purposes of drafting a patent application are protected, the underlying facts and data regarding the invention are not. The effect of the privilege is to indirectly block access to this kind of information by shielding the discussions between the lawyer and the inventor. It does not prevent full discovery of every fact, document, and test that the inventor knows or created in the course of developing the invention. Advanced Cardiovascular Systems, Inc. v. C.R. Bard, Inc., 144 F.R.D. 372, 374 (N.D.Cal. 1992). D. [4.5] Application of the Attorney-Client Privilege to Corporations The application of the attorney-client privilege in the context of a corporate client is complex. See generally Radiant Burners, Inc. v. American Gas Ass’n, 320 F.2d 314 (7th Cir. 1963) (extending privilege to corporations and containing detailed and well-reasoned analysis of privilege law). The fact that corporate clients are inanimate, artificial entities that can communicate with their attorneys only through their agents makes it difficult to determine when the confidentiality requirement for privileged communications has been met — how many agents and employees may know about the lawyer communications before confidentiality is destroyed? Two approaches, the control-group test and the subject-matter test, have been developed to address this issue, both of which should be kept in mind when developing procedures and practices for a corporate patent department. Sections 4.6 and 4.7 below detail these two approaches. See also §§4.17 – 4.25 below, discussing typical patent department communications. 1. [4.6] The Control-Group Test The first and narrower approach is known as the “control-group test.” To maintain the attorney-client privilege, this test requires that access to the communication be limited to personnel within the corporation who had authority to act on the legal advice rendered. If the communication or advice was disseminated beyond this “control group,” then the confidentiality requirement is not met and the protection of the privilege is lost. See In re Ampicillin Antitrust Litigation, 81 F.R.D. 377 (D.D.C. 1978) (discussing but not applying control-group test); City of Philadelphia v. Westinghouse Electric Corp., 210 F.Supp. 483 (E.D.Pa. 1962). See generally Upjohn Co. v. United States, 449 U.S. 383, 66 L.Ed.2d 584, 101 S.Ct. 677, 683 – 685 (1981) (tax case discussing and criticizing shortcomings of control-group test). 2. [4.7] The Subject-Matter Test The second, broader, and more widely accepted test is known as the “subject-matter test.” See Cuno, Inc. v. Pall Corp., 121 F.R.D. 198, 200 (E.D.N.Y. 1988). Under this test, for the communication to be privileged, the following must apply: a. The communication must have been made for the purpose of securing legal advice. b. The subject matter of the communication must have been within the scope of the employee’s duties.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4—9
§4.8
INTELLECTUAL PROPERTY LAW
c. The communication must not have been disseminated beyond persons with a need to know the information. In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 385 (D.D.C. 1978) (discussing subject-matter test but applying broader test). See also Diversified Industries, Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978) (en banc). The subject-matter test has also been called the “Harper & Row test,” based on Harper & Row Publishers, Inc. v. Decker, 423 F.2d 487 (7th Cir. 1970), aff’d, 91 S.Ct. 479 (1971). The Northern District of Illinois has succinctly articulated the subject-matter test: If the agent [of the corporate client] is in possession of information acquired in the ordinary course of business relating to the subject matter of his employment, and the information is communicated confidentially to corporate counsel to assist him in giving legal advice to the corporation, then the communication is privileged. Sneider v. Kimberly-Clark Corp., 91 F.R.D. 1, 3 (N.D.Ill. 1980), quoting United States v. Upjohn Co., 600 F.2d 1223, 1226 (6th Cir. 1979), rev’d, 101 S.Ct. 677 (1981).
III. [4.8] WORK-PRODUCT IMMUNITY IN GENERAL The work-product immunity doctrine is distinct from, and broader than, the attorney-client privilege. The work-product doctrine protects a lawyer’s materials that were prepared in anticipation of litigation. Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 539 – 540 (N.D.Ill. 2000); Radiant Burners, Inc. v. American Gas Ass’n, 320 F.2d 314, 323 (7th Cir. 1963) (noting that attorney work-product rule “is something separate and apart from the attorney-client privilege”). Thus, unlike the attorney-client privilege, the work-product doctrine can protect documents that do not necessarily relate to a communication with a client. Also, unlike the attorney-client privilege, the lawyer, in conjunction with the client, holds the work-product protection. See Genentech, Inc. v. United States International Trade Commission, 122 F.3d 1409, 1415 (Fed.Cir. 1997) (“The work product privilege protects the attorney’s thought processes and legal recommendations.”), quoting Zenith Radio Corp. v. United States, 764 F.2d 1577, 1580 (Fed.Cir. 1985). The work-product doctrine was first enunciated by the Supreme Court in Hickman v. Taylor, 329 U.S. 495, 91 L.Ed. 451, 67 S.Ct. 385, 393 – 394 (1947), in which the Court set forth the policy and rule for this doctrine: Historically, a lawyer is an officer of the court and is bound to work for the advancement of justice while faithfully protecting the rightful interests of his clients. In performing his various duties, however, it is essential that a lawyer work with a certain degree of privacy, free from unnecessary intrusion by opposing parties and their counsel. . . . This work is reflected, of course, in interviews, statements, memoranda, correspondence, briefs, mental impressions, personal beliefs, and countless other tangible and intangible ways — aptly though roughly termed by the Circuit Court of Appeals in this case (153 F.2d 212, 223) as the “Work product of the lawyer.” Were such materials open to opposing counsel on mere demand, much of what is now put down in writing would remain unwritten. An attorney’s
4 — 10
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.8
thoughts, heretofore inviolate, would not be his own. Inefficiency, unfairness and sharp practices would inevitably develop in the giving of legal advice and in the preparation of cases for trial. The effect on the legal profession would be demoralizing. The Court’s warning about unfairness, sharp practices, and demoralization of the legal profession has come to fruition in patent litigation. As addressed in detail in §§4.9 and 4.32 – 4.39 below, the issue of waiver of attorney-client privilege and work-product immunity has become a significant, confusing, and costly subset of virtually every patent litigation. The work-product doctrine was codified in 1970 by the addition of Federal Rule of Civil Procedure 26(b)(3). See Vardon Golf Co. v. Karsten Manufacturing Corp., 213 F.R.D. 528, 533 – 534 (N.D.Ill. 2003). Rule 26(b)(3) provides: Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent). But, subject to Rule 26(b)(4), those materials may be discovered if: (i) they are otherwise discoverable under Rule 26(b)(1); and (ii) the party shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means. Unlike the attorney-client privilege, the work-product doctrine has been limited by some courts to apply only to documents. In re EchoStar Communications Corp., 448 F.3d 1294, 1301 (Fed.Cir. 2006) (“[u]nlike the attorney-client privilege, which protects all communication whether written or oral, work-product immunity protects documents and tangible things”); Akeva L.L.C. v. Mizuno Corp., 243 F.Supp.2d 418, 422 (M.D.N.C. 2003) (work-product immunity does not apply to oral communications). This distinction, however, finds no support in Hickman or Rule 26(b)(3) and was put to rest, at least for patent litigations, by the Federal Circuit, which stated in In re Seagate Technology, LLC, 497 F.3d 1360, 1376 (Fed.Cir. 2007) (en banc): “We agree that work product protection remains available to ‘nontangible’ work product.”
PRACTICE POINTERS
Work-product immunity protects materials prepared in anticipation of litigation. The anticipated litigation must be specific as to both the issue and the adversary. A general belief that litigation happens all the time is insufficient to form a basis for work-product protection.
Care should be taken when asserting the work-product immunity protection because the facts needed to establish that protection are very similar to the facts that create the duty to preserve documents. As such, a litigation hold should be in place at or around the date of the earliest document for which work-product protection is asserted.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 11
§4.9
INTELLECTUAL PROPERTY LAW
There must be an anticipation of litigation before the work-product doctrine will apply to protect communications. The mere fact that litigation arises, however, does not ensure that the work-product doctrine will apply to protect particular materials. The work-product doctrine protects neither materials developed in the ordinary course of business nor materials developed because there was some remote or inarticulable risk of litigation. Rather, to be protected by the work-product doctrine, the materials must be prepared with an eye toward a particular claim against a particular opposing party. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 259 (N.D.Ill. 2000); Sylgab Steel & Wire Corp. v. Imoco-Gateway Corp., 62 F.R.D. 454, 457 (N.D.Ill. 1974).
IV. [4.9] WAIVER The general rule is that voluntary disclosure of privileged material constitutes waiver of the attorney-client privilege and the work-product doctrine as to the disclosed material, as well as all other communications on the same subject. Genentech, Inc. v. United States International Trade Commission, 122 F.3d 1409, 1415 (Fed.Cir. 1997) (“disclosure of confidential communications or attorney work product to a third party, such as an adversary in litigation, constitutes a waiver of privilege as to those items”). This rule is based on a fundamental sense of fair play, that is, one should not be allowed to rely on the privilege as both a sword and a shield. W.R. Grace & Co.Conn. v. Viskase Corp., 21 U.S.P.Q.2d (BNA) 1121, 1991 WL 141131 (N.D.Ill. 1991). The scope of the waiver based on a disclosure can vary from great to none, depending on the circumstances of the case and the judge’s predisposition.
PRACTICE POINTER
Disclosure of a privileged communication waives the protection of the privilege as to communications on that subject matter.
Some courts have held that if the waiver of privilege was inadvertent and reasonable safeguards to protect the privilege were in place, no waiver takes place or the waiver is limited solely to the disclosed communication. See Genentech, supra, 122 F.3d at 1415, citing Alldread v. City of Grenada, 988 F.2d 1425, 1434 (5th Cir. 1993), KL Group v. Case, Kay & Lynch, 829 F.2d 909, 919 (9th Cir. 1987), and In re Sealed Case, 877 F.2d 976, 980 (D.C.Cir. 1989). See also Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 611 (8th Cir. 1978) (en banc); Transamerica Computer Co. v. International Business Machines Corp., 573 F.2d 646, 650 – 651 (9th Cir. 1978). A series of courts have held that by raising the defense of equitable estoppel, the defendant waives the attorney-client privilege as to the patent in suit. Sig Swiss Industrial Co. v. Fres-Co System USA, Inc., 22 U.S.P.Q.2d (BNA) 1601, 1992 WL 23446 (E.D.Pa. 1992); Dow Chemical Co. v. Atlantic Richfield Co., 227 U.S.P.Q. (BNA) 129, 1985 WL 71991 (E.D.Mich. 1985); Metropolitan Wire Corp. v. Falcon Products, Inc., 528 F.Supp. 897, 903 – 904 (E.D.Pa. 1981). This rationale was expressly rejected in International Rectifier Corp. v. IXYS Corp., 361 F.3d 1363, 1376 (Fed.Cir. 2004).
4 — 12
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.10
Waiver should not occur from a lawyer negotiating with an opponent and, in the course of those negotiations, taking legal and factual positions, provided that a specific privileged communication is not relied on or disclosed during the negotiations. Sylgab Steel & Wire Corp. v. Imoco-Gateway Corp., 62 F.R.D. 454, 458 (N.D.Ill. 1974). Similarly, a party does not waive the attorney-client privilege or work-product protection simply by bringing suit. Zenith Radio Corp. v. United States, 764 F.2d 1577, 1580 (Fed.Cir. 1985). An extrajudicial waiver may occur when statements are made in a press release or other public forum. For example, if the opinion of counsel is directly referenced in a press release, then the totality of this opinion will be waived. On the other hand, if a press release expresses a belief that is consistent with the confidential advice of a lawyer, the advice is not waived. The same rational applies to pleadings and papers filed with the court: I hasten to emphasize, moreover, that the fact that a party takes a position in a pleading that is consistent with advice that party received in confidence from its attorney is irrelevant to waiver analysis. Waiver analysis focuses on the disclosure of the content of specific communications between counsel and client — and a pleading would not effect a waiver unless the pleading disclosed specific lawyer-client communications, even if the substance of the pleading tracked what a lawyer had confidentially advised the client. [Emphasis in original.] Electro Scientific Industries, Inc. v. General Scanning, Inc., 175 F.R.D. 539, 543 (N.D.Cal. 1997). Thus, stating in a press release “We believe that we do not infringe and that the plaintiff’s patent is invalid” should not give rise to any waiver of the attorney-client privilege or workproduct immunity. On the other hand, stating in a press release “Our lawyers have advised us that we do not infringe and the patents are invalid” may give rise to a waiver regarding the underlying lawyer’s advice. Moreover, the scope of this waiver will depend on whether the press release is relied on in the litigation by the party making it. If it is not being relied on (i.e., it was an extrajudicial disclosure), then the scope of waiver will be very narrow. Electro Scientific, supra, 175 F.R.D. at 543 – 544. If the privileged communication is being relied on, the scope of waiver will be substantially broader. See, e.g., Mosel Vitelic Corp. v. Micron Technology, Inc., 162 F.Supp.2d 307 (D.Del. 2000); Novartis Pharmaceuticals Corp. v. Eon Labs Manufacturing, Inc., 206 F.R.D. 396 (D.Del. 2002); Thorn EMI North America, Inc. v. Micron Technology, Inc., 837 F.Supp. 616 (D.Del. 1993). The risk of inadvertent waiver during discovery has been greatly reduced with the adoption of Fed.R.Evid. 502, which is discussed in §§4.40 – 4.43 below.
V. CONTROLLING LAW AND STANDARDS A. [4.10] Choice of Law In general, choice-of-law questions regarding privilege and work product are governed by federal common law. Fed.R.Evid. 501; Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 521 (S.D.N.Y. 1992) (noting that Rule 501 was intended not to freeze law of privilege but instead
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 13
§4.11
INTELLECTUAL PROPERTY LAW
to let it evolve on case-by-case basis). The applicability of the privilege is a question of fact (American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 744 (Fed.Cir. 1987)), and the scope of the privilege is a question of law (Katz v. AT&T Corp., 191 F.R.D. 433, 436 (E.D.Pa. 2000), citing In re Bevill, Bresler & Schulman Asset Management Corp., 805 F.2d 120, 124 (3d Cir. 1896)). With respect to attorney-client privilege and work-product immunity issues, to the extent that they involve patent-related activities, Federal Circuit law is controlling. In re Queen’s University at Kingston, 820 F.3d 1287, 1290 – 1291 (Fed.Cir. 2016) (in patent cases, and for privileged matters that relate to substantive patent issues, such as validity and infringement, Federal Circuit will apply its own law and not look to law of regional circuits); In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 803 – 804 (Fed.Cir. 2000) (noting that relevancy-based discovery disputes and privilege issues relating to patent prosecution documents are governed by Federal Circuit law and not law of regional circuits). With respect to all other issues (i.e., non-patent-related issues), the law of the regional circuits applies. Spalding Sports, supra, 203 F.3d at 804; In re Regents of University of California, 101 F.3d 1386, 1390 (Fed.Cir. 1996) (applying law of regional circuit (Seventh Circuit) to determine that privilege should be narrowly drawn); McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 251 (N.D.Ill. 2000). B. [4.11] Burden of Proof The burden of establishing that a communication is subject to the protection of the attorneyclient privilege or the work-product immunity is always on the party asserting the protection. Vardon Golf Co. v. Karsten Manufacturing Corp., 213 F.R.D. 528, 531 (N.D.Ill. 2003); McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 251, 258 (N.D.Ill. 2000). Because of the conflicting policies between full discovery and encouraging frank communications between lawyers and their clients, the scope of protection will be given its narrowest possible limits. Cavallaro v. United States, 284 F.3d 236, 245 (1st Cir. 2002); McCook Metals, supra, 192 F.R.D. at 251; Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 518 (S.D.N.Y. 1992); In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 384 (D.D.C. 1978). The burden to establish entitlement to the protection of the commonality of interest doctrine (see §§4.26 – 4.31 below) is also on the party seeking this protection. C. [4.12] Appellate Review Depending on the procedural context in which the privilege issues are raised, appellate review can be had by writ of mandamus or direct appeal of a discovery ruling. In re Queen’s University at Kingston, 820 F.3d 1287, 1291 – 1294 (Fed.Cir. 2016) (mandamus); In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 804 – 805 (Fed.Cir. 2000) (granting writ of mandamus to review order compelling production of privileged invention disclosure form); In re Regents of University of California, 101 F.3d 1386, 1387 – 1388 (Fed.Cir. 1996) (granting writ of mandamus to party ordered to produce privileged material); American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 738 – 739 (Fed.Cir. 1987) (direct appeal of denial of motion to compel production from third party). For general discussion regarding appellate review of discovery orders, see Truswal Systems Corp. v. Hydro-Air Engineering, Inc., 813 F.2d 1207, 1209 (Fed.Cir. 1987), and Heat & Control, Inc. v. Hester Industries, Inc., 785 F.2d 1017, 1022 (Fed.Cir. 1986).
4 — 14
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.13
VI. PATENT PROSECUTION A. [4.13] In General Historically, there have been two schools of thought about the applicability of the attorneyclient privilege to the preparation of patent applications and the prosecution of those applications to obtain patents. The older and now widely discredited view found that the attorney-client privilege did not apply to patent attorneys and employees of patent departments because they were supposedly not engaged in legal work. This erroneous view was perhaps based on the courts’ failure to understand the highly complicated nature of patent law and the technologies that form the underlying facts to which patent lawyers must apply these complex laws to render advice to their clients. See, e.g., Zenith Radio Corp. v. Radio Corp. of America, 121 F.Supp. 792, 793 – 794 (D.Del. 1954). This rationale was rejected by the Supreme Court in Sperry v. State of Florida ex rel. Florida Bar, 373 U.S. 379, 10 L.Ed.2d 428, 83 S.Ct. 1322, 1325 (1963), in which the Court expressly held that “the preparation and prosecution of patent applications for others constitutes the practice of law.” The Sperry Court further held: Such conduct inevitably requires the practitioner to consider and advise his clients as to the patentability of their inventions under the statutory criteria . . . as well as to consider the advisability of relying upon alternative forms of protection which may be available under statute law. It also involves his participation in the drafting of the specification and claims of the patent application . . . which this Court long ago noted “constitute(s) one of the most difficult legal instruments to draw with accuracy.” Topliff v. Topliff, 145 U.S. 156, [36 L.Ed. 658, 12 S.Ct. 825, 831 (1892)]. And upon rejection of the application, the practitioner may also assist in the preparation of amendments . . . which frequently requires written argument to establish the patentability of the claimed invention under the applicable rules of law and in light of the prior art. [Emphasis added.] [Citations omitted.] Id. In spite of this clear and unambiguous pronouncement by the Court, several lower courts nevertheless refused to apply the attorney-client privilege to patent prosecution-related matter under what has become known as the “conduit theory.” See Jack Winter, Inc. v. Koratron Co., 50 F.R.D. 225 (N.D.Cal. 1970); Jack Winter, Inc. v. Koratron Co., 54 F.R.D. 44 (N.D.Cal. 1971) (related case); Sneider v. Kimberly-Clark Corp., 91 F.R.D. 1, 7 (N.D.Ill. 1980). The conduit theory of the Jack Winter line of cases was expressly rejected by the court in Knogo Corp. v. United States, 213 U.S.P.Q. (BNA) 936, 1980 WL 39083 (Ct.Cl. 1980), and the line of decisions that followed. See In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 805 – 806 (Fed.Cir. 2000); Rohm & Haas Co. v. Brotech Corp., 815 F.Supp. 793 (D.Del. 1993), aff’d, 19 F.3d 41 (Fed.Cir. 1994); Hydraflow, Inc. v. Enidine Inc., 145 F.R.D. 626 (W.D.N.Y. 1993); Fromson v. Anitec Printing Plates, Inc., 152 F.R.D. 2 (D.Mass. 1993); Advanced Cardiovascular Systems, Inc. v. C.R. Bard, Inc., 144 F.R.D. 372 (N.D.Cal. 1992) (expressly rejecting this court’s earlier decision in Jack Winter, supra, 54 F.R.D. 44); Cuno, Inc. v. Pall Corp., 121 F.R.D. 198 (E.D.N.Y. 1988); Minnesota Mining & Manufacturing Co. v. Ampad Corp., 7 U.S.P.Q.2d (BNA) 1589, 1987 WL 124334 (D.Mass. 1987); FMC Corp. v. Old Dominion Brush Co., 229 U.S.P.Q. (BNA) 150, 1985 WL 5983 (W.D.Mo. 1985).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 15
§4.14
INTELLECTUAL PROPERTY LAW
The debate over whether to apply the Jack Winter rationale or the Knogo rationale and over the unfairness that the Jack Winter line of cases imposed on clients was put to rest by the Federal Circuit when it adopted the rationale of the Knogo line of cases. Spalding Sports, supra, 203 F.3d at 805 – 806 (expressly rejecting Jack Winter conduit line of cases and holding that invention submission forms were protected under attorney-client privilege). Because Federal Circuit law controls regarding privilege issues as they relate to drafting and obtaining patents (see §4.10 above), the Jack Winter line of cases and rationale should be ended. B. [4.14] Patent Agents Patent law is unique in its use of patent agents. These individuals are not members of the bar of any state, yet they are authorized to practice law before the United States Patent and Trademark Office. To be authorized to practice before the USPTO, one must pass the patent bar exam, which is administered by the USPTO. The only requirement to sit for the patent bar is a science undergraduate degree or equivalent experience in the industry. Although law school or a law degree is not required to sit for the patent bar, a thorough and in-depth knowledge of patent law is required. Over the years, the patent bar exam has become more difficult to pass than many state bar examinations. Thus, a patent agent working in a corporate legal department or as an outside consultant must have a detailed and complete understanding of the patent laws and the rules of practice and procedure before the USPTO, which allows the patent agent to provide legal advice to clients about the strategies and options they have to obtain patent protection for their inventions: The registered patent agent is required to have a full and working knowledge of the law of patents . . . and is even regulated by the same standards, including the Code of Professional Responsibility, as are applied to attorneys in all courts. . . . Thus, in appearance and fact, the registered patent agent stands on the same footing as an attorney in proceedings before the Patent Office. [Footnotes omitted.] In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 393 (D.D.C. 1978). Because patent agents generally are practicing law (Sperry v. State of Florida ex rel. Florida Bar, 373 U.S. 379, 10 L.Ed.2d 428, 83 S.Ct. 1322, 1325 (1963)) yet are not truly “lawyers,” they create unique and confusing issues regarding the attorney-client privilege and work-product immunity. The majority rule provides that the privilege applies to communications in which the patent agent is acting under the authority or control of a lawyer. See, e.g., Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 518 – 519 (S.D.N.Y. 1992); Gorman v. Polar Electro, Inc., 137 F.Supp.2d 223, 227 (E.D.N.Y. 2001); Saxholm AS v. Dynal, Inc., 164 F.R.D. 331, 337 (E.D.N.Y. 1996); Willemijn Houdstermaatschaapij BV v. Apollo Computer Inc., 707 F.Supp. 1429 (D.Del. 1989); Cuno, Inc. v. Pall Corp., 121 F.R.D. 198, 204 (E.D.N.Y. 1988). Other courts, however, have correctly extended the privilege to agents acting on their own and not under the authority or control of a lawyer. Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 537 (N.D.Ill. 2000); Dow Chemical Co. v. Atlantic Richfield Co., 227 U.S.P.Q. (BNA) 129, 1985 WL 71991 (E.D.Mich. 1985); Ampicillin, supra, 81 F.R.D. at 393 – 394; Vernitron Medical Products, Inc. v. Baxter Laboratories, Inc., 186 U.S.P.Q. (BNA) 324, 1975 WL 21161 (D.N.J. 1975). See
4 — 16
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.14
generally David Hricik, Patent Agents: The Person You Are, 20 Geo.J. Legal Ethics 261, 282 – 283 (2007) (noting that split of authority still exists and arguing that agents should be subject to privilege). Thus, it is prudent when using patent agents to always have them working under the authority or control of a lawyer.
PRACTICE POINTER
To assure that the attorney-client privilege and work-product immunity protections are available, a patent agent’s work should always be done under the direction of a lawyer.
Because a patent agent cannot litigate (i.e., represent a client in federal court), the workproduct doctrine would not apply to the agent unless the agent were somehow performing a task at the direction of the lawyer and thus his or her activities were the lawyer’s work product. Dow Chemical, supra. Some courts, however, have found that work-product protection applies to proceedings before the Board of Patent Appeals and Interferences, as well as reexamination and reissue proceedings, and these decisions should be extended to the Patent Trial and Appeal Board. These are quasi-adversarial proceedings between the patent examiner and the inventor. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 260 – 262 (N.D.Ill. 2000). Patent agents can represent clients in these proceedings. Although no rational basis exists for precluding patent agents from work-product protection since they are performing the exact same tasks and functions that a lawyer would be performing in the same proceeding, it is unclear how the courts will treat these issues. Thus, to make certain that work-product protection is available to these quasi-adversarial proceedings before the USPTO, an agent’s work should be under the authority or control of a lawyer. The Federal Circuit in In re Queen’s University at Kingston, 820 F.3d 1287 (Fed.Cir. 2016), addressed the issue of whether the attorney-client privilege applied to a patent agent working without lawyer supervision. In Queen’s, the court found that such activities were privileged. However, the court created a new privilege, the “patent-agent privilege,” rather than placing these activities under the attorney-client privilege. 20 F.3d at 1294. The court based the creation of this new privilege on the powers granted federal courts under Fed.R.Evid. 501 and Sperry, supra (finding that patent prosecution by patent agents was practice of law). The Queen’s court, however, went on to note that the scope of this privilege was limited, applying only to activities that patent agents are authorized to do before the USPTO. Thus, if a patent agent opined on the validity of a competitor’s patent, the communication would not be privileged. 820 F.3d at 1301 – 1302. In spite of Queen’s and Sperry, a Texas state appellate court came to an entirely different conclusion, finding that patent agent-client communications were not privileged. In re Silver, 119 U.S.P.Q.2d (BNA) 1758, 2016 WL 4386004 (Tex.App. 2016). This is a poorly written and irrational opinion. Nevertheless, the party’s privilege is lost and the communications are a part of the litigation.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 17
§4.15
INTELLECTUAL PROPERTY LAW
Unfortunately, to make certain that patent agents prosecuting matters before the USPTO are privileged, their work should be done under the supervision of a lawyer. C. [4.15] Foreign Patent Prosecution In addition to seeking patent protection in the United States, companies and inventors may seek protection in foreign countries. The use of nonlawyer specialists, who are similar in status to patent agents in the United States, is more common in foreign countries. Determining privilege issues in these settings can become very complex, involving choice-of-law issues and analysis of foreign law. If a U.S. firm is used to prosecute the foreign patent application, then the privilege applies to the same extent that it applies to U.S. prosecution activities. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 256 (N.D.Ill. 2000). If, however, patent agents of a particular country are used, then a test similar to the one applied to U.S. patent agents has been applied by the courts. Thus, the privilege may extend to communications with foreign patent agents related to foreign patent activities if the privilege would apply under the law of the foreign country and this law is not contrary to the law of the U.S. forum. Id. If the foreign patent agent was functioning as an agent for the attorney, the communication is privileged to the same extent as any communication between an attorney and a nonlawyer working under the lawyer’s supervision. Thus, if the foreign patent agent is engaged in the lawyering process, the communication is privileged to the same extent as any communication between cocounsel. Id.; Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 535 (N.D.Ill. 2000); Burroughs Wellcome Co. v. Barr Laboratories, Inc., 143 F.R.D. 611, 616 (E.D.N.C. 1992). As in all cases of privilege, the burden of establishing the privilege is on the party asserting it. McCook Metals, supra, 192 F.R.D. at 258. See §4.11 above. In cases in which communications with a foreign agent or attorney are made regarding a U.S. patent, the law of the United States, not the foreign jurisdiction, should be applied. “[B]ecause the United States has a strong interest in regulating activities that involve its own patent laws, all communications relating to patent activities in the United States will be governed by the American rule.” In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 391 (D.D.C. 1978). Thus, the privilege has been extended to protect communications between in-house U.S. lawyers and French attorneys and agents and German attorneys and agents. McCook Metals, supra, 192 F.R.D. at 257 – 258. The privilege has also been extended to protect communications between U.S. clients and British patent agents. Smithkline Beecham, supra, 193 F.R.D. at 535 – 536 (acknowledging that United Kingdom law has recognized privilege in communications with patent agents since 1968); Ampicillin, supra, 81 F.R.D. at 392. The privilege has also been extended to protect communications between an Italian corporation and its patent agents in Norway, Germany, and Israel. Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 523 – 524 (S.D.N.Y. 1992). D. [4.16] Work-Product Protection for Patent Prosecution Activities The preparation and prosecution of patent applications generally has not been held to be in anticipation of litigation because they are ex parte administrative acts that are too far removed
4 — 18
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.18
from any specific anticipated litigation. As such, work-product protection would not apply to shield these communications from discovery. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 260 (N.D.Ill. 2000); Oak Industries v. Zenith Electronics Corp., 687 F.Supp. 369, 374 (N.D.Ill. 1988). Some proceedings before the United States Patent and Trademark Office, however, are quasiadversarial and may be viewed as giving rise to a particularized threat of litigation. Thus, workproduct protection has been extended to materials prepared in anticipation of reexamination proceedings, interferences, and appeals before the Board of Patent Appeals and Interferences. McCook Metals, supra, 192 F.R.D. at 262. This rationale should also apply to provide workproduct protection for materials prepared in anticipation of challenging patent validity before the Patent Trial and Appeal Board.
VII. [4.17]
TYPICAL PATENT DEPARTMENT COMMUNICATIONS
There are several types of documents that are typically created during the process of preparing and prosecuting patent applications and in commercializing new technologies. See §§4.18 – 4.25 below. If a corporate in-house patent department is set up properly, these documents should be subject to the protection of the attorney-client privilege.
PRACTICE POINTER
Typical patent department documents may be protected under the attorney-client privilege provided they independently meet the requirements of the privilege.
A. [4.18] Invention Submission Forms Invention submission forms are usually filled out by inventors for the purpose of conveying information about their invention to a patent department. They are typically used for the purposes of making patentability, inventorship, and prior art determinations by the patent department. If the requisite confidentiality is present, they should be privileged. In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 804 – 806 (Fed.Cir. 2000). Although it is not necessary to expressly request confidential legal assistance in a document to obtain the protection of the privilege (203 F.3d at 806), it is nevertheless prudent to set up forms and documents so that they expressly reflect their privileged nature and purpose. Additionally, invention submission forms should not contain information or references to business decisions or issues. If a document is seen as reflecting principally a business decision (e.g., “do we want to spend money on this invention” or “how does this invention fit into our product mix”), it will not be privileged. For example, in W.R. Grace & Co.-Conn. v. Viskase Corp., 21 U.S.P.Q.2d (BNA) 1121, 1991 WL 141131 (N.D.Ill. 1991), the court found that some invention submissions forms were protected while others were not. This holding was based on the failure of proofs on the part of the party asserting the privilege.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 19
§4.19
INTELLECTUAL PROPERTY LAW
B. [4.19] Draft Patent Applications Like any other legal document, patent applications are usually prepared in an iterative process between the lawyer and the inventor. The drafts compiled in this process necessarily reflect the communications between the inventor and the lawyer as the lawyer attempts to put forth the invention in the best light possible to protect the inventor’s legal rights. A draft patent application is no different than a draft of a contract. Internal drafts between a lawyer and client are privileged. Draft disclosures to the other party are not. Similarly, internal drafts of patent documents are privileged, while papers filed with the United States Patent and Trademark Office are not. Thus, a draft patent application implicitly reflects both confidential communications from a client seeking legal advice and the advice that is provided in response to those communications, and as such it should be privileged. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 253 (N.D.Ill. 2000). For cases that improperly found that draft applications were not privileged, see the discussion of the line of cases following Jack Winter, Inc. v. Koratron Co., 50 F.R.D. 225 (N.D.Cal. 1970), and the related case Jack Winter, Inc. v. Koratron Co., 54 F.R.D. 44 (N.D.Cal. 1971), in §4.13 above. C. [4.20] Inventor Sign-Off Forms Patent departments typically have inventors sign inventor sign-off forms around the time that the patent application is filed. These forms are used to reinforce the inventor’s legal obligation to disclose the best mode of practicing the invention and to disclose all pertinent prior art. In general, they are not disclosed to the United States Patent and Trademark Office. They also can be used to confirm the prior art status of any activity relating to the invention. If the requisite confidentially is present, they should be privileged. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 253 (N.D.Ill. 2000). Care should be taken with these and all forms because they could be viewed as only providing legal advice void of any client confidences, which would render them nonprivileged. See §4.2 above. D. [4.21] Internal Patent Department Checklists Frequently, patent departments have various checklists that lawyers go through at the time of filing a patent application and at the time a patent application issues as a patent. These checklists document the various legal issues that surround these events and the advice, based on the communications received from the inventor, that the lawyer has provided. In general, they are not disclosed to the United States Patent and Trademark Office. If kept confidential, they should be protected by the privilege. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 253 (N.D.Ill. 2000). As with the inventor sign-off forms discussed in §4.20 above, care should be taken with these and all forms because they could be viewed as only providing legal advice void of any client confidence, which would render them nonprivileged. E. [4.22] Attorney Notes By their very nature, a lawyer’s notes reflect the confidential communications that were made to the lawyer and the advice that the lawyer provided. They should be protected by the privilege.
4 — 20
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.25
McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 254 (N.D.Ill. 2000). Notes written by a corporate manager discussing legal advice that was rendered to the manager also should be privileged even though the lawyer did not write the notes. Illinois Tool Works, Inc. v. KL Spring & Stamping Corp., 207 U.S.P.Q. (BNA) 806, 1980 WL 30331 (N.D.Ill. 1980). Notes from an inventor to an attorney summarizing the prior art are also privileged. FMC Corp. v. Old Dominion Brush Co., 229 U.S.P.Q. (BNA) 150, 1985 WL 5983 (W.D.Mo. 1985). F. [4.23] Invention Review Committees Documents generated by invention review committees have various names; however, they are all typically the same and involve the process of reviewing invention submission forms to determine whether a patent application should be filed. These committees and their minutes are usually under the direction of a lawyer, but there may also be businesspeople and technical people involved. Care should be taken to make sure that the committees and their minutes or reports stay on the legal side of the equation and do not cross over into the nonprivileged business advice area. Cuno, Inc. v. Pall Corp., 121 F.R.D. 198, 203 – 204 (E.D.N.Y. 1988) (addressing each document individually and holding that majority of documents reflected business rather than legal advice and thus were not privileged). See §4.4 above. The communications surrounding these committees, if properly set up and documented, are typically (although not always) protected as privileged. The key to maintaining protection of the privilege is to properly establish the committee, its purpose, and its reporting mechanisms in the first place. G. [4.24] Draft Agreements Provided that the confidentiality requirement is met, draft agreements should be privileged. Internal working drafts of agreements that are shared between businesspeople and a lawyer implicitly, if not expressly, reflect confidential requests for legal advice, as well as the advice that was rendered based on those requests, and should be privileged. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 255 (N.D.Ill. 2000). On the other hand, drafts of agreements that are exchanged between negotiating parties do not have the requisite confidentiality and should not be protected by the privilege. H. [4.25] Invalidity Opinions and Noninfringement To avoid a finding of willful infringement and the potential for an award of increased damages, a party should seek and obtain the opinion of outside patent counsel that the party does not infringe a patent or that the patent of concern is invalid. See §4.32 below. In general, these opinions will be protected by attorney-client privilege, provided all elements to maintain the privilege are present. If an invalidity opinion, however, is based solely on publicly available, nonconfidential information, it is not privileged. In this situation, the legal advice that the patent is invalid does not disclose either directly or indirectly the substance of a confidential communication by a client and the key element for privilege is absent. On the other hand, if the invalidity opinion reveals client confidences, either directly or indirectly, it will be privileged provided the other
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 21
§4.26
INTELLECTUAL PROPERTY LAW
requirements of the privilege are met. American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 745 – 746 (Fed.Cir. 1987). Moreover, the mere fact that the opinion is also based on publicly available information, such as United States Patent and Trademark Office records and prior art, will not preclude the privilege from applying: The view that in-house and outside patent counsels’ patent-validity opinions are never protected by the attorney-client privilege, expressed in [United States v. United Shoe Machinery Corp.], 89 F.Supp. 357, 87 U.S.P.Q. 5 (D.Mass. 1950) and American Cyanamid Co. v. Hercules Powder Co., 211 F.Supp. 85, 135 U.S.P.Q. 235 (D.Del. 1962), was dealt a fatal blow by the Supreme Court in Sperry v. [State of Florida ex rel. Florida Bar], 373 U.S. 379, 83 S.Ct. 1322, 10 L.Ed.2d 428 (1963), and was administered the coup de grace by our predecessor, the Court of Claims, in Ledex, Inc. v. United States, 172 U.S.P.Q. 538, 539 (Ct.Cl. 1972). The current weight of authority, see In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 390, 202 U.S.P.Q. 134, 143 (D.D.C. 1978); Nestle Co. v. A. Cherney & Sons, Inc., 207 U.S.P.Q. 930, 933 (D.Md. 1980), to which we would add our own, recognizes that counsel’s opinions on patent validity are not denied the client’s privilege protection merely because validity must be evaluated against publicly available information. American Standard, supra, 828 F.2d at 745 – 746.
VIII. [4.26]
COMMONALITY OF INTEREST DOCTRINE
The “commonality of interest” doctrine is an exception to the confidentiality requirement of the attorney-client privilege. The commonality of interest doctrine prevents the privilege from being waived when a privileged communication is shared with a third party who is within the commonality of interest group. The doctrine has also been known as the “joint defense,” “joint client,” and “allied lawyer” doctrine. When parties have commonly aligned business and legal interests, this doctrine permits communications between each of the clients and their lawyers to take place without losing or waiving the privilege. In re Regents of University of California, 101 F.3d 1386, 1390 (Fed.Cir. 1996) (holding that regional circuit law applied to commonality of interest issue). The doctrine has the potential to be applicable in several factual scenarios. The doctrine does not, however, provide an independent basis for claiming privilege. Thus, the communication at issue must still meet all the requirements of privilege in the first place. Cavallaro v. United States, 284 F.3d 236 (1st Cir. 2002); Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 539 (N.D.Ill. 2000) (“The [commonality of interest] doctrine, however, is not a privilege in and of itself; it is merely an exception to the waiver of attorney-client privilege.”).
PRACTICE POINTER
4 — 22
To protect the exchange of privileged communications between third parties, the commonality of interest doctrine requires that the parties have commonly aligned business and legal issues.
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.30
A. [4.27] Multiple Accused Infringers The commonality of interest doctrine finds applicability in the situations in which several parties are accused of infringing the same patent. These parties’ legal interests are typically aligned. Their business interests, however, may not be as clearly aligned as would seem on first inspection to be the case. In this situation, it is quite likely that the multiple defendants are competitors and their products and noninfringement defenses may be quite different. Thus, the first defendant, who has a very strong noninfringement defense, may actually benefit if the second defendant, its biggest competitor, is found liable for infringement and subjected to substantial damages liability. While these potentially divergent interests should not normally prevent the parties from relying on the commonality of interest doctrine to protect the attorneyclient privilege, they do raise other issues. For example, in this situation, serious antitrust issues are present because the commonality of interest agreement has the potential to be a horizontal agreement between competitors that affects price and thus is per se illegal. See §3.12 of this handbook. B. [4.28] Manufacturer-Buyer The commonality of interest doctrine can find applicability in situations between the manufacturer of an accused infringing product and its customers. In this context, the issues can become quite complex because, if the customer is accused of direct infringement and the manufacturer is accused of contributory infringement, their legal and business interests may not be entirely aligned. Nevertheless, for the purpose of the initial dispute with the patentee, they are mutually aligned. In this situation, care should be taken to make sure that the commonality of interest agreement does not prejudice or unnecessarily bind the manufacturer, who may face substantially less risk than the customer. C. [4.29] Indemnitor-Indemnitee The commonality of interest doctrine finds applicability in the situation between an indemnitor and an indemnitee. This situation is different from the manufacturer-buyer situation discussed in §4.28 above because there is a contractual obligation between the parties for the indemnitor to share at least some of the risk that the indemnitee faces from the infringement accusations. In this case, there is less risk that the commonality of interest agreement will increase the indemnitor’s obligations to the indemnitee. D. [4.30] Licensor-Licensee In the context of an exclusive licensing arrangement, the business and legal interests of the licensor and licensee are sufficiently aligned that the commonality of interest doctrine typically should apply to them. The Federal Circuit has found that a relationship between the patentee and a nonexclusive licensee with an option to take an exclusive license meets the requirements for the commonality of interest doctrine to apply. In re Regents of University of California, 101 F.3d 1386, 1389 – 1391 (Fed.Cir. 1996). Thus, in Regents, the Federal Circuit upheld the applicability of the privilege to communications between these parties and their lawyers regarding the prosecution of patent applications that were the subject of the license-option agreement.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 23
§4.31
INTELLECTUAL PROPERTY LAW
E. [4.31] Mergers and Acquisitions The commonality of interest doctrine can also find applications in the merger, acquisition, and financing setting. This setting, however, makes it more difficult to find applicability because arguably the parties in the merger negotiations or in the financing discussions are adverse to each other until such time as the deal is closed. In general, great care should be taken to protect the attorney-client privilege until after the deal has closed because up until this point it may very well be determined that the two parties’ business and legal interests are not sufficiently aligned for the commonality of interest doctrine to apply, regardless of what the parties may have otherwise agreed to or believed.
IX.
RELIANCE ON OPINION OF COUNSEL AND WAIVER
A. [4.32] Enhanced Damages In patent litigation, an infringer can be subject to punitive damages for infringement that can be up to three times actual damages. 35 U.S.C. §284. Section 284 provides that “the court may increase the damages up to three times the amount found or assessed.” The law of enhanced damages has seen several significant changes. First, the Leahy-Smith America Invents Act has been put into place, with its protections against de facto waiver of attorney-client privilege. See §4.39 below. Second, the Supreme Court, in Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1929 (2016), rejected the Federal Circuit’s objectively reckless standard and clear and convincing evidence burden of In re Seagate Technology LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc). Thus, after Halo, it is unlikely that the law will return to the days when, to avoid a finding of willful infringement, an accused infringer had to have a good-faith belief that it did not infringe or that the patent was invalid. Although it was not an absolute, obtaining an opinion from outside counsel that there was no infringement or that the patent was invalid was vitally important to establishing the requisite good faith to avoid willful infringement. It is too soon to know, after Halo, the extent to which subjective intent of the infringer will again be front and center in an enhanced damages award case. Prior to Halo, to avoid a finding of willful infringement, a defendant was required to rely on counsel’s opinion at trial. This reliance, however, destroyed the confidentiality of the communication and thus waived the privilege. See §4.9 above. Thus, a defendant was faced with the Hobson’s choice of risking treble damages or waiving attorney-client privilege. This conundrum was acknowledged by the Northern District of Illinois: [I]n patent cases, the waiver rule creates a cruel dilemma for one accused of willful infringement. While reliance on advice of counsel is not necessary per se to defend the suit, it is, as a practical matter, absolutely essential to the good faith defense [to willful infringement]. Thus the choice is between a complete sacrifice of the privilege or a complete sacrifice of the defense. Abbott Laboratories v. Baxter Travenol Laboratories, Inc., 676 F.Supp. 831, 832 – 833 (N.D.Ill. 1987).
4 — 24
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.33
In three cases, Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), In re EchoStar Communications Corp., 448 F.3d 1294 (Fed.Cir. 2006), and Seagate, supra, the Federal Circuit substantially rewrote the law of willful infringement. In these cases, the Federal Circuit eliminated the majority of inequities that had developed over the prior 20 years in the area of willful infringement. See §§4.33 – 4.38 below. Knorr-Bremse and EchoStar are untouched by Halo. Further, Halo commented favorably on the goals of the Seagate test, but rejected it as having no basis in §284. 136 S.Ct. at 1932 (“The Seagate test reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under §284 only in egregious cases. That test, however, ‘is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to the district courts.’ ”), quoting Octane Fitness, LLC v. Icon Health & Fitness, Inc., ___ U.S. ___, 188 L.Ed.2d 816, 134 S.Ct. 1749, 1755 (2014). Thus, all three Federal Circuit cases are still important to consider and evaluate. See §§4.33 – 4.38 below. B. [4.33] Knorr-Bremse The Federal Circuit in its en banc decision in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), addressed the interplay between willfulness, the need to obtain an opinion of counsel, and the decision to rely on such an opinion at trial. The Knorr-Bremse court in general noted that “[f]undamental to determination of willful infringement is the duty to act in accordance with law.” 383 F.3d at 1343. The Knorr-Bremse court then went on to maintain the affirmative duty of good care that arises upon knowledge of a patent — “ ‘where, as here, a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing,’ including ‘the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.’ ” Id., quoting Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380, 1389 – 1390 (Fed.Cir. 1993). The Knorr-Bremse court also reaffirmed the nine factors for a willfulness determination that were set out in Read Corp v. Portec, Inc., 970 F.2d 816, 826 – 827 (Fed.Cir. 1992), and Rolls-Royce Ltd. v. GTE Valeron Corp., 800 F.2d 1101, 1110 (Fed.Cir. 1986): 1. whether there was a good-faith belief on the part of the infringer that the patent was not infringed or was invalid; 2. whether the questions of validity and infringement were a close call; 3. the infringer’s litigation conduct; 4. whether the infringer intentionally copied the patented invention; 5. the infringer’s size and financial condition; 6. the duration of the infringement; 7. whether the infringer took any remedial actions;
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 25
§4.34
INTELLECTUAL PROPERTY LAW
8. whether the infringer was motivated to harm the patentee; and 9. whether the infringer attempted to conceal its infringement. 383 F.3d at 1342 – 1343. As addressed in §4.38 below, the affirmative duty to exercise due care and to seek opinion of counsel was ultimately done away with by the Federal Circuit in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007) (en banc), which has now been rejected by Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923 (2016). Thus, the Federal Circuit in Knorr-Bremse answered key questions regarding willfulness and privilege issues, and the significance of that case may have been reinvigorated by Halo. See §§4.34 – 4.36 below.
CASE HIGHLIGHTS
Knorr-Bremse — back to the future: 1. Created new options. 2. Created new risks. 3. When it is unclear if the options are worth the risks, the client decides. 4. Did away with presumptions a. of willfulness for asserting the attorney-client privilege; and b. of willfulness for failing to seek the advice of counsel.
1. [4.34] No Presumption of Willfulness for Asserting the Attorney-Client Privilege The court in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337, 1344 (Fed.Cir. 2004), held: When the attorney-client privilege and/or work-product privilege is invoked by a defendant in an infringement suit, is it appropriate for the trier of fact to draw an adverse inference with respect to willful infringement? The answer is “no.” Although the duty to respect the law is undiminished, no adverse inference shall arise from invocation of the attorney-client and/or workproduct privilege. The removal of this presumption created new options. Prior to Knorr-Bremse, companies were faced with a very difficult decision. The very act of seeking legal advice would give rise to an adverse inference, unless they waived their attorney-client privilege. Thus, prior to KnorrBremse, the decision to seek advice of counsel was inextricably linked with the decision to waive privilege.
4 — 26
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.36
2. [4.35] No Presumption of Willfulness for Failing To Seek the Advice of Counsel Although maintaining, for the time being, the affirmative duty of due care, Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), also did away with the presumption that if a potential infringer did not seek legal advice, then its infringement was willful. Specifically, the court held: When the defendant had not obtained legal advice, is it appropriate to draw an adverse inference with respect to willful infringement? The answer, again, is “no.” The issue here is not of privilege, but whether there is a legal duty upon a potential infringer to consult with counsel, such that failure to do so will provide an inference or evidentiary presumption that such opinion would have been negative. . . . Although there continues to be “an affirmative duty of due care to avoid infringement of the known patent rights of others,” . . . the failure to obtain an exculpatory opinion of counsel shall no longer provide an adverse inference or evidentiary presumption that such an opinion would have been unfavorable. [Citation omitted.] 383 F.3d at 1345 – 1346, quoting L.A. Gear, Inc. v. Thom McAn Shoe Co., 988 F.2d 1117, 1127 (Fed.Cir. 1993). The removal of this presumption created potentially the most alluring risk. Companies could simply forgo seeking the advice of outside counsel, because the failure to do so no longer created a presumption of willfulness. As noted by the Federal Circuit, large corporations can spend millions of dollars annually in legal fees to obtain opinions. Id. Thus, the removal of this presumption changed the cost-benefit analysis as to whether opinions of outside counsel should be obtained. The Federal Circuit’s decision in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007) (en banc), discussed in §4.38 below, reduced the risk for not obtaining an opinion from outside counsel to the point that such costly opinions were no longer needed in most circumstances. It is unclear whether the rejection of Seagate in Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1929 (2016), will again require the costly practice of seeking opinion from outside counsel. 3. [4.36] No Presumption of Willfulness in a Close Case In Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), the Federal Circuit was also asked to create a presumption that there was no willful infringement if the accused infringer put on a strong defense. The court declined to adopt this presumption, holding: Should the existence of a substantial defense to infringement be sufficient to defeat liability for willful infringement even if no legal advice has been secured?
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 27
§4.37
INTELLECTUAL PROPERTY LAW
The answer is “no.” Precedent includes this factor with others to be considered among the totality of circumstances. . . . We deem this approach preferable to abstracting any factor for per se treatment, for this greater flexibility enables the trier of fact to fit the decision to all of the circumstances. 383 F.3d at 1347. The court’s refusal to adopt this presumption left the law of willfulness fully open to a factual balancing test. While this may have been more equitable, it left companies with a high level of uncertainty. This uncertainty, however, was short lived. In In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007) (en banc), the court adopted a new standard for willfulness that from all practical purposes changed the court’s answer to the above question from a “no” to a “yes.” See §4.38 below. However, Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1929 (2016), overruled this holding of Seagate and criticized Seagate for placing too great a reliance on a good defense at trial to avoid willfulness. 136 S.Ct. at 1926 (“The Seagate test further errs by making dispositive the ability of the infringer to muster a reasonable defense at trial, even if he did not act on the basis of that defense or was even aware of it.”). Halo has not only reinvigorated the uncertainty over Knorr-Bremse’s refusal to adopt such a presumption, it has heightened it. Thus, it may be that the only tool available to clients to reduce this uncertainty is to obtain and follow a competent opinion of counsel. C. [4.37] EchoStar About a year and a half after Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), the Federal Circuit decided In re EchoStar Communications Corp., 448 F.3d 1294 (Fed.Cir. 2006). In that decision, the court focused on the scope and effect of the waiver that occurs if a party relies on the advice of counsel to defend a charge of willful infringement. The EchoStar court addressed the scope of waiver in the context of three types of documents and based its opinion primarily on the work-product immunity doctrine. The first type of documents involved “documents that embody a communication between the attorney and client concerning the subject matter of the case, such as a traditional opinion letter.” 448 F.3d at 1302. The court found that the privilege with these types of documents was always waived. The second type of documents involved “documents analyzing the law, facts, trial strategy, and so forth that reflect the attorney’s mental impressions but were not given to the client.” [Emphasis added.] Id. The court found that this “category of work product, which is never communicated to the client, is not discoverable” and stated that “this so-called ‘opinion’ work product deserves the highest protection from disclosure.” 448 F.3d at 1303. The third type of documents involved “documents that discuss a communication between attorney and client concerning the subject matter of the case but are not themselves communications to or from the client.” 448 F.3d at 1302. These would be the things in the lawyer’s file that “reference and/or describe a communication between the attorney and client, but were not themselves actually communicated to the client.” 448 F.3d at 1304. The court found the
4 — 28
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.38
privilege regarding such documents is waived. However, the waiver is only to the extent it aids in determining what was communicated to the client and when. Pure, non-communicated opinion work product would still be protected and could be redacted from the documents prior to production. Id.
CASE HIGHLIGHTS
EchoStar — defines the scope of waiver: 1. Documents that are communications between the attorney and the client — waived. 2. Documents that reflect the attorney’s mental impressions but were not given to the client — not waived. 3. Documents discussing a communication between the attorney and the client but that were not given to the client — limited waiver.
D. [4.38] Seagate and Its Overruling by Halo About a year and a half after In re EchoStar Communications Corp., 448 F.3d 1294 (Fed.Cir. 2006), the Federal Circuit decided In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007) (en banc). In that decision, the court addressed the affirmative duty of care, did away with that standard, and set up a new two-fold test based on a threshold showing of objective recklessness and then a subjective inquiry into good faith. In Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1929 (2016), the Court rejected this two-fold test of Seagate. The Halo Court expressly rejected the threshold requirement of objective recklessness. 136 S.Ct. at 1932 – 1933. The Court also rejected the clear and convincing burden of proof standard for enhanced damages, finding that only a preponderance of evidence was required. 136 S.Ct. at 1934. The Halo Court again turned the focus back to the subjective intent of the infringer. See, e.g., 136 S.Ct. at 1932 (conduct warranting enhanced damages is “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or — indeed — characteristic of a pirate”). The Halo Court, however, expressly noted that Seagate “reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under §284 only in egregious cases.” 136 S.Ct. at 1932. Thus, those sections of Seagate that were not expressly overruled may still prove pertinent under the more freewheeling, open-ended subjective analysis of Halo. The Seagate court additionally addressed the scope of waiver, stating: In sum, we hold, as a general proposition, that asserting the advice of counsel defense and disclosing opinions of opinion counsel do not constitute waiver of the attorney-client privilege for communications with trial counsel. We do not purport
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 29
§4.39
INTELLECTUAL PROPERTY LAW
to set out an absolute rule. Instead, trial courts remain free to exercise their discretion in unique circumstances to extend waiver to trial counsel, such as if a party or counsel engages in chicanery. 497 F.3d at 1374 – 1375.
CASE HIGHLIGHTS
Halo — the standard for willfulness: 1. Unclear under Halo’s subjective approach the extent to which this duty will reemerge. 2. Look to subjective intent. With Halo’s preponderance of the evidence standard, proof of bad faith, versus a requirement to show good faith, could have great significance. 3. Trial counsel privilege ordinarily is not waived.
E. [4.39] 35 U.S.C. §298 Section 17 of the Leahy-Smith America Invents Act created a new section in the patent statutes, 35 U.S.C. §298. This section provides: The failure of an infringer to obtain the advice of counsel with respect to any allegedly infringed patent, or the failure of the infringer to present such advice to the court or jury, may not be used to prove that the accused infringer willfully infringed the patent or that the infringer intended to induce infringement of the patent. Id. There is no provision in AIA §17 for the effective date of §298. The catchall provision, AIA §35, provides that “[e]xcept as otherwise provided in this Act, the provisions of this Act shall take effect upon the expiration of the 1-year period beginning on the date of the enactment of this Act and shall apply to any patent issued on or after that effective date.” Pub.L. No. 112-29, §35. Thus, it is unclear when, and to which patents, §298 will apply. In particular, those patents that issue during the phase-in period of the AIA, i.e., September 16, 2012, to March 16, 2013, may not be subject to this provision.
PRACTICE POINTER
Care should be taken in litigation not to reopen the door and lose the benefits of §298 and Fed.R.Evid. 502.
Section 298 codifies the Federal Circuit’s ruling in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004). See §§4.34 and 4.35 above.
4 — 30
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.41
Section 298 also appears to overrule the Federal Circuit’s ruling in Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683, 699 (Fed.Cir. 2008), that opinion of counsel was relevant and could be substantive evidence in an inducement-to-infringe case. See H.R.Rep. No. 98, 112th Cong., 1st Sess. 53 (2011), reprinted in 2011 U.S.C.C.A.N. 67, 84. Care should be taken, however, in fashioning a defense to an inducement charge not to reopen the door to this issue and thus allow such evidence in as rebuttal.
X.
[4.40] FEDERAL RULE OF EVIDENCE 502
Fed.R.Evid. 502 took effect September 19, 2008. This rule helps to resolve and clarify the confusing caselaw regarding inadvertent disclosure of privileged information. By clarifying the law in this area, and by eliminating some of the draconian consequences that could arise with an inadvertent production of privileged material, the rule should reduce the costs of litigation. Because of the nature of patent litigation, there are typically large amounts of privileged documents, long privilege logs, and protected privilege disputes. Thus, although applicable to all types of civil cases, Rule 502 should play a very significant and prominent role in patent litigation. Additionally, Rule 502 extends to state court proceedings to the extent that if the original disclosure occurs in a federal proceeding or to a federal agency, then a state court cannot find a broader scope of waiver than is provided by this rule. Thus, Rule 502 should provide a uniform scope of waiver across all proceedings.
RULE HIGHLIGHTS
Fed.R.Evid. 502 — defines the scope of waiver: a. Occurs only if disclosure is intentional. b. Does not occur if disclosure is inadvertent and reasonable steps are taken. c. May apply to state court proceedings. d. Private agreements need a court order to have broad effect.
A. [4.41] Federal Rule of Evidence 502(a) — Intentional Disclosure and the Scope of Waiver Fed.R.Evid. 502(a) provides: When the disclosure is made in a federal proceeding or to a federal office or agency and waives the attorney-client privilege or work-product protection, the waiver
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 31
§4.42
INTELLECTUAL PROPERTY LAW
extends to an undisclosed communication or information in a federal or state proceeding only if: (1) the waiver is intentional; (2) the disclosed and undisclosed communications or information concern the same subject matter; and (3) they ought in fairness to be considered together. Thus, this rule provides that waiver of privilege may occur only if the production was intentional — for example, the production of an opinion of counsel for the purpose of relying on it to defend a willfulness charge. The waiver is limited to only the same subject matter and has a fairness consideration added to it. This rule should not impact, and at most may further limit, the scope of waiver under the analysis set forth in the Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), In re EchoStar Communications Corp., 448 F.3d 1294 (Fed.Cir. 2006), and In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007), trilogy of cases discussed in §§4.32 – 4.38 above. B. [4.42] Federal Rule of Evidence 502(b) — Inadvertent Disclosure and the Scope of Waiver Fed.R.Evid. 502(b) provides: When made in a federal proceeding or to a federal office or agency, the disclosure does not operate as a waiver in a federal or state proceeding if: (1) the disclosure is inadvertent; (2) the holder of the privilege or protection took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure 26(b)(5)(B). This rule should greatly reduce the costs, risks, and burn associated with the review, withholding, and identification of privileged documents in patent litigation. The rule, however, requires that reasonable steps be taken to prevent the disclosure. It will be interesting to see if the use of contract lawyers or outsourcing to a foreign country for document production will constitute “reasonable steps” under the rule.
PRACTICE POINTER
4 — 32
Outsourcing production and privilege review may not meet Fed.R.Evid. 502(b)’s reasonable steps requirement to avoid waiver.
WWW.IICLE.COM
THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE
§4.43
Fed.R.Civ.P. 26(b)(5)(B), upon notice to the other party, puts a hold on the use of any inadvertently produced privileged material until the request for its return is resolved. C. [4.43] Federal Rules of Evidence 502(c) – 502(f) — State Proceedings and Private Agreements Fed.R.Evid. 502(c) provides that, absent a state court order regarding waiver, if a disclosure is made in a state proceeding, it will not give rise to a waiver in a federal preceding if the disclosure would not have caused a waiver if made in a federal proceeding or if the disclosure did not cause a waiver under state law. Rule 502(d) provides that an order from a federal court that waiver has not occurred from a disclosure is binding in all other federal or state proceedings. Rule 502(e) provides that for a private agreement regarding waiver to have effect on third parties, it must be entered as a court order. This is a significant provision. For example, if during a deposition an exhibit is marked and an objection is raised that the exhibit is an inadvertently produced privileged document, and if the lawyers reach an agreement to return the document or an agreement that the document does not have to be returned but its production will not be used as a basis for waiver, this agreement will not be binding on a third party, e.g., the next defendant in a subsequent law suit. Thus, a stipulated order embodying this lawyer agreement should be entered. Alternatively, a blanket provision may be included in the case’s protective order providing that agreements between counsel regarding waiver and the return of privileged material have the effect of an order of the court. However, a federal judge may be disinclined to permit such an open-ended provision in a court’s order and thus require the filing of stipulated orders. Rule 502(f) makes it clear that with respect to state law and other rules of evidence, Rule 502 is controlling.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
4 — 33
5
Ownership and Management of Patent Rights
JOHN S. PANIAGUAS Clark Hill PLC Chicago
The contributions of William H. Frankel to previous editions of this chapter are gratefully acknowledged.
®
©COPYRIGHT 2017 BY IICLE .
5—1
INTELLECTUAL PROPERTY LAW
I. [5.1] Introduction II. Ownership of Patent Rights A. [5.2] Inventorship 1. [5.3] Joint Inventorship and Coownership 2. [5.4] Correction of Inventorship B. [5.5] Employer-Employee Relationships 1. [5.6] Illinois Employee Patent Act 2. [5.7] Shop Rights C. [5.8] Acquisition and Loss of Patent Rights 1. [5.9] Assignments vs. Licenses 2. [5.10] Assignments 3. [5.11] Licenses a. [5.12] Exclusive vs. Nonexclusive Licenses b. [5.13] Package and Hybrid Licenses c. [5.14] License Terms (1) [5.15] License grant (2) [5.16] Field of use (3) [5.17] Licensed territory (4) [5.18] Payment terms (5) [5.19] Term and termination (6) [5.20] Ancillary provisions (7) [5.21] Boilerplate provisions 4. [5.22] Licensee and Assignor Estoppel a. [5.23] Uniform Commercial Code b. [5.24] Government Interest in Patents c. [5.25] Tax Considerations 5. [5.26] Constitutional Standing To Sue for Infringement III. Management of Patent Rights A. [5.27] Patent Audits and Due Diligence 1. [5.28] Conducting a Patent Audit 2. [5.29] Due Diligence Considerations 3. [5.30] Managing Risks Through Deal Terms B. [5.31] Strategic Deployment of Patents
5—2
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
IV. Appendix — Sample Agreements A. B. C. D.
[5.32] [5.33] [5.34] [5.35]
Employee Agreement Regarding Confidentiality and Intellectual Property Assignment of Patent Rights Nonexclusive Patent License Agreement Exclusive Patent License Agreement
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5—3
§5.1
I.
[5.1]
INTELLECTUAL PROPERTY LAW
INTRODUCTION
The CEO wants to close by noon tomorrow on a lucrative sale of a business unit. The company’s outside general counsel has a significant role in negotiating and papering the transaction. It is 11:30 p.m., and the mergers and acquisitions attorneys in the firm are scrambling to complete the intellectual property schedules and warranties requested by the buyer of the client’s soon-to-be divested business unit. The attorneys call because they have discovered that a nonemployee coinventor has just licensed a significant competitor under the patent on the company’s flagship software product. Furthermore, the employee-inventors on three other key patents never assigned their rights to the company, and two of the company’s patents have lapsed for failure to pay the requisite maintenance fees. Counsel’s legal team works through the night to resolve all the issues to the client’s and the buyer’s satisfaction, and the deal closes on schedule. This fire drill gets the CEO thinking about patents. The CEO asks what steps could have been taken to avoid these last-minute surprises and is beginning to worry about increasingly patentconscious and litigious competitors. There is a desire to know whether the company is doing everything that it can to protect its innovations and to avoid the patents of its competitors. Counsel’s assessment is due within a week. The answers to the CEO’s questions lie in a fundamental understanding of the types of proprietary interests that can exist in patents, coupled with an effective program for managing patent (along with other intellectual property) opportunities and risks. The patent laws provide that “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. §101. The same laws also define a “patentee” as including “not only the [person] to whom the patent was issued but also the successors in title to the patentee” (35 U.S.C. §100(d)), and they expressly provide that “[a]pplications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing” (35 U.S.C. §261). Thus, one can acquire a proprietary interest in a patent by contract, even if he or she did not originally conceive of the patented invention. Most often, transfers of patent rights occur in the context of assignments and licenses, in the context of patent and invention development agreements, or as the result of a litigation settlement. As explained in this chapter, the operative terms of a particular conveyance will dictate the extent and consequences of the transfer of patent rights. Absent an assignment, the inventor is the owner of the patent rights by operation of law. Patents are valuable to a company in many ways. For example, knowing what patent rights are owned by a company and what patent rights are owned by its competitors is fundamental to strategic patent management and sound business. Today, savvy businesses build patent fences around their technologies, creating obstacles for competition and using their patents as economic weapons in furtherance of business objectives. Additionally, patents can be used as collateral for loans as well as equity for the purchase of, or participation in, other businesses. Companies can generate cash by selling or licensing their patents to others. On the flip side, maintaining awareness of competitors’ patent rights helps clients avoid the staggering cost and exposure of patent infringement litigation. Companies that have devised and implemented a strategic patent
5—4
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.3
asset management program report a significant and lasting effect on their bottom lines. The fundamental aspects of such a program also are discussed in this chapter.
II. OWNERSHIP OF PATENT RIGHTS A. [5.2] Inventorship The patent statute provides that “[w]hoever invents or discovers” any patentable subject matter “may obtain a patent therefor.” 35 U.S.C. §101. Inventorship is determined on a claim-byclaim basis and is governed by federal patent law. “Inventorship” must not be confused with “ownership,” which concerns legal title to a patent obtained by contract or operation of law. Sewall v. Walters, 21 F.3d 411, 417 (Fed.Cir. 1994). Initially, the patent right vests with the inventor. Thereafter, it may be transferred to another. To qualify as an inventor, a person must have conceived of every feature of the invention. The inventor must have a “definite and permanent idea of the complete and operative invention.” Cooper v. Goldfarb, 154 F.3d 1321, 1327 (Fed.Cir. 1998). An idea is sufficiently definite and permanent when it can be reduced to practice with only ordinary skill, not extensive research or experimentation. Accordingly, conception has been said to be the “touchstone” of inventorship. Stern v. Trustees of Columbia University in City of New York, 434 F.3d 1375, 1378 (Fed.Cir. 2006), quoting Burroughs Wellcome Co. v. Barr Laboratories, Inc., 40 F.3d 1223, 1227 – 1228 (Fed.Cir. 1994). In order to determine proper inventorship, one must determine who conceived of the subject matter of a given patent claim. Conception and reduction to practice are questions of law that the Court of Appeals for the Federal Circuit reviews de novo on appeal, with underlying facts being reviewed for clear error. Taskett v. Dentlinger, 344 F.3d 1337, 1339 – 1340 (Fed.Cir. 2003). 1. [5.3] Joint Inventorship and Coownership More than one inventor can contribute to a given invention. The patent statute mandates that application for a patent be made in the name of all of its joint inventors. See 35 U.S.C. §116(a) (“[w]hen an invention is made by two or more persons jointly, they shall apply for patent jointly”). One who makes a suggestion that “planted the seed” for an invention may or may not make a contribution that is sufficient to constitute coinventorship. Pro-Mold & Tool Co. v. Great Lakes Plastics, Inc., 75 F.3d 1568, 1576 (Fed.Cir. 1996). Usually, joint invention connotes some degree of collaborative effort by inventors to produce a complete and operative invention. Burroughs Wellcome Co. v. Barr Laboratories, Inc., 40 F.3d 1223, 1227 (Fed.Cir. 1994). The collaboration need not even be face-to-face, and the contributions among joint inventors need not be equal. 35 U.S.C. §116. To constitute a joint invention, it is necessary that each of the inventors work on the same subject matter and make some contribution to the inventive thought and to the final result. Vanderbilt University v. ICOS Corp., 601 F.3d 1297, 1302 (Fed.Cir. 2010), quoting Monsanto Co. v. Kamp, 269 F.Supp. 818, 824 (D.D.C. 1967).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5—5
§5.4
INTELLECTUAL PROPERTY LAW
The Vanderbilt court went on to state, “Each inventor must contribute to the joint arrival at a definite and permanent idea of the invention as it will be used in practice.” Vanderbilt, supra, 601 F.3d at 1303. Furthermore, an inventor may use the ideas and the help of others while perfecting his or her invention without losing the right to claim sole inventorship. Shatterproof Glass Corp. v. Libbey-Owens Ford Co., 758 F.2d 613, 624 (Fed.Cir. 1985). However, if a person is seeking recognition as a coinventor, he or she must actually allege and show clear and convincing evidence of collaboration. Vanderbilt University, supra, 601 F.3d at 1308. See also Kimberly Clark Corp. v. Proctor & Gamble, 973 F.2d 911 (Fed.Cir. 1992) (plaintiff could not establish collaboration because he never communicated with other named inventors). It may also be important to show a common development time among the coinventors. Credle v. Bond, 25 F.3d 1566 (Fed.Cir. 1994). The emphasis is on conception of the invention, and mere reduction to practice by or with another may not — in and of itself — give rise to joint inventorship if the reduction to practice only required routine skill or the person reducing the invention to practice was merely following directions from an inventor. What is required of a joint inventor is that he or she a. contributes in some significant manner to the conception or reduction to practice of the invention; b. makes a contribution to the invention that is not insignificant in quality when measured against the full invention; and c. does more than merely explain to the real inventors well-known concepts or the current state of the art. Pannu v. Iolab Corp., 155 F.3d 1344, 1351 (Fed.Cir. 1998). Joint inventors must apply for a patent jointly because a patent may be invalid if fewer or more than the true inventors are named. 35 U.S.C. §116. See also Trovan, Ltd. v. Sokymat SA, 299 F.3d 1292, 1301 – 1302 (Fed.Cir. 2002). Different claims in a patent can be drawn to inventions made by different inventorship entities, but each coinventor owns an undivided interest in each claim and the entire patent regardless of his or her individual contribution. Ethicon, Inc. v. United States Surgical Corp., 135 F.3d 1456, 1465 (Fed.Cir. 1998). Patents can be jointly owned by coinventors and coowners alike. Absent an agreement otherwise, any coinventor or coowner of a patent may make, use, or sell the patented invention. 35 U.S.C. §262. See also Harrington Manufacturing Co. v. Powell Manufacturing Co., 815 F.2d 1478, 1481 (Fed.Cir. 1986). Similarly, any coowner may license others under a jointly owned patent or patent application. One who takes a license from a joint owner of a patent may practice the invention without the consent of, and without accounting to, the other coowners of the patent. 35 U.S.C. §262. See also Schering Corp. v. Roussel-UCLAF SA, 104 F.3d 341, 344 (Fed.Cir. 1997). As a result, less than all of the joint owners of a patent or patent application are incapable of granting an exclusive license. 2. [5.4] Correction of Inventorship The inventors named in an issued patent are presumed to be correct, and the burden of showing otherwise is a heavy one and must be proven by clear and convincing evidence. Garrett Corp. v. United States, 422 F.2d 874, 880 (Ct.Cl. 1970). Errors in naming the correct inventor
5—6
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.5
(e.g., nonjoinder, misjoinder) may be cured upon application of all the parties and assignees as long as the error arose without any deceptive intention. The correction of errors in inventorship is governed by 35 U.S.C. §§116 (pending patent applications) and 256 (issued patents). B. [5.5] Employer-Employee Relationships In the absence of a contract, the general rule is that employees own any inventions they make, subject to the equitable considerations of a shop right, discussed in §5.7 below. This rule was affirmed by the U.S. Supreme Court. Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, Inc., 563 U.S. 776, 180 L.Ed.2d 1, 131 S.Ct. 2188, 2195 (2011). In this case, Stanford University argued that the Bayh-Dole Act (Bayh-Dole University and Small Business Patent Procedures Act), Pub.L. No. 96-517, 94 Stat. 3019 (1980), codified at 35 U.S.C. §200, et seq., automatically gives the patent rights in federally funded inventions to the contractors that receive the federal funds, not to their workers who create the inventions. The Supreme Court rejected this argument and clarified that the Act gave the contractors the right to “retain title to any subject invention,” but they still had to fulfill a number of requirements imposed by the statute — including securing an assignment from their employees. 131 S.Ct. at 2193, 2197. When there is a contract between an employer and an employee covering the subject of employee-made inventions, however, the allocation of proprietary rights is governed by the terms of the contract. Thus, the solution to Stanford’s dilemma lies in crafting tight assignment agreements with its researchers, scientists, and students. Thus, it is common for companies to insist that all employees sign an employment agreement that, among other things, sets forth the terms and ownership of employee-made inventions. Usually, such an agreement will provide that the employee assigns his or her rights to any inventions to the employer. The language used in the contract to assign the rights of the employee’s inventions to the employer is crucial. An agreement can be interpreted to cover ideas, but if the court finds the text does not compel that reading, then ideas will not be included. Mattel, Inc. v. MGA Entertainment, Inc., 616 F.3d 904, 909 – 910 (9th Cir. 2010). In Mattel, other employees’ contracts expressly included the rights to their ideas as well as their inventions, but the contract in question did not, which led the court to conclude that the term “inventions” alone did not include “ideas.” 616 F.3d at 909. Absent an express assignment, courts will sometimes infer an implied-in-fact contract to assign in situations in which it is clear that the employee has been “hired to invent” or to give himself or herself to the task of solving a particular problem. See Banks v. Unisys Corp., 228 F.3d 1357, 1359 (Fed.Cir. 2000); Teets v. Chromalloy Gas Turbine Corp., 83 F.3d 403 (Fed.Cir.), cert. denied, 117 S.Ct. 513 (1996). In such situations, ownership of patent rights will pass to the employer by operation of law. In other situations, the court will not make that inference. For example, the Federal Circuit has held that even though a prior employment contract contained language assigning patent rights to the employer, once it was terminated and a new consulting agreement was signed without such language, the new agreement was not assumed to still contain the assigning language of the prior agreement. Abbott Point of Care Inc. v. Epocal, Inc., 666 F.3d 1299, 1303 (Fed.Cir. 2012). The rules for identifying and enforcing such contracts are largely governed by state contract law and can vary from jurisdiction to jurisdiction. Lear, Inc. v. Adkins, 395 U.S. 653, 23 L.Ed.2d 610, 89 S.Ct. 1906 – 1907 (1969) (construction of patent license agreements governed by state law).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5—7
§5.6
INTELLECTUAL PROPERTY LAW
However, the Federal Circuit has declared that when an employment contract has patent ownership implications and includes language assigning future inventions, federal law — not state contract law — controls. DDB Technologies, L.L.C. v. MLB Advanced Media, L.P., 517 F.3d 1284 (Fed.Cir. 2008). See also Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245 (Fed.Cir. 2000). The DDB Technologies court considered whether a computer scientist’s patent assignment clause to his former employer was an automatic assignment or a mere obligation to assign in the future. The court determined that ownership was “intimately bound up with the question of standing in patent cases.” DDB Technologies, supra, 517 F.3d at 1290. Thus, federal law controls, and the ownership determination will be based on whether the language in the clause is in the present or future tense. Compare FilmTec Corp. v. Allied-Signal Inc., 939 F.2d 1568, 1573 (Fed.Cir. 1991) (“agrees to grant and does hereby grant” was assignment as matter of law), with Arachnid, Inc. v. Merit Industries, Inc., 939 F.2d 1574, 1576, 1581 (Fed.Cir. 1991) (“all rights . . . will be assigned by [inventor] . . . to CLIENT” did not rise to level of obligation to assign). What is the effect of DDB Technologies, supra? Employers are claiming that the Federal Circuit strengthened their right to employees’ inventions as long as they have used the right contract provision. This may not be the last word on the issue, as Judge Newman wrote a blistering dissent in DDB Technologies and the Supreme Court has shown an interest in patent law — and in reversing the Federal Circuit.
PRACTICE POINTER
Regardless of the assignment language in an employment agreement, the United States Patent and Trademark Office likely will require a separately executed assignment document to pass title for any given patent application on a specific invention. Therefore, an employment agreement requiring an employee to assign inventions to his or her employer should not be deemed a suitable substitute for a separate assignment of inventions after they are made.
As for independent contractors and other nonemployees who are in a position to invent, companies are well advised to have these outside parties sign a nondisclosure agreement and an agreement as to ownership of inventions before they are given access to company information and resources. 1. [5.6] Illinois Employee Patent Act In the State of Illinois, employers contracting for rights to employee inventions must be mindful of the requirements of the Employee Patent Act, 765 ILCS 1060/1, et seq. First, any provision that purports to require an assignment of the employee’s rights in an invention for which no equipment, supplies, facilities, or trade secret information of the employer was used and that was developed entirely on the employee’s own time is void and unenforceable as against public policy unless (a) the invention relates to (1) the employer’s business or (2) the employer’s actual or demonstrably anticipated research or development or (b) the invention results from any work performed by the employee for the employer. 765 ILCS 1060/2(1).
5—8
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.8
Second, the employer must provide a written notification of these requirements upon presenting invention assignment language to an employee. The Employee Patent Act does not preempt existing common law applicable to any shop rights of employers with respect to employees who have not signed an employment agreement. 765 ILCS 1060/2(2). 2. [5.7] Shop Rights When an employee develops an invention using his or her employer’s time, materials, facilities, and equipment, the law then recognizes that the employer may obtain a so-called “shop right” in the invention. A shop right permits the employer to use — not to sell or license — the employee’s invention without providing compensation and without causing liability for patent infringement. The shop right is a common-law doctrine founded in equity and has the attributes of equitable estoppel or an implied license. It is an exception to the general rule that an employeeinventor owns his or her own invention, regardless of whether it was conceived and/or reduced to practice during the course of employment. A shop right usually arises when an employee-inventor stands by without objection while permitting his or her employer to assume expenses and expend resources in connection with the development of the employee’s invention. The principle involved is that an employer should be deemed vested with an irrevocable, equitable license to use an invention when the employee thus induces and assists in such use without demand for compensation or other notice of restriction on the use. The proper methodology for determining whether a shop right exists is to consider all of the circumstances surrounding the development of the patented invention and to determine whether equity and fairness require that the employer be allowed to use the invention in its business. McElmurry v. Arkansas Power & Light Co., 995 F.2d 1576, 1581 – 1582 (Fed.Cir. 1993). Shop rights have several attributes worth noting. They are personal to the employer and are not assignable; they do not automatically pass to a purchaser of the employer’s business. The holder of a shop right may duplicate the invention or procure it from others for its own use. A shop right is an affirmative defense to a patent infringement suit and, when applicable, must be pleaded when answering a complaint for patent infringement. Shop rights are nonexclusive rights. Tin Decorating Company of Baltimore v. Metal Package Corp., 37 F.2d 5 (2d Cir.), cert. denied, 50 S.Ct. 410 (1930). C. [5.8] Acquisition and Loss of Patent Rights The U.S. Code provides that patents have the attributes of personal property and that “[a]pplications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing.” 35 U.S.C. §261. Moreover, implicit in the right to exclude that is conferred on a patent owner is the ability to waive that right and to license activities that otherwise might be excluded. Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1379 (Fed.Cir. 2000). Thus, patent rights may be assigned and licensed to others. The transfer and sharing of patent rights by agreement frequently occurs in the context of straight assignments and licenses or in the context of codevelopment and joint venture agreements. The operative terms of a particular conveyance will dictate the extent and consequences of the transfer of patent rights.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5—9
§5.9
INTELLECTUAL PROPERTY LAW
The U.S. Code also provides that a patent assignment, grant, or conveyance shall be void as against a subsequent purchaser for value without notice unless it is recorded in the United States Patent and Trademark Office within three months or prior to the subsequent purchase. 35 U.S.C. §261. Since one who does not acquire title cannot assert the protection of the bona fide purchaser rule, the bona fide purchaser defense does not apply to a nonexclusive patent licensee. RhonePoulenc Agro, S.A. v. DeKalb Genetics Corp., 284 F.3d 1323, 1334 (Fed.Cir. 2002). 1. [5.9] Assignments vs. Licenses An assignment involves a transfer of patent rights, whereas a license constitutes more of a sharing of rights. It is important when analyzing a patent transfer to assess its operative terms. What purports to be a license may, in fact, be an assignment and vice versa. By way of example, although “royalties” are generally associated with licenses, the retention of royalty rights may constitute a financing arrangement for payment, and it is not necessarily inconsistent with an assignment. Conversely, if the transferor in a purported assignment document retains substantial rights in the patent (such as the right to continue preexisting contracts and licenses), then the conveyance will be deemed to constitute a license rather than an assignment. Abbott Laboratories v. Diamedix Corp., 47 F.3d 1128, 1132 (Fed.Cir. 1995). Another exemplary retention of rights relates to a field-of-use restriction. For example, restricting the right of the assignee to sell to commercial customers while the assignor retains the right to sell to military customers. Retention of rights, in this case, restricts the assignee’s rights to sell the patented invention to military customers, and the assignee does not have the exclusive right to sell the invention. Thus, the retention of rights will be considered a “substantial” retention of rights. In general, any retention of rights that interferes with the assignee’s rights to (a) make, use, and sell the patented invention or (b) sue in its own name may be considered “substantial,” thus converting a purported assignment to a license. See Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245 (Fed.Cir. 2000). To be specific, the Federal Circuit, generally, looks to whether three rights have been conveyed in the agreement to decide whether the grant constitutes an assignment or a mere license: a. the exclusive right to make, use, and sell products covered by the patent; b. the right to sue for infringement of the patent; and c. a virtually unrestricted authority in the licensee to sublicense its rights under the agreement. Additionally, the court must ascertain the intention of the parties and the substance of what the agreement granted. Mentor H/S, Inc. v. Medical Device Alliance, Inc., 240 F.3d 1016, 1017 (Fed.Cir. 2001), citing Vaupel Textilmaschinen KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 875 (Fed.Cir. 1991). The party asserting that it has “all the substantial rights in the patent” as the assignee has the burden to prove this assertion, evidenced in writing. Mentor, supra, 240 F.3d at 1017, citing Speedplay, supra, 211 F.3d at 1250.
5 — 10
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.10
The differences between a patent assignment and a patent license are not without legal consequence. Principally, an assignee has the ability to file suit for patent infringement, whereas a licensee cannot do so on its own. The U.S. Code provides that a patentee shall have remedy by civil action for infringement of a patent. 35 U.S.C. §281. The term “patentee” is defined in 35 U.S.C. §100(d) to include successors in title to the patentee. Thus, a patent assignee effectively becomes a patentee with standing to sue for infringement in its own name. Enzo APA & Son, Inc. v. Geapag A.G., 134 F.3d 1090, 1093 (Fed.Cir. 1998). In contrast, a patent licensee does not have the right to sue for patent infringement in its own name unless the license terms are such that the licensee possesses sufficient interest in the patent to have standing to sue as a coplaintiff with the patentee. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1552 (Fed.Cir. 1995). Another distinction between an assignment and a license is that patent licenses are governed by state contract law, whereas patent assignments language, as discussed above, may be considered a matter of federal patent law. Notwithstanding, the proper construction of both licenses and assignments is a matter of state contract law. Minco, Inc. v. Combustion Engineering, Inc., 95 F.3d 1109, 1117 (1996), reh’g en banc denied, 1996 U.S.App. LEXIS 31225 (Fed.Cir. Nov. 18, 1996). 2. [5.10] Assignments An assignment of the entire right, title, and interest to a patent passes both legal and equitable title to the assignee. Rights in an invention also may be assigned, and legal title to any ensuing patent will pass to the assignee upon grant of the patent. Although no magic language is essential for an assignment to occur, it must be apparent from the conveyance instrument that there was a clear intent on the part of the assignor to part with his or her legal interest. The U.S. Code requires that the assignment of a patent or patent application be in writing. 35 U.S.C. §261. Recordation of the assignment with the United States Patent and Trademark Office is necessary only to protect the assignee from subsequent bona fide purchasers without notice. GAIA Technologies, Inc. v. Reconversion Technologies, Inc., 93 F.3d 774, 777 (Fed.Cir. 1996). There are many reasons why a company should record all of its patent and patent application assignments with the United States Patent and Trademark Office. One reason relates to an asset purchase of the target company by an acquiring company. In this case, it is important that the target company record all of its patents and patent applications so that they can be properly transferred to the acquiring company at the close of the transaction. Another reason relates to use of the patents and patent applications as collateral for a loan In an asset purchase, as part of the due diligence of the acquiring company, the acquiring company will require assignments of all patents and patent applications of the target company. The acquiring company also will require that all patents and patent applications reflect a proper chain of title from the inventor(s) all the way up to the target company. This will allow the patents and patent applications to be assigned to the acquiring company and vest the entire right, title, and interest in all of the patent applications and patents in the acquiring company. A company can also put its patents and patent applications up for collateral in order to obtain financing. In this situation, a company can put either a part or its entire portfolio of patents and
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 11
§5.11
INTELLECTUAL PROPERTY LAW
patent applications up for collateral for a loan. In exchange for loan, the lending institution will either require a security assignment or a security interest in the patents and patent applications. The security assignment or security interest is recorded against the borrower’s patents and patent applications. For the security assignment or security interest to be effective against the borrower, the chain of title of the patent applications and patents must be proper. It should be noted that an agreement to assign is not an assignment. Thus, a contract provision that all rights to inventions developed during a joint venture relationship “will be assigned” is ineffective to transfer all legal and equitable rights in the inventions to the proposed assignee and thereby extinguish the rights of the proposed assignor. Such an agreement to assign future inventions not yet developed may vest the promisee with equitable rights in the inventions once made, but it does not — by itself — convey legal title to patents on those inventions. IpVenture, Inc. v. ProStar Computer, Inc., 503 F.3d 1324, 1326 (Fed.Cir. 2007). On the other hand, an actual assignment of rights in an invention yet to be made (as opposed to an agreement to assign) is viewed as a valid assignment of an expectant interest. Once the invention is made and a patent application is filed, legal title passes to the assignee. FilmTec Corp. v. Allied-Signal Inc., 939 F.2d 1568, 1572 (Fed.Cir. 1991). The right to sue infringers is implicit in and an incident of an assignment, as is the right to claim damages for future infringement. However, the right to recover damages for past infringement is deemed retained by the assignor unless expressly conveyed in the assignment document. Minco, Inc. v. Combustion Engineering, Inc., 95 F.3d 1109, 1117 – 1118 (Fed.Cir. 1996), reh’g en banc denied, 1996 U.S.App. LEXIS 31225 (Fed.Cir. Nov. 18, 1996). In addition, unless the language of the assignment makes specific mention of future improvements, it is ineffective to assign rights to such improvements. Filmtec, supra, 939 F.2d at 1570. See also Affymetrix, Inc. v. Illumina, Inc., 446 F.Supp.2d 292, 296 (D.Del. 2006).
PRACTICE POINTER
If representing the assignee of patent rights, be certain that the assignment document expressly conveys to the client the right to recover damages for past infringement, or this potentially valuable right will remain with the assignor.
3. [5.11] Licenses Patents confer on the patentee certain exclusionary rights in the subject matter of the claims. These exclusionary rights include the right to exclude others from making, using, or selling the claimed invention. Implicit in these exclusionary rights is the ability to waive that right by licensing to others activities that otherwise would be excluded. Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372 (Fed.Cir. 2000). Thus, a license is merely a promise not to sue or a grant of permission to do something, not a grant of a proprietary interest in a patent. A license is revocable at the will of the licensor unless it specifies otherwise. A valid license to practice a patented invention is a complete defense to an infringement action as long as the licensee has not exceeded the terms of the license. Endo Pharmaceuticals Inc. v. Actavis, Inc., 746 F.3d 1371 (Fed.Cir. 2014). A merger has been found to violate the express terms of a nontransferable license. Cincom
5 — 12
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.11
Systems, Inc. v. Novelis Corp., 581 F.3d 431, 437 – 438 (6th Cir. 2009); PPG Industries, Inc. v. Guardian Industries Corp., 597 F.2d 1090, 1095 (6th Cir. 1979). Cincom, supra, expanded the ruling from PPG, supra, to include not only patent licenses but also copyright licenses, as well as stating it is immaterial if the transferee is a competitor of the licensor. 581 F.3d at 437 – 438. A patent license need not be expressed in any formal manner to be effective and can even be implied. As explained by the Supreme Court: No formal granting of a license is necessary in order to give it effect. Any language used by the owner of the patent or any conduct on his part exhibited to another, from which that other may properly infer that the owner consents to his use of the patent in making or using it, or selling it, upon which the other acts, constitutes a license, and a defense to an action for a tort. De Forest Radio Telephone & Telegraph Co. v. United States, 273 U.S. 236, 71 L.Ed. 625, 47 S.Ct. 366, 367 (1927). The provisions of 35 U.S.C. §261 (requiring that an assignment be in writing) do not apply to licenses. Moraine Products v. ICI America, Inc., 538 F.2d 134, 143 (7th Cir. 1976). Implied licenses may arise in a number of contexts. The shop right discussed in §5.7 above is a form of implied license. Implied licenses can also arise by acquiescence, by conduct, by equitable estoppel, or by legal estoppel. Wang Laboratories, Inc. v. Mitsubishi Electronics America, Inc., 103 F.3d 1571, 1580 (Fed.Cir. 1997). The exhaustion doctrine holds that once the first authorized sale of a patented product has been made, no further restraint on its use is permitted. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 L.Ed.2d 996, 128 S.Ct. 2109 (2008). It follows that the authorized and unconditional sale of a patented article carries with it an implied license to use and also to repair the article. Patent licenses and agreements embodied therein are construed according to state-based common law of contract. Schaefer Fan Co. v. J&D Manufacturing, 265 F.3d 1282, 1286 (Fed.Cir. 2001). Thus, the enforceability of a patent litigation settlement and license agreement is governed by state contract law, including the applicable statute of frauds. Sun Studs, Inc. v. Applied Theory Associates, Inc., 772 F.2d 1557, 1561 (Fed.Cir. 1985). Some patent licenses are considered to confer personal rights. Such licenses may not be shared with others absent an express provision in the license agreement that authorizes sublicensing. The owner of a fractional portion of a patent may license whomever he or she wants, and licensees thereof may practice the invention without the consent of the other patent coowner. 35 U.S.C. §262. Moreover, a coowner has no duty to account to other coowners for royalties received absent any agreement to the contrary. Schering Corp. v. Roussel-UCLAF SA, 104 F.3d 341, 344 (Fed.Cir. 1997). As is discussed in §§5.12 – 5.21 below, a patent holder has considerable latitude with respect to which of the substantive rights embraced in the patent grant he or she elects to license. Furthermore, a patent holder can lawfully place restrictions on the term of the license, can limit a license according to field of use, can split up a license according to territory, and can impose
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 13
§5.12
INTELLECTUAL PROPERTY LAW
minimum royalty obligations and other conditions on the license grant. Implicit within this scheme and consistent with the state contract laws that have application to patent licenses, patent rights, such as the right to sublicense and the right to assign, are not included in the license grant unless expressly so stated. In Helferich Patent Licensing LLC v. New York Times Co., 778 F.3d 1293 (Fed.Cir. 2015), the Court of Appeals for the Federal Circuit addressed the issue of patent exhaustion in a situation in which only some the claims in a patent are licensed. The doctrine of patent exhaustion clearly applies to the licensed claims. What about the unlicensed claims — are they exhausted as well? The court concluded that the judicially-created doctrine of patent exhaustion should not be expanded to cover unlicensed claims. A patentee can refuse to license or otherwise exploit his or her patent without fear of challenge. However, once a patentee decides to exploit the patent by granting licenses, there arises the potential that patent rights may be used in a scheme violative of the antitrust laws. Carl Schenck, A.G. v. Nortron Corp., 713 F.2d 782, 786 n.3 (Fed.Cir. 1983). Nevertheless, the U.S. Supreme Court has enunciated the principle that the patent laws (which promise freedom from competition in the practice of patented inventions) are in pari materia with the antitrust laws (which seek to suppress monopolization and foster competition) and modify them pro tanto. Simpson v. Union Oil Company of California, 377 U.S. 13, 12 L.Ed.2d 98, 84 S.Ct. 1051, 1053 (1964). A more in-depth discussion of the antitrust considerations that relate to patent licensing is presented in Chapter 3 of this handbook. a. [5.12] Exclusive vs. Nonexclusive Licenses A patent license may be exclusive or nonexclusive, but these terms alone are insufficient to describe the grant in a particular license agreement. As with the case of contrasting assignments and licenses, one must assess the operative terms of the license agreement, and not its title, to ascertain what rights actually vest in the licensee and what rights are retained by the licensor. An exclusive license assures the licensee that the license grant includes all the rights that the licensor has with respect to a defined activity, territory, and period. Stated another way, an exclusive license is a license to practice the invention, accompanied by the patent owner’s promise that others will not be licensed from practicing the invention with respect to the same defined activity, territory, and period. Thus, the holder of a patent on an inflation system, after assessing the relative strengths and weaknesses of a number of potential licensees, might elect to license his or her patented technology exclusively to one licensee for use with inflatable bedding products and exclusively to another licensee for use with inflatable water toys. Moreover, a license may be exclusive with respect to less than all the rights embraced in the patent. For example, a patent owner may exclusively license his or her patent only with respect to the right to make, sometimes referred to as a manufacturing license. An exclusive license prevents the licensor from practicing the invention unless that right has been reserved in the license agreement. CoreBrace LLC v. Star Seismic LLC, 566 F.3d 1069 (Fed.Cir. 2009); Cutter Laboratories, Inc. v. Lyophile-Cryochem Corp., 179 F.2d 80, 93 (9th Cir. 1949). Absent such a reservation, the exclusive license granted is sometimes referred to as an
5 — 14
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.13
“absolute exclusive” or “true exclusive” license because not even the licensor has a right to practice the patented invention. In such a case, the exclusive licensee can sue the patent owner for patent infringement. Yarway Corp. v. Eur-Control USA, Inc., 775 F.2d 268, 273 (Fed.Cir. 1985). When a license is exclusive, without reservation of rights on the part of the licensor, the licensee may possess sufficient interest in the patent to have standing to sue as a coplaintiff with the patentee. WiAV Solutions LLC v. Motorola, Inc., 631 F.3d 1257 (Fed.Cir. 2010); Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1552 (Fed.Cir. 1995) (en banc). When the licensor grants an exclusive license but retains the right to continue operating under the subject matter of the license, such an exclusive license is sometimes referred to as a “sole” license. Sole licensing is generally employed when a patent owner has an existing facility that it wishes to continue to operate. A sole licensee is entitled to sue for patent infringement and, if necessary, join the patent owner involuntarily. Independent Wireless Telegraph Co. v. Radio Corporation of America, 269 U.S. 459, 70 L.Ed. 357, 46 S.Ct. 166, 169, reh’g denied, 46 S.Ct. 224 (1926). A sole licensee may not maintain an infringement suit in the patent owner’s absence. Agrashell, Inc. v. Hammons Products Co., 352 F.2d 443, 447 (8th Cir. 1965). Sole licenses tend to be characterized in agreement documents as “an exclusive license” but are subject to an express reservation of the continued right to use. In contrast to exclusive licenses, nonexclusive licenses do not prevent a licensor from licensing the same patent rights to others but are an encumbrance on the patent that binds future assignees. Furthermore, a nonexclusive or “bare” license — a covenant by the patent owner not to sue the licensee for making, using, or selling the patented invention and under which the patent owner reserves the right to grant similar licenses to other entities — confers no constitutional standing on the licensee to bring suit or even to join a suit with the patentee because a nonexclusive (or “bare”) licensee suffers no legal injury from infringement. Ortho Pharmaceutical Corp. v. Genetics Institute, Inc., 52 F.3d 1026, 1031 (Fed.Cir. 1995); Rite-Hite, supra. b. [5.13] Package and Hybrid Licenses When the parties to a patent license agree to licensing more than one patent under a single agreement, such an agreement is known as a “package license.” Such arrangements are permissible as long as the licensee is not coerced into taking the package by the licensor. Also, any attempt to collect royalties beyond the expiration of a licensed patent has been held by the U.S. Supreme Court to constitute an unlawful patent misuse. Brulotte v. Thys Co., 379 U.S. 29, 13 L.Ed.2d 99, 85 S.Ct. 176, 179 – 180 (1964). Courts recognize that the convenience of the parties is served, and no patent misuse occurs, when the parties to a license of multiple patents bargain for a fixed royalty to cover the use of more than one patent. However, in doing so, the parties run the risk that the expiration or invalidity of any of the licensed patents could potentially jeopardize future entitlement to a royalty. The safer way to approach such arrangements, therefore, is to allocate the rate of royalty to each particular patent when it is possible to do so. Also, as a belt-and-suspenders approach, it is advisable that the license agreement include an express recitation concerning the mutual convenience aspect of the licensing arrangement.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 15
§5.14
INTELLECTUAL PROPERTY LAW
Similarly, licensing parties may enter into what is known as a “hybrid license,” in which different types of intellectual property (e.g., patents and trade secrets) are jointly licensed in the same license agreement, sometimes without allocating royalties to one type of intellectual property or the other. As with package licenses, care must be taken when drafting hybrid licenses to ensure that future and/or untoward events, such as the public disclosure of confidential trade secrets, will not render the agreements nonviable or illegal. Courts have found that “hybrid licenses” that involve tying arrangements can result in one or more of the patents being rendered unenforceable. See U.S. Philips Corp. v. ITC, 424 F.3d 1179 (Fed.Cir. 2005). In such tying arrangements, the licensee is coerced to purchase a product or take a license under an unwanted patent in exchange for the hybrid license. c. [5.14] License Terms A company charged with infringing the patent of another may seek to take a license and buy peace, thus ensuring its freedom to operate with respect to the licensed patent and protecting its investment in the accused product. This is but one example of the numerous scenarios that give rise to patent license negotiations, each requiring a tailor-made negotiation strategy to fit the circumstances. Of course, if the patentee in the above example is unreasonable and makes exorbitant royalty demands, the accused infringer may be forced to test the validity of the patent in litigation. While the lessons and lore of patent license negotiation would consume far more pages than are found in this handbook, there are some fundamental licensing considerations and basic license terms that are shared with the reader below and exemplified in the sample agreements in §§5.32 – 5.35 below. The parties to any patent license negotiation should give consideration to at least the following factors: 1. the scope and strength of the patent(s); 2. the strength of the patentee’s infringement contentions; 3. the importance of the accused activity to the alleged infringer; 4. the economic harm that the patentee is likely to suffer if the infringing activity continues; 5. the number of potential infringers and the resources available to the patentee to go after them; 6. the parties’ respective arsenals of technology and patents; and 7. the business and economic costs of litigation.
5 — 16
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.15
Obviously, it is easier for a patentee to extract greater royalties for a patent that has broad claims and that has withstood a validity challenge in the crucible of litigation. If, on the other hand, the patent is untested and/or of limited scope, a potential licensee/infringer may be more inclined to design around the patent or challenge it than to take a license. If the accused infringer has little invested in the accused activity and the activity is of marginal importance, he or she may elect to stop the activity rather than pay for a license. Conversely, if the technology is important to either the licensee or the patentee, or both, then the parties may be motivated to do what is necessary to achieve their business objectives and/or come to terms. When there are numerous infringers, a common strategy is for the patentee to select a first potential licensee who most requires a license or who can least afford to litigate against an infringement claim, negotiate a license, and then use the first license to go after others. In all such negotiations, each party should be informed about its negotiating partner’s other technology and patents and, when necessary, should negotiate for additional protection (e.g., such as a cross-license or the inclusion of rights under other patents or pending patent applications). Licensors and prospective licensees are well advised to be mindful of the threat of patent litigation, which is always hovering outside the door of the negotiating room. There are many ways to structure a patent license agreement between a willing licensor and a willing licensee who are in general agreement as to terms. The parties should give due consideration to ease of administration of the license when negotiating payment and reporting schedules, periodic versus lump-sum payments, dispute resolution mechanisms, and the like. It is also a good idea to build some flexibility into the license to allow for events that are reasonably anticipated to occur (e.g., an assignment provision). (1)
[5.15] License grant
The license grant is the heart of the license, the part of the agreement that specifies what rights the patent owner is conveying to the licensee. The patent owner may license another to make, use, offer to sell, and import, or the patent owner may split up these rights. For example, a patent owner that engages in the manufacture of a patented product may elect to license another to use, but not make, the product. Similarly, a patent owner may grant a license to make and use a patented product but withhold the right to sell the product. As discussed in §5.11 above, if a license grant is silent on the question of sublicensing rights, no such rights are conveyed. The license grant should state whether the licensor intends that the conveyance of rights be nonexclusive or exclusive and, in the latter case, whether it is intended that the licensor also be excluded from practicing the patented invention. Consider the following example of a license grant: Licensor hereby grants to Licensee a nonexclusive, paid-up, irrevocable, and perpetual worldwide right and license under the Licensed Patents, without the right to sublicense, make, have made for its own use, use, offer for sale, sell, and import Licensed Products on the terms and conditions set forth herein.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 17
§5.16
INTELLECTUAL PROPERTY LAW
(2)
[5.16] Field of use
Inventions can have applications in more than one field, and licensors will try to maximize their revenues by limiting prospective licensees to fields of use according to the licensees’ technical and marketing expertise. The patent rights to a drug that has both human and veterinary applications, for example, may be separately licensed for these uses. Benger Laboratories Ltd. v. R.K. Laros Co., 209 F.Supp. 639 (E.D.Pa. 1962), aff’d, 317 F.2d 455 (3d Cir. 1963). The scope of the “field-of-use” definition often reflects the relative bargaining strengths of the parties. Great care should be exercised in crafting such definitions to anticipate evolving technologies and to avoid ambiguity. A field of use defined simply as involving computers, for example, could raise countless questions when applied to products such as kitchen appliances, audio equipment, automotive components, avionics, medical devices, and a host of other products utilizing microprocessors. Also, if the field of use is defined too broadly or indefinitely, disputes might arise over whether specific technological developments fall within the license grant or whether a new license has to be negotiated. In the context of defining a field-of-use restriction, one must be mindful of the fact that a licensor cannot manufacture and sell a patented product and thereafter restrict its field of use because the patented monopoly on the product is exhausted with the sale. United States v. Univis Lens Co., 316 U.S. 241, 86 L.Ed. 1408, 62 S.Ct. 1088, 1093 (1942). The following is an example of a field-of-use restriction for a lighting technology: The Licensed Field, as used herein, shall mean and refer to the practice of the Licensed Patent Rights to produce, sell, and/or resell Licensed Products for and in connection with outdoor sport, camping, and boating-related lighting products such as flashlights and lanterns. Notwithstanding anything herein to the contrary, the Licensed Field shall exclude any product that is intended, developed, or sold for indoor residential and commercial lighting purposes. (3)
[5.17] Licensed territory
Unless the parties intend to enter into a worldwide license, it is prudent to define the licensed territory in which the licensee is being permitted to operate. A U.S. patent is effective throughout the United States and its territories and possessions, and a patent owner may split up the license grant according to parts of the United States. 35 U.S.C. §261 (sanctioning patent owner’s grant of exclusive right under patent “to the whole or any specified part of the United States”). As long as the licensor’s use of territorial restrictions is predicated on the rights derived from the patent grant, and not on some other, anticompetitive practice, such restrictions are deemed lawful and do not violate the antitrust laws or the laws of patent misuse. See Reinke Manufacturing Co. v. Sidney Manufacturing Corp., 446 F.Supp. 1056, 1068 (D.Neb. 1978), aff’d, 594 F.2d 644 (8th Cir. 1979). Courts have extended and applied the language of §261 relating to the division of domestic patent rights among different parts of the United States to world markets. See Cryomedics, Inc. v.
5 — 18
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.18
Frigitronics of Conn., Inc., No. Civ. B-76-113, 1977 WL 22807 (D.Conn. Oct. 27, 1977). Thus, it is permissible, for example, for a licensor to grant foreign patent rights to foreign licensees while restricting their ability to export the licensed product to the United States. Dunlop Co. v. KelseyHayes Co., 484 F.2d 407, 417 – 418 (6th Cir. 1973). The following is an example of a “licensed territory” definition: The Licensed Territory means and includes the United States and its Territories, as well as any jurisdiction in which Licensor has filed and received rights to practice, or rights to exclude others from practicing, the inventions claimed in the Licensed Patent Rights. (4)
[5.18] Payment terms
The consideration paid for patent licenses can take many forms and include such value as the furnishing of improvements to the licensor, a cross-license under patents held by the licensee, monetary payments, or any combination of these. This section focuses on monetary consideration, through the payment of a lump sum, a running royalty payment, or a combination of the two. In the case of a lump-sum payment, the patent licensor receives consideration in the form of an initial cash payment at the outset of the license, either as a single payment or in prescribed installments. A lump-sum payment is frequently advantageous to the licensor. It allows the licensor to recover more quickly on its investment in the licensed technology and to continue funding its own research. It offers the licensor some assurance that the licensee is appropriately capitalized and sufficiently motivated to exploit the licensed technology. On the flip side, it also protects the licensor in the event that the licensee decides to shelve the technology and not produce or sell licensed products. In addition, the patent licensor that has received its consideration at the outset of the license is probably exempt from claims for refund by the licensee if the patent is later held invalid. Another advantage of lump-sum payments for the licensor is that, in international transactions, they can help avoid the potential adverse consequences of future currency rate fluctuations and/or political instability. The following is an example of a lump-sum royalty provision: As consideration, Licensee agrees to pay Licensor, within 30 days of the effective date of this Agreement, the sum of $100,000. In the case of a royalty, the consideration paid by the licensee is tied to some objective standard and usually takes the form of cash consideration expressed as a percentage of net sales or a payment based on units produced or sold. Usually, licensees prefer the continuing remuneration approach of a royalty payment, which allows them to devote their capital to the necessary facilities and personnel to take full advantage of the licensed technology. Licensees also prefer to pay the licensor out of the profits being generated from their operations under the license. From an accounting standpoint, royalty arrangements permit the licensee to cost account for each unit produced. Another important advantage of a royalty form of consideration is that, if based on net sales, the royalty approach can reflect the effects of inflation (net sales tend to trend
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 19
§5.18
INTELLECTUAL PROPERTY LAW
upward) and market forces (prices tend to be reduced over time due to competition, product life cycle, and other factors). If the licensor is in a strong financial position, is confident that the licensing relationship will be successful, and wants to share in the fortunes of the licensee, the licensor might be inclined to forgo up-front payments in favor of a high royalty rate. The following is an example of a running royalty provision: As consideration for the rights and licenses granted herein, Licensee shall pay to Licensor five percent of the Net Sales Price of all Licensed Products made, used, or sold by Licensee. There are many variations on the royalty form of remuneration. When the licensor is weak financially and may need to develop further the licensed technology, the parties to a license might agree to an initial advance payment, in the form of a prepaid royalty, to be applied against future running royalties. Minimum royalties are frequently employed to assure commitment and adequate performance by a licensee; frequently, though not always, minimum royalty levels are set to increase over time and then level off. Depending on the business and the product involved, the parties can specify that minimum royalties are due annually, quarterly, or at any other period. Also, a royalty may be expressed as a fixed fee per unit made, used, or sold rather than as a percentage of net sales. The crucial issues for the parties negotiating a royalty-based patent license are (a) determining the appropriate royalty for a given situation and (b) defining the royalty base. These determinations necessarily go hand in hand because a royalty rate has significance only in relation to the base to which it is applied. Hughes Aircraft Co. v. United States, 31 Fed.Cl. 481 (1994), aff’d, 86 F.3d 1566 (Fed.Cir. 1996). For example, a royalty rate of 0.5 percent based on a $500,000 medical scanner apparatus will yield more revenue ($2,500) than a royalty rate of 5 percent based on a $500 servomotor in the medical scanner apparatus ($25). The selection of a reasonable royalty rate is, in essence, the licensing parties’ negotiated allocation of the profit opportunity presented by the license. This conceptual underpinning has given rise to a number of “rule of thumb” royalty bases, the most commonly used until recently being the so-called “25-percent rule.” In one version of the rule, a royalty of 25 percent of net profits is used in license negotiations. W.L. Gore & Associates, Inc. v. International Medical Prosthetics Research Associates, Inc., No. CIV 84-559 PHX CLH, 1990 WL 180490, *23 (D.Ariz. July 9, 1990). The 25-percent rate is then negotiated up or down based on a number of factors, such as (a) the licensor’s ability to continue to reinforce the licensed package with research and development and know-how, (b) the licensor’s reputation for diligence in pursuing infringers and protecting its licensees, (c) the licensee’s preexisting manufacturing capabilities and/or skilled marketing force, (d) the licensee’s access to raw materials or local government approvals, and (e) the likelihood of substantial market gyrations. However, in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed.Cir. 2011), the Federal Circuit held that “the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation.” Increasingly, it is possible for licensors trying to set a reasonable royalty rate for licensing their inventions to obtain information about agreed royalty rates in relevant licenses. Although
5 — 20
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.20
there is little published information about actual royalties in specific license agreements, such information can be gleaned from litigation documents in the public record (either case records including actual licenses or testimony and decisions reflecting a reasonable royalty analysis for a given product or industry) and through various websites (see, e.g., www.royaltysource.com). Chapter 2 of this handbook discusses determining a reasonable royalty under 35 U.S.C. §284 in the context of assessing damages for patent infringement. (5)
[5.19] Term and termination
In the absence of a specified term not to exceed the life of the licensed patent, a patent license will be deemed to run to the expiration of the licensed patent. The term provision of a package patent license agreement might read as follows: This agreement and the licenses granted hereunder to Licensee shall run until expiration of the last to expire of the Licensed Patents and shall thereupon terminate. It is customary when crafting patent license agreements to contemplate and address the scenarios, in addition to expiration of the licensed patent, that might give rise to a termination of the license agreement. These scenarios can include, among others, default in the payment of royalties, a material breach, or the insolvency or bankruptcy of one of the parties. As a result of an amendment to 11 U.S.C. §365 by the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549, the clause, which was customary at the time, providing for termination of the license by the licensor in the event of the bankruptcy of the licensee, was rendered unenforceable. Under the current law, the bankrupt estate can repudiate a patent license without immunity but also is considered to be vested with the power to transfer the license to the highest bidder, even if there is a clause in the license to the contrary. See generally Aleta A. Mills, Comment, The Impact of Bankruptcy on Patent and Copyright Licenses, 17 Bankr.Dev.J. 575 (2001). (6)
[5.20] Ancillary provisions
The number of additional provisions that can be included within a license agreement, many of which can be very important to some or all of the parties, is limited only by the imagination of the authors of the license agreement. A partial list follows: a. Definitions, in addition to those mentioned in §§5.15 – 5.19 above, can promote consistency and avoid ambiguities. Such definitions might include “licensed patents,” “licensed products,” “related companies,” and others. b. Reporting intervals and requirements concerning payments due should be specified, as well as audit provisions.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 21
§5.21
INTELLECTUAL PROPERTY LAW
c. Representations and warranties that the licensed patent rights are valid and that the claimed inventions are operable, against infringement of third-party rights, of indemnification, and of product liability are among the types of warranties addressed in license negotiations and inserted into patent licenses. d. Confidential information is always of concern to parties negotiating technology agreements, and confidential information provisions are frequently signed in advance of patent license negotiations or included within the formal license agreement. e. Improvements and grantbacks are relevant considerations when further technological innovations are contemplated as a result of licensor research or licensee improvement on the licensed technology. f. Patent infringements are always a concern to licensors (who may not want to be obligated to expend resources on chasing third-party infringers) and licensees (who do not want to be bound to pay royalties while a competitor gets a “free ride”). It is wise to address this issue during license negotiations and craft provisions concerning who may pursue third-party infringers, the sharing of litigation costs and damages obtained, and who has settlement authority. g. Most-favored licensee clauses can protect a licensee from being placed at a competitive disadvantage if more favorable license terms are granted to a competitor licensee. See Studiengesellschaft Kohle, M.B.H. v. Hercules, Inc., 105 F.3d 629, 633 (Fed.Cir. 1997). h. A working requirement is mandatory in some foreign jurisdictions, but not in the United States. Absent some undertaking by the licensee to produce a specified minimum number of patented products within a specified period of time, or some similar requirement, the licensee could simply shelve the invention and pay nothing to the licensor. A naked promise to use one’s “best efforts” to exploit an invention is regarded, under Illinois law, as too vague to constitute an enforceable contract term. Beraha v. Baxter Healthcare Corp., No. 88 C 9898, 1990 WL 207380, *1 (N.D.Ill. Nov. 30, 1990), aff’d in pertinent part, 956 F.2d 1436 (7th Cir. 1992). i. Arbitration, or other alternative dispute resolution mechanisms, may be specified in a license agreement. The U.S. Code expressly sanctions the arbitration of any dispute relating to patent validity or infringement arising under a license contract. 35 U.S.C. §294. j. Patent-marking provisions can be important because failure of a licensee to mark licensed patent numbers on licensed goods can prevent the licensor from collecting damages for past infringement in a suit brought against a third party on the licensed patents. 35 U.S.C. §287. k. Restrictions on assignment may prohibit an assignment of the license or delineate terms under which a contract may be assigned. Such provisions can be especially important to a party that contemplates a change of ownership or a transfer of assets. (7)
[5.21] Boilerplate provisions
There are many so-called “boilerplate” provisions that can be included in a patent license agreement to clarify and remove ambiguity. A few of these are
5 — 22
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.22
a. a severability clause in the event that any provision is found invalid or unenforceable; b. an integration clause affirming that the agreement contains the entire understanding of the parties; c. a notice clause identifying the parties to whom notices should be sent, their addresses, and the manner of service; d. a survival of obligations clause, such as payment of pretermination royalties and confidentiality obligations in the event of termination; and e. choice-of-law and forum-selection clauses in the event that a dispute should arise. Additional boilerplate provisions can address topics as varied as waivers of breach by either party, force majeure, the need for government approval in a licensed territory, execution in counterparts, paragraph headings being for convenience only, and signatories representing that they are authorized to sign the license agreement on behalf of the parties. 4. [5.22] Licensee and Assignor Estoppel Prior to 1969, licensees were precluded from challenging the validity of patents under which they were licensed in accordance with the traditional state contract law principle of licensee estoppel. Thus, a patent owner could license his or her invention then sit back and collect royalties for as long as the licensee used the invention. This situation changed dramatically, though, with the 1969 Supreme Court decision in Lear, Inc. v. Adkins, 395 U.S. 653, 23 L.Ed.2d 610, 89 S.Ct. 1902 (1969). In Lear, the Supreme Court struck down the doctrine of licensee estoppel in patent cases and held that a patent licensee is not estopped from contesting the validity of a licensed patent and that a licensor cannot continue to collect royalties on a patent after it has been declared invalid. The rationale behind the decision was that the public policy of placing invalid patents in the public domain outweighed the traditional requirements of state contract law. As a result, a patent licensee can challenge validity in an effort to release itself from future royalty obligations and, possibly, from making royalty payments while the challenge is pending. Under Lear, a licensee may assert invalidity of the licensed patent as a defense to a patentee’s suit for patent infringement or breach of contract. The licensee also has the option to actually cease payment of royalties and institute suit for a declaratory judgment that the patent is invalid. Studiengesellschaft Kohle, M.B.H. v. Shell Oil Co., 112 F.3d 1561, 1568 (Fed.Cir. 1997). In any event, the licensee remains liable for royalties until the date of the validity challenge, even if the patent is ultimately held invalid. While some courts permit the licensee to seek an injunction prohibiting termination of the license and either a refund of interim royalty payments or the establishment of a court-ordered escrow account for the deposit of royalties due pendente lite, the Federal Circuit Court of Appeals has characterized such relief as constituting a misapplication of Lear. Cordis Corp. v. Medtronic, Inc., 780 F.2d 991, 994 – 995 (Fed.Cir. 1985) (Cordis I). Cf. Cordis Corp. v. Medtronic, Inc., 835 F.2d 859, 861 (Fed.Cir. 1987) (licensee challenging not
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 23
§5.23
INTELLECTUAL PROPERTY LAW
validity of patent itself, but rather scope of its license) (Cordis II). The Federal Circuit’s view is that a licensee may withhold royalties while challenging a patent but that it would be unfair to allow the licensee “to avoid facing the consequences that such an action would bring.” Cordis I, supra, 780 F.2d at 995. That view was challenged and invalidated in the U.S. Supreme Court’s decision in Medimmune, Inc. v. Genentech, Inc., 549 U.S. 118, 166 L.Ed.2d 604, 127 S.Ct. 764 (2007). There the Court held that a patent licensee is not required to terminate its license agreement before seeking a declaratory judgment that the subject patent is invalid, unenforceable, or not infringed. Justice Scalia, writing for the Court, noted that a licensee need not materially breach prior to a justiciable U.S. Constitution Article III “case or controversy.” This decision eliminated the dilemma a licensee previously faced in either challenging the patent and risking contract damages or paying royalties for a potentially worthless patent. The public policy that favors allowing a licensee to contest patent validity is not present in the assignment context. Unlike a licensee who might be forced to pay royalties on an invalid patent, an assignor who challenges a patent already has been paid for the rights to the patent. For this and other reasons, the Federal Circuit has affirmed the doctrine of assignor estoppel, which is an equitable doctrine that prevents an assignor of patent rights from later contending that what was assigned is a nullity. Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1224 (Fed.Cir. 1988). Absent an express reservation by the assignor of the right to challenge validity or an express waiver by the assignee of the assignor’s right to assert assignor estoppel, the assignor of a patent surrenders the right to later challenge the validity of the assigned patent. Mentor Graphics Corp. v. Quickturn Design Systems, Inc., 150 F.3d 1374, 1378 (Fed.Cir. 1998). Can an accused infringer agree not to challenge the validity of a patent as part of a litigation settlement agreement, or is such an agreement void as against public policy pursuant to Lear? When an accused infringer has challenged patent validity, has had the opportunity to conduct discovery on validity issues, and has dismissed litigation under a settlement agreement that contains an unambiguous undertaking not to challenge validity, the accused infringer is thereafter contractually estopped from raising any such challenge. Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1370 (Fed.Cir. 2001). a. [5.23] Uniform Commercial Code Any sale of goods, as distinguished from the provision of services, raises issues of state law. Most states, including Illinois, have adopted the provisions of the Uniform Commercial Code — Sales (UCC), 810 ILCS 5/2-101, et seq., which govern the sale of goods. In particular, Illinois has adopted, without change, §2-312 of the UCC, which is entitled, “Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement.” Under Illinois law, a seller of goods makes certain warranties to the buyer of goods and, in certain limited circumstances, the buyer makes a warranty to the seller. By way of example, under 810 ILCS 5/2-312(1)(a), the seller warrants that the title conveyed is good and its transfer rightful. Rockdale Cable T.V. Co. v. Spadora, 97 Ill.App.3d 754, 423 N.E.2d 555, 558, 53 Ill.Dec. 171 (3d Dist. 1981). Related to this warranty of title, some sellers will be deemed to have additionally warranted against patent infringement.
5 — 24
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.24
The UCC provides: Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications. 810 ILCS 5/2-312(3). Essentially, this section provides that the merchant seller is deemed to promise to a buyer that the goods are free of patent infringement. As a result, a buyer who is sued for infringement is given a right to indemnification from the seller. When the buyer orders goods to be assembled, prepared, or manufactured to its own specifications, however, the buyer is deemed to represent that the seller will be safe in manufacturing goods according to the provided specifications. In such a case, the seller makes no warranty against infringement and, additionally, the buyer is under a good-faith obligation to indemnify the seller for any loss suffered as a result of infringement. As indicated by the “[u]nless otherwise agreed” preface to §2-312(3), the UCC provision is a gap-filler provision. In other words, parties to a sale of goods are free to make their own agreement regarding the presence or absence of a warranty against infringement. However, to effectively exclude or modify a warrant of title, §2-312(2) requires a seller to use “[p]recise and unambiguous language.” Rockdale, supra, 423 N.E.2d at 558. b. [5.24] Government Interest in Patents The U.S. government can own and assert patent rights. See United States v. Telectronics, Inc., 857 F.2d 778 (Fed.Cir. 1988). Additionally, federal agencies can license patents. 35 U.S.C. §207(a)(2). It is beyond the scope of this chapter to review comprehensively the laws relating to the government’s proprietary interest in patents on inventions made with federal assistance and federal money. These laws, comprised in part of the statutory scheme set forth in 35 U.S.C. §§200 – 212, are predicated on the policy of promoting the commercialization and availability of inventions made with federal funds and pursuant to contracts or grants (known as “funding agreements”) involving federal agencies. The extent of the government’s proprietary interest in a given invention largely will turn on the source of the inventive activity, the funding for it, and any applicable legislation. Because the doctrine of sovereign immunity prohibits suit against the government unless the government has consented thereto, 28 U.S.C. §1498 provides the exclusive judicial remedy for patent infringement by or for the United States (including its contractors, subcontractors, and others acting with the authorization and consent of the United States). Section 1498 was primarily intended to permit the U.S. government to purchase goods and services for the performance of governmental functions without the possibility that the work could not be carried out because the government supplier or contractor was subject to the threat or reality of an injunction for patent infringement. Section 1498 provides a waiver of sovereign immunity only with respect to direct
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 25
§5.25
INTELLECTUAL PROPERTY LAW
government infringement of a patent; the government is not liable for infringement by inducement or for contributory infringement. Motorola, Inc. v. United States, 729 F.2d 765, 768 n.3 (Fed.Cir. 1984). The patentee’s remedy in a §1498 action is limited to “reasonable and entire compensation” for the unauthorized use and manufacture. 729 F.2d at 767. c. [5.25] Tax Considerations Patents and patent applications are treated as intangible assets under the tax laws, their transfer and acquisition giving rise to tax consequences. Individuals and corporations alike need to know the tax consequences of patents, which, though summarized below, are best left to the tax attorneys. A transfer of patent rights may subject the transferor to income taxation on the revenues derived from the transfer. Under 26 U.S.C. §1235(a), inventors can take advantage of long-term capital gain treatment of the proceeds derived from any “transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder.” Under §1235, long-term capital gain treatment is available regardless of whether the transferor has profited from the sales of patented articles and regardless of whether the payment for the transfer was made with lump-sum or periodic payments (such as royalties). Further, under §1235, there is no minimum holding period to qualify for long-term capital gain treatment. Section 1235 is designed to give the benefit of long-term capital gain treatment to individual, independent inventors and certain financial backers; it generally excludes the employer of the inventor, all corporations, partnerships, estates, trusts, and the inventor’s own relations. It should be noted that the Internal Revenue Code speaks in terms of “all substantial rights” and not in terms of assignments or licenses. Accordingly, the operative effect of a transaction needs to be considered when assessing the tax consequences. Generally speaking, the transfer of the right to make, use, and sell will be deemed to constitute an assignment of “all substantial rights” in the patent, whereas a transfer that includes a reservation of valuable rights will not qualify for long-term capital gain treatment under §1235. See Blake v. Commissioner, 615 F.2d 731, 735 (6th Cir. 1980). When a patent or a patent application is acquired by purchase, the cost of acquisition can ordinarily only be depreciated. Under 26 U.S.C. §197, the cost of acquisition may be capitalized by depreciating it over a 15-year period beginning with the month in which the patent was acquired. Under 26 U.S.C. §174, a taxpayer may deduct or depreciate research or experimental expenditures that are paid during the taxable year. Expenditures incurred in prosecuting a patent application, including attorneys’ fees, are deemed a part of the cost of acquisition and may be depreciated over the life of the patent or deducted as a current expense in the year paid or incurred. 26 C.F.R. §1.174-2(a). As long as they are necessary and reasonable, royalties paid by a patent licensee are a deductible business expense. Similarly, “ordinary and necessary” litigation expenses associated
5 — 26
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.26
with patent litigation are deductible, as are damages paid for patent infringement. Schnadig Corp. v. Gaines Manufacturing Co., 620 F.2d 1166, 1169 (6th Cir. 1980). Damages recovered for patent infringement, whether compensatory or punitive, are treated as ordinary income.
PRACTICE POINTER
Many a hard-negotiated litigation settlement/license agreement has been scuttled after the company’s chief financial officer inspects the agreement and considers the tax ramifications. It is always prudent, therefore, to consult with the CFO, company accountants, or company tax attorney early in the negotiations concerning the payment terms in the agreement and the tax consequences thereof.
5. [5.26] Constitutional Standing To Sue for Infringement A conveyance of legal title by the patentee can be made only of (a) the entire patent, (b) an undivided part or share of the entire patent, or (c) all rights under the patent in a specified geographical region of the United States. A transfer of any of these is an assignment and vests the assignee with title in the patent and a right to sue infringers (either alone, in cases a and b, or, in case c, jointly with the assignor). A transfer of less than one of these three interests is a license, not an assignment of legal title, and it gives the licensee no right to sue for infringement at law in the licensor’s own name. Aspex Eyewear, Inc. v. Miracle Optics, Inc., 434 F.3d 1336 (Fed.Cir. 2006). See also Vaupel Textilmaschinen KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 873 – 874 (Fed.Cir. 1991). The U.S. Supreme Court has not spoken to what right or rights must be conveyed for a successor in interest to have constitutional standing under the “all substantial rights” analysis. Accordingly, courts are split as to which of the three rights — the right to make, use, or sell; the right to sue for infringement; and the right to alienate — is determinative to prove whether an assignment or a license was conveyed. The Federal Circuit has noted that a “key factor” is where the right to sue for infringement lies. Aspex Eyewear, supra, 434 F.3d at 1340, citing Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1380 (Fed.Cir. 2000). Withholding the right to sue was decisive in Intellectual Property Development, Inc. v. TCI Cablevision of California, Inc., 248 F.3d 1333 (Fed.Cir. 2001), because the patentee’s choice to require the licensee to obtain consent to litigation — including the right to require the licensee to withdraw at any time — was inconsistent with the notion of “conveying all substantial rights.” See Sicom Systems Ltd. v. Agilent Technologies, Inc., 427 F.3d 971, 977 (Fed.Cir. 2005) (summarizing Federal Circuit caselaw). However, more recent Federal Circuit precedent seems to turn on more than just which party retains the right to sue, but whether the licensor places substantial restraint on alienation of the patent right by the licensee. New Medium Technologies LLC v. Barco N.V., 644 F.Supp.2d 1049, 1052 (N.D.Ill. 2007), citing Propat International Corp. v. RPost, Inc., 473 F.3d. 1187, 1191 (Fed.Cir. 2007). More explicitly, the Northern District of Illinois noted that
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 27
§5.27
INTELLECTUAL PROPERTY LAW
[t]he ability to transfer patent rights is “particularly significant” within the “all substantial rights” analysis, and the Federal Circuit has gone so far as to refer to a restraint on transferability as “ ‘fatal’ to the argument that the agreement transferred all substantial rights in the patent.” New Medium, supra, 644 F.Supp.2d at 1052, quoting Propat, supra, 473 F.3d at 1191. A closer reading of Sicom, supra, suggests that perhaps it is a fusion of both the factors that decides the issue of standing to sue. Amgen, Inc. v. ARIAD Pharmaceuticals, Inc., 513 F.Supp.2d 34, 41 (D.Del. 2007) (“In four of the five cases [discussed in Sicom, the Federal Circuit] found that limitations on the assignment of ownership and litigation rights prevented the licensee to sue on its own behalf.” Citing Sicom, supra, 427 F.3d at 971.). Finally, whether the licensor or the licensee is obligated to “maintain the patent” is a factor to be considered. New Medium, supra, 644 F.Supp.2d at 1052, citing Propat, supra, 473 F.3d. at 1190 – 1193. The court in New Medium found this factor to support the licensee who was obligated to pay prosecution and maintenance fees for the patent in issue because it was “an indication that the party with that obligation has retained an ownership interest in the patent.” 644 F.Supp.2d at 1057, quoting Propat, supra, 473 F.3d. at 1191. Additionally, a Delaware district court called “[m]aintenance of the patent . . . indicative of ownership.” Amgen, supra, 513 F.Supp.2d at 40.
III. MANAGEMENT OF PATENT RIGHTS A. [5.27] Patent Audits and Due Diligence An effective intellectual property compliance program provides a framework for harvesting, documenting, evaluating, protecting, and enforcing technological and business innovations. It optimizes intellectual property exploitation opportunities, controls intellectual property expenses, and minimizes the risk of infringing the intellectual property of others. Any such program involves first identifying patentable inventions and then using the patents obtained therefrom as economic weapons in furtherance of the company’s business objectives. 1. [5.28] Conducting a Patent Audit The first step toward identifying patentable inventions is to conduct an audit of the company’s patent assets and practices. A comprehensive patent audit reviews selected aspects of a company’s business practices in light of current intellectual property law and provides an invaluable reference and planning tool for a company’s intellectual property manager. An intellectual property audit will identify patentable inventions, patent assets, patent issues, and risks that are relevant to the company’s business. Patent audits can be company-wide or limited in scope. If the company needs to review its procedures for acquiring, perfecting, maintaining, and enforcing its patent assets, a broad-scope patent audit may be warranted. Sometimes, a narrower audit can be done in response to a specific problem. Most importantly, the audit must be tailored to the needs and culture of the company, and its scope should reflect a cost-benefit analysis based on the relevant circumstances.
5 — 28
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.29
The scope of the audit will dictate, in part, who should be on the audit team. The team should include a. the chief legal officer (CLO) or his or her designee; b.
a business manager with the knowledge to help define the scope of the audit and the authority to encourage audit participation and compliance; and
c. outside intellectual property counsel to conduct the audit and work with the CLO to formulate appropriate recommendations to management. While most business managers recognize that technological innovations can be protected by patents, few appreciate the breadth of patent issues that arise in the day-to-day operations of their businesses. It is easy to recognize that a patent application should be filed for an exciting new product. However, it may be less readily apparent that nontechnical business methods might also be patentable — or might infringe the patents of others. In addition, the patent ownership provisions found (or not found) in purchase orders, vendor agreements, joint venture agreements, and other development or teaming agreements can have a significant impact on a company’s return on its research and development investments, as well as its freedom to operate in a given area. A patent audit can be used to examine all such issues and help advance corporate business objectives and intellectual property strategies. Further, the audit can help assemble, organize, and inventory patent assets; bring company practices into compliance with current intellectual property law; uncover overlooked opportunities for protecting and capitalizing on company intellectual property investment; and prevent the recurrence of adverse litigation experiences. After the internal audit, the audit team will report its findings to management. The audit report outlines the level and type of intellectual property creation in the company and discusses the company’s current procedures for identifying, organizing, and protecting patents and for avoiding the patents of others. The report will make recommendations for addressing any discovered problems and for strengthening the company’s patent asset management. 2. [5.29] Due Diligence Considerations Companies frequently encounter the need for patent due diligence investigations. These investigations address some of the same issues as internal patent audits but also seek to confirm the legal status and ownership of patents and to assess their strength. Due diligence audits are usually performed in connection with acquisitions, mergers, joint ventures and technology transfers, and licenses. They frequently involve some degree of risk assessment from the business, financial, and legal perspectives.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 29
§5.29
INTELLECTUAL PROPERTY LAW
A patent due diligence investigation necessarily involves a thorough review of a. patent rights held by the owner/assignor/licensor, including ownership issues; b. patent rights held by third parties and possible infringement issues; c. patent transfer and other agreements, including the review, drafting, and recordation of documents; d. patent investigations, including product clearances, equipment and process operation, and documentation; and e. other legal considerations, such as antitrust, tax, and insurance issues. The following list outlines key patent due diligence issues with appropriate action to be taken with respect to each: Identification of the subject patent rights. Consideration should be given to the target’s list of patents and pending patent applications, which should be compared to the list produced from an independent search. Ownership of and access to the subject patent rights. Existing licenses and other agreements should be studied to identify preexisting rights/obligations of patent inventors and owners. This entails conducting title searches and reviewing agreements, including security interests recorded against patents. Strength, scope, and value of the subject patent rights. The strength, scope, and value of the subject patent rights can be established through a six-step process: a. examine the circumstances under which the patent rights were developed and first disclosed and offered for sale; b. consider the status of the persons involved in the development of the patent rights; c. review copies of issued patents, pending applications, and their file histories; d. confirm the timely payment of maintenance fees; e. assess the scope of protection sought/obtained; and f.
confirm that the subject patent rights in fact cover the product(s) of interest.
Risk of infringing third-party patent rights. Relevant correspondence, pleadings, and opinions concerning threatened or actual litigation or United States Patent and Trademark Office proceedings should be reviewed.
5 — 30
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.30
Depending on the nature of the transaction in which patents are being acquired or transferred, other legal considerations may warrant evaluation as well. These can include antitrust, tax, and insurance and warranty issues. In addition, most such transactions include pre-investigation agreement among the involved parties with respect to confidentiality of the information being exchanged and evaluated. 3. [5.30] Managing Risks Through Deal Terms In addition to conducting a thorough and comprehensive due diligence investigation, a purchaser of patent and other intellectual property rights should also negotiate for final deal terms that can help minimize the risks associated with the subject intellectual property rights in the transaction. A set of warranties that a buyer should seek from a seller in an asset purchase agreement, for example, might read as follows: Seller’s Warranties Concerning Purchased Rights (a) [Schedule 1.2] sets forth a true and complete list of all Purchased Patents, Purchased Copyrights, and Purchased Trademarks (Purchased Rights) owned by, used by, filed by, or licensed to Seller and used, held for use, or intended to be used primarily in the operation or conduct of the Business. Except as set forth in [Schedule 1.2] (1) all the Purchased Rights have been duly registered in, filed in, or issued by the appropriate Government Entity when such registration, filing, or issuance is necessary for the activities of the Business as presently conducted; (2) Seller is the sole and exclusive owner of, and Seller has the right to make, use, offer for sale, sell, import, reproduce, display, perform, modify, enhance, distribute, prepare derivative works of, and sublicense, without payment to any other person, all products and works included in and covered by the Purchased Rights, and the consummation of the transactions contemplated hereby does not and will not conflict with, alter, or impair any such rights; and (3) to Seller’s knowledge during the past two years, Seller has not received any written or oral communication from any person asserting ownership in any of the Purchased Rights. (b) Except as set forth on [Schedule 1.2] hereof, Seller has not granted any license of any kind relating to any Purchased Rights or the marketing or distribution thereof. Seller is not bound by or a party to any option, license, or agreement of any kind relating to the intellectual property of any other person or entity for the use of such intellectual property in the conduct of the Business, except as set forth in [Schedule 1.4], [except for so-called “shrinkwrap” license agreements relating to computer software licensed in the ordinary course of the Business]. To the knowledge of Seller, the activities of the businesses presently conducted do not violate, conflict with, or infringe on the intellectual property rights of any other person. Except as set forth in [Schedule 1.2] (1) no claims are pending against Seller by any person with respect to the ownership, validity, enforceability, effectiveness, or use in the Business of any
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 31
§5.31
INTELLECTUAL PROPERTY LAW
Purchased Rights, and (2) during the past two years Seller has not received any written communication alleging that it has, in the conduct of the Business, violated any rights relating to the intellectual property of any person. (c) All material technology has been maintained in confidence in accordance with protection procedures customarily used in the industry to protect rights of like importance. All current members of management and key personnel of Seller have executed and delivered to Seller a proprietary information agreement restricting each such person’s right to disclose proprietary information of Seller. No former or current management and key personnel have any claim against Seller in connection with any such person’s involvement in the conception and development of any technology, and no such claim has been asserted or is threatened. None of the current officers or employees of Seller has any patents issued or applications pending for any device, process, design, or invention of any kind now used or needed by Seller in the furtherance of the Business, which patents or applications have not been assigned by Seller, with such assignments having been duly recorded in the United States Patent and Trademark Office and with any appropriate Government Entity when such recordation is necessary for the activities of the Business as presently conducted. B. [5.31] Strategic Deployment of Patents With the patent audit results in hand, the company intellectual property manager is now ready to work with the CEO and business managers to devise patent strategies aimed at realizing economic value and important business objectives based on company patent assets. There are several common intellectual property strategies that can be employed to maximize the value of company patents. One strategy is to secure a patent position for future exploitation and to integrate patent assets with specific business objectives. Another strategy is to create bargaining chips for trading technology the company wants or needs. Further, company patents can be used as equity for the purchase of, or participation in, other businesses. Companies can seek to generate cash by selling or licensing company patents to others. Patents can be used to create obstacles for the competition or to create tax benefits for the company. Companies that have devised and implemented an overall intellectual property assetmanagement strategy report a significant and lasting effect on their bottom lines. Texas Instruments was one of the first companies to see the financial potential in its intellectual property portfolio. In 1985, in the wake of declining profits and shrinking market share, Texas Instruments began an aggressive program of seeking royalty payment from other semiconductor companies for the use of its patents. This strategy generated billions of dollars in royalty payments over the subsequent decade. In 2000, Lucent Technologies devoted roughly 11 percent of its $33.8 billion in revenue to research and development, obtaining an average of two new patents every day. To capitalize on that investment, Lucent set up a patent assertion team to identify and prosecute infringers and a licensing team to seek revenue aggressively from its patent portfolio. IBM, which has 35,000 patents worldwide, generated over $2 billion in intellectual property licensing royalties — over 15 percent of its total profits — from licensing royalties in 2002.
5 — 32
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.32
In contrast, consider the cost of not seeking patent protection and revenues. In 1979, Xerox decided not to patent its invention of the graphical user interface that later evolved into the Microsoft Windows Operating System. Strategic intellectual property asset management can yield dividends other than licensing revenue. An increasing number of companies are setting up intellectual property holding companies and/or subsidiary intellectual property management companies for business-focused asset management and the reduction of tax liabilities. Intellectual property holding companies tend to focus on tax objectives, setting up an entity to own intellectual property and receive royalty income in a state that does not tax income, for instance. Intellectual property management companies are independent businesses focused on the aggressive exploitation of intellectual property as an economic asset. These arrangements must be carefully constructed to avoid a loss of valuable intellectual property rights. Patents are increasingly recognized and employed as economic weapons in today’s business climate. Successful litigation strategies against infringers have resulted in injunctive relief and damage awards (trebled for willful infringement) that have escalated into hundreds of millions of dollars. All it took was seven patents for Polaroid to decimate Eastman Kodak’s instant photography business, at a cost to Kodak of more than $3 billion in infringement damages, lost research and development and manufacturing costs, employee layoffs, and legal fees. Other slain Goliaths include Stac Electronics’ $120 million patent victory in 1994 over Microsoft (data compression technology) and Fonar’s damages award of $103.7 million in 1997 against General Electric (magnetic resonance imaging technology). Numerous companies have paid dearly for their intellectual property mismanagement, especially when they failed to keep an eye on what their competition was doing. Accordingly, patent strategies should be employed, and they should be evaluated and modified, as necessary, on an ongoing basis.
IV. APPENDIX — SAMPLE AGREEMENTS A. [5.32] Employee Agreement Regarding Confidentiality and Intellectual Property EMPLOYEE AGREEMENT REGARDING CONFIDENTIALITY AND INTELLECTUAL PROPERTY THIS AGREEMENT is made between [company], a corporation organized and existing under the laws of the State of Illinois and having a place of business at [address], and [employee], residing at [address]. CONFIDENTIALITY 1. I, [employee], am aware of [company]’s need to maintain the confidentiality of its business information. Therefore, I agree to take the utmost precautions to ensure that the confidentiality of [company]’s papers, effects, and technical and accounting matters is
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 33
§5.32
INTELLECTUAL PROPERTY LAW
preserved, and I agree not to divulge or discuss with any third parties [company]’s confidential matters relating to [company]’s business. Upon termination of my employment, I will return to [company] all of its papers, effects, and materials that have been entrusted to me. Additionally, I will return all notes, memoranda, correspondence, and reports completed, or in process, at the time of termination. This covenant for confidentiality shall survive my employment for as long as such material or information does not enter the public domain (through no fault of my own). 2. I will keep and hold in confidence all confidential information, including, without limitation, all records and documents of which I may have knowledge and all data obtained by me from [company]’s computer system, and unless required by my work with [company], I will not remove from [company]’s premises any record, information, or other document or data relating to any business of [company] or make any unauthorized copy thereof. All confidential information is recognized as property of [company] and is not to be used for my own or another’s benefit or communicated to any unauthorized person, at any time, without the written consent of [company]. ASSIGNMENT OF INTELLECTUAL PROPERTY 3. I acknowledge ownership by [company] of, and hereby assign and agree to hereafter execute any further documents as requested by [company] to assign to [company], the entire worldwide rights to all works of authorship, inventions, improvements, and developments, whether patentable or unpatentable, copyrightable or uncopyrightable, that, during the course of my employment, I make or conceive or may make or conceive in the future, either solely or jointly with others, with the use of [company]’s time, equipment, materials, supplies, facilities, trade secrets, or confidential information, or otherwise resulting from or suggested by my work for [company]. All such works of authorship, inventions, improvements, and developments shall automatically and immediately be deemed to be the property of [company] as of the date authored, made, or conceived. 4. If, during the course of my employment with [company], I create or discover any patentable or potentially patentable invention or design, within the meaning of Title 35 of the United States Code, any utility or design patent application that may be based on any such invention or design created or discovered by me during the course of my employment with [company], including patent applications related thereto and patents issuing therefrom throughout the world, shall be and hereby are assigned to [company]. The assignment of rights contemplated in this Agreement includes all rights to sue for all infringements, including those that may have occurred before the assignment, and to recover past damages. I agree to fully cooperate with [company] in filing and prosecuting any such patent applications and in obtaining any such patents, and I further agree to execute any and all documents that [company] may deem necessary to obtain such patents or to document such assignments to [company]. I hereby designate [company] as my attorney-in-fact to execute any such documents relating to any such patent or applications, issued patents, and assignments thereof to [company].
5 — 34
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.32
5. I acknowledge that, under the Illinois Employee Patent Act, 765 ILCS 1060/1, et seq., the obligation that I have undertaken herein to assign my inventive rights to [company] does not apply to an invention for which no equipment, supplies, facility, or trade secret information of [company] was used and that was developed entirely on my own time, unless (a) the invention relates (1) to the business of [company] or (2) to [company]’s actual or demonstrably anticipated research or development or (b) the invention results from any work performed by me for [company]. 6. I agree that any original work of authorship fixed in a tangible medium of expression, including but not limited to literary works; computer programs, software, or other associated intangible property; network configuration; musical works, including any accompanying words; dramatic works, including any accompanying music; pantomimes and choreographic works; pictorial, graphic, and sculptural works; motion pictures and other audiovisual works; sound recordings; and architectural works, within the meaning of Title 17 of the United States Code, prepared within the scope of my involvement with [company], shall be a “work made for hire” within the meaning of 17 U.S.C. §201(b) and that all ownership rights comprised in the copyright shall vest exclusively in [company]. Should a court of competent jurisdiction hold that such work is not a “work made for hire,” I further agree to assign and hereby do assign all of my right, title, and interest in the work, including all copyrights, domestic and foreign, and to execute any assignments or other documents presented to me by [company] relating to such assignment. I shall not exercise any right under copyright or other right of [company] in the work or materials without the prior written approval of [company]. The assignment of rights contemplated in this Agreement includes all rights to sue for all infringements, including those that may have occurred before the assignment, and to recover past damages. I agree to assist in securing [company]’s rights and shall execute any and all applications, assignments, or other instruments that [company] shall deem necessary to apply for, obtain, and enforce copyright registrations in the United States or any foreign country. 7. I hereby acknowledge the existence of, and hereby expressly and forever waive, any moral rights arising under U.S. federal law, such as the rights described in 17 U.S.C. §106 and under any state law and under the laws of any other country that convey rights of the same nature or any other type of moral right or droit moral, and knowingly execute this waiver on the following terms: (a) this waiver applies to all works prepared by me within the scope of my work; and (b) this waiver applies to any and all uses and applications in which either the attribution right (and rights of a similar nature) or the integrity right (and rights of a similar nature) may be implicated. 8. If I, during the course of my employment, discover, invent, or produce, without limitation, any information, computer programs, software, or other associated intangible property — network configuration, formulas, product, device, system, technique, drawing, program, or process — that is a “trade secret” as defined within the meaning of the Illinois Trade Secrets Act, 765 ILCS 1065/1, et seq., such information, formulas, product, device, system, technique, drawing, program, or process shall be assigned to [company]. I agree to fully cooperate with [company] in protecting the value and secrecy of any such trade secret
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 35
§5.33
INTELLECTUAL PROPERTY LAW
and further agree to execute any and all documents that [company] deems necessary to document any such assignment to [company]. I appoint [company] as my attorney-in-fact to execute any documents that [company] may deem necessary that relate to any such trade secret or assignment thereof to [company]. ADDITIONAL TERMS 9. I acknowledge that I have been provided a copy of this Employee Agreement Regarding Confidentiality and Intellectual Property, and I agree to the vesting of ownership in, and assignment to, [company] of all intellectual property rights described herein. 10. I agree to disclose promptly to [company] all such works of authorship, inventions, improvements, and developments when made or conceived. Upon termination of my employment for any reason, I will immediately give to [company] all written records of such works of authorship, inventions, improvements, and developments and make full disclosure thereof to the [company], whether or not they have been reduced to writing. 11. I agree that this Agreement shall be governed by, interpreted by, and construed in accordance with the laws of the State of Illinois and that any suit, action, or proceeding with respect to this Agreement shall be brought in the courts of [Cook County in the State of Illinois] [the U.S. District Court for the Northern District of Illinois]. I accept the exclusive jurisdiction of those courts for the purpose of any such suit, action, or proceeding. Venue for any such action will be [city], [state]. 12. This Agreement shall be binding on my heirs, executors, administrators, or other legal representatives or assigns and may not be changed or modified by me in whole or in part except by an instrument in writing signed by the President of [company]. [signatures of employee and company representatives and dates of signing] [execution date and location] [signature of witness and date of signing] B. [5.33] Assignment of Patent Rights ASSIGNMENT OF PATENT RIGHTS WHEREAS, [company] (Assignor), a corporation organized and existing under the laws of the State of [name of state], having a place of business at [address], is the exclusive owner of the entire right, title, and interest in and to the invention of [invention, process, etc.], and the United States and foreign patents and patent applications therefore (Patent Rights) listed in Schedule I, attached hereto and made a part hereof; WHEREAS, [company] (Assignee), a corporation organized and existing under the laws of the State of [name of state], having a place of business at [address], desires to acquire the entire and exclusive right, title, and interest in and to said invention and the Patent Rights;
5 — 36
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.33
NOW, THEREFORE, in consideration of the sum of $1, and other valuable and legally sufficient consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor does hereby assign and transfer to Assignee and its successors, assigns, and nominees, without any restrictions, reservations, or limitations 1. the entire and exclusive right, title, and interest in and to said invention and said Patent Rights, and all continuations, divisions, renewals, reissues, reexaminations, and extensions thereof; 2. all priority rights pertaining to said invention and derived from any and all of said Patent Rights under any applicable convention; 3. the sole right to file applications for patents on said invention under the patent laws of any country of the world in its name, and the sole right to have patents granted on said applications in its name, as fully and entirely as they would have been held by Assignor had this assignment not been made; Assignor hereby covenants and agrees that it will assist Assignee in the prosecution of any such patent applications and in the prosecution of any interference or other proceedings that may arise involving the inventions of the Patent Rights and that Assignor will execute and deliver to Assignee any and all additional papers that may be requested by Assignee to carry out the terms of this assignment; and 4. the sole right to enforce the Patent Rights with the right to sue and recover for Assignee’s own use any accrued profits or damages for any and all infringements thereof, including, but not limited to, past infringements, with respect to which Assignor waives any right to receive any portion thereof. [execution date] [signature of assignor and date of signing] Subscribed and sworn to before me this [signature date]. _______________________________ NOTARY PUBLIC [signature of assignee and date of signing] Subscribed and sworn to before me this [signature date]. _______________________________ NOTARY PUBLIC
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 37
§5.34
INTELLECTUAL PROPERTY LAW
SCHEDULE I PATENT RIGHTS UNITED STATES Title
Filing Date
Publication Date
Issue Date
Patent or Application Number
FOREIGN Title
Filing Date
Publication Date
Issue Date
Patent or Application Number
C. [5.34] Nonexclusive Patent License Agreement NONEXCLUSIVE PATENT LICENSE AGREEMENT THIS AGREEMENT is made and entered into this [execution date], by and between [company], [address] (Licensor), and [company], [a Delaware corporation], through its [division], located at [address] (Licensee). WITNESSETH: This Agreement is made and entered into with reference to the following facts: A. Licensor manufactures and sells, through a marketing and distribution system, a [device] under the name [device name] and is the owner of U.S. Patent No. ____________, issued [date], entitled [patent title]. B. Licensee wishes to manufacture, have manufactured, advertise, market, distribute, and sell [device] products, and Licensor is willing to grant to Licensee a nonexclusive license to do so. NOW, THEREFORE, in consideration of the mutual covenants and promises hereinafter set forth, and other good and valuable consideration, it is agreed as follows: 1. DEFINITIONS A. “Licensed Patents” shall mean U.S. Patent No. ____________ and all continuations, continuations in part, divisionals, reissues, and reexaminations thereof, as well as all foreign counterpart patents and applications.
5 — 38
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.34
B. “Licensed Product(s)” shall mean a [device] that is covered by at least one valid claim of a Licensed Patent, which is in force in the country in which such [device] is manufactured, distributed, or sold by Licensee. C. “Reporting Period” shall mean on or before the end of the first week of each calendar quarter beginning January 1, April 1, July 1, and October 1. 2. RIGHT TO MANUFACTURE, PRODUCE, MARKET, AND SELL Licensor hereby grants to Licensee the nonexclusive right to manufacture, have manufactured for it, produce, distribute, market, offer for sale, and sell Licensed Products and any modifications, alterations, or improvements of such throughout the world on the terms and conditions herein set forth. 3. WARRANTIES A. Licensor represents and warrants that (1) it is the sole owner of the Licensed Patent; (2) it has the authority to license the Licensed Patent to Licensee for use under the terms and conditions herein set out; (3) the terms and conditions of this Agreement do not violate the terms and conditions of any other agreement executed by Licensor and the performance by Licensee hereunder will not violate the terms and conditions of any such agreement; and (4) it knows of no claims or other assertions of any kind to rights in the Licensed Patent inconsistent with the granting of the license herein granted. B. Licensor hereby indemnifies Licensee against and agrees to hold Licensee harmless from any damages, expenses, liabilities, judgments, and losses, including reasonable attorneys’ fees, arising from claims or suits by third parties arising out of any breach or alleged breach of Licensors’ obligations, representations, or warranties hereunder, provided Licensee shall have given Licensor prompt written notice of any such claim or suit and cooperate fully with the defense. C. Licensee hereby indemnifies Licensor against and agrees to hold Licensor harmless from any damages, expenses, liabilities, judgments, and losses, including reasonable attorneys’ fees, arising from claims or suits by third parties arising out of any defects or alleged defects of any Licensed Products sold by Licensee, or other acts or omissions of Licensee, other than for patent infringement, relating to the Licensed Products sold by Licensee provided Licensor shall have given Licensee prompt written notice of any such claim or suit and cooperate fully with the defense. 4. ROYALTY AND REPORTING A. Licensee shall pay to Licensor a royalty of $____________ for each Licensed Product that Licensee sells during the term of this Agreement. B. For each Reporting Period during the term of this Agreement, Licensee shall pay to Licensor the royalty established as set out above for the Licensed Products sold by Licensee
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 39
§5.34
INTELLECTUAL PROPERTY LAW
during that Reporting Period. For purposes of calculating royalties due in each Reporting Period, Licensed Products shall be considered to be sold when invoiced by Licensee. C. Royalties paid on Licensed Products returned to Licensee shall be credited against royalty payments due hereunder. No royalties shall be paid on Licensed Products that are furnished to customers free of charge as replacement for returned products on which royalties previously had been paid, provided that no credit has been taken against royalty payments for such returned products. D. For each Reporting Period, payment of royalties hereunder shall be forwarded by Licensee to Licensor within 30 days following the end of the Reporting Period. Payments of royalties not made when due will bear interest at the rate of 12 percent per annum. With each payment, Licensee shall provide a statement showing the quantity of Licensed Products sold by Licensee and the calculation used to determine the amount of royalties due for that Reporting Period. E. Licensee shall keep records and books of accounts showing for each Reporting Period the quantities of Licensed Products sold. F. During the term of this Agreement, Licensee agrees to permit its books and records to be examined from time to time by Licensor to the extent necessary to verify reports provided in accordance with this Agreement. Such books and records are to be made available and examination made at the offices of Licensee, located at [address], or at another location mutually agreeable to by the parties. Such examination shall be at the sole expense of Licensor unless Licensee shall have been found to have understated the number of Licensed Products sold but not returned by ten percent or more, in which case the examination shall be at the sole expense of Licensee. The examination shall be performed by an auditor appointed by Licensor who shall be reasonably acceptable to Licensee, or by a certified public accountant appointed by Licensor, such examination to be made only during office hours and not more often than once per year, unless Licensee consents to a greater number of examinations. 5. TERM A. The initial term of this Agreement shall commence on the date of the first sale of a Licensed Product by Licensee and shall extend for the initial term of five years. This Agreement shall be renewed automatically for subsequent five-year terms beyond the initial term unless Licensee, by notice in writing to Licensor at least 60 days prior to the expiration of the initial term or any renewal term, shall advise Licensor of its desire to terminate. B. This Agreement can be terminated by Licensee with respect to a particular country if the Licensed Patents in that country or countries in which Licensed Products are sold by Licensee expire or are held invalid or unenforceable by a judgment of a court from which no appeal can or has been taken.
5 — 40
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.34
C. This Agreement can be terminated by either Licensor or Licensee upon a material breach hereof by the other, which breach remains uncorrected after the expiration of a 30-day cure period beginning on the delivery of written notice of the breach to the breaching party. If a party seeks relief based on an alleged material breach of this Agreement, the prevailing party shall be entitled to recover from the losing party reasonable attorneys’ fees and expenses incurred in connection with the proceeding. 6. PATENT MARKING It is agreed that Licensee shall apply the number of the Licensed Patents to Licensed Products and that Licensee may in the future design and manufacture other products on which the parties may agree to apply the number of Licensed Patents. Such patent marking by Licensee shall not be construed as an admission of infringement of the Licensed Patents. Licensor does not secure any rights or interests in and to any of Licensee’s products or intellectual property, and if this Agreement should be terminated, Licensor will not have any rights with respect to any of Licensee’s products or intellectual property. 7. DISPUTE RESOLUTION A. Mediation. If a dispute arising under this Agreement cannot be resolved by the personnel directly involved, either party may invoke the dispute resolution procedure set forth in this section by giving written notice to the other party designating a person with appropriate authority to be its representative in negotiations relating to the dispute. Upon receipt of such notice, the other party shall, within five business days, designate a person with similar authority to be its representative. The designated persons shall, following whatever investigation each deems appropriate, promptly enter into discussions concerning the dispute. If the dispute is not resolved as a result of such discussion, an attempt will be made to resolve the matter by a formal nonbinding mediation with an independent neutral mediator agreed to by the parties. If the parties cannot agree on the mediator within a period of 30 days, then [dispute resolution organization] shall be asked to select a mediator, and the parties agree to be bound by this choice and to enter into a mediation procedure with that mediator. Upon commencement of the mediation process, the parties shall promptly through counsel communicate with respect to a procedure and schedule for the conduct of the proceeding and for the exchange of documents and other information related to the dispute. The mediation process will be deemed ended when either party or the mediator, in good faith, asserts in writing that an impasse has been reached. B. Arbitration. Any and all disputes between the parties arising under or related to this Agreement that are not resolved in accordance with the provisions of Article 7A above within 90 days after appointment of the mediator shall be conclusively determined by final and binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then obtaining, unless the parties mutually agree in writing otherwise. No arbitration may commence until after the mediation set forth in Article 7A above has taken place. The award or determination of the arbitrator or arbitrators shall be final and binding on the parties, and judgment on the award may be entered in any court having jurisdiction thereof. The arbitrator or arbitrators shall not act
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 41
§5.34
INTELLECTUAL PROPERTY LAW
as amiable compositors. The parties acknowledge and agree that the transactions contemplated by this Agreement, and any disputes that may arise hereunder or in relation to or involving this Agreement, involve interstate commerce, and the obligations of the parties hereunder involve substantial interstate activities. The mediation and arbitration set forth here shall take place at a location mutually agreed on by the parties, which agreement shall not be unreasonably withheld. The prevailing party may be reimbursed such of its reasonable attorneys’ fees and costs, if any, as may be determined by the arbitrator. This arbitration agreement shall survive termination of this Agreement. 8. MISCELLANEOUS A. Notices. All notices, requests, demands, consents, and other communications required or permitted hereunder shall be in writing and shall be delivered personally or mailed by certified or registered mail (return receipt requested), postage prepaid, provided that any notice delivered by certified or registered mail shall also be delivered by facsimile at the same time of such delivery. When such facsimile is sent, notices shall be deemed given upon dispatch of such facsimile and the return of an acknowledgment of an acceptable transmission. Facsimiles shall be sent on business days or, if sent on a weekend or holiday, will be deemed received on the next normal business day. If the notice is delivered personally, it shall be deemed given when delivered. All communications hereunder shall be delivered to the respective parties at the following address (or to such other person or at such other address for a party as shall be specified by like notice, provided that notices of a change of address shall be effective only upon receipt thereof): As to Licensor: [address] [fax number] and As to Licensee: [address] [fax number] B. More Favorable Terms. In the event Licensor shall hereafter grant to another party a license under the Licensed Patents at a royalty rate that, calculated on an equivalent basis as to price and quantity, is lower than the corresponding rate provided by this Agreement, or on any more favorable terms and conditions, Licensee shall be entitled to the benefit of such other terms or conditions taken as a whole for its manufacture, use, sale, or offer for sale of Licensed Products subsequent to the date of such grant to the other party. C. Product Appearance. Licensee agrees not to copy the nonfunctional aspects of the appearance and trade dress of the [patented device] made and sold by Licensor during the term of this Agreement.
5 — 42
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.34
D. Choice of Laws. This Agreement shall be governed by the laws of the State of Illinois and federal patent law, and any other questions arising hereunder shall be construed or determined according to such law. E. Successors. This Agreement shall not be assigned by either party without the express written consent of the other party, except in connection with the transfer of all or substantially all of the [business related to patented device] of a party. The terms, covenants, and conditions of this Agreement shall be binding on and shall inure to the benefit of the heirs, executors, administrators, successors, and assigns of the respective parties hereto. F. Survival. This Agreement shall survive the close of this transaction and shall remain a binding contract between the parties. G. Headings. Headings at the beginning of each section of this Agreement are solely for the convenience of the parties and are not part of this Agreement. H. Time. Time is of the essence of this Agreement, it being understood that each date set forth herein, and the obligations of the parties to be satisfied by such date, have been the subject of specific negotiations by the parties. I. Entire Agreement. This Agreement and the items incorporated herein contain all the agreements of the parties hereto with respect to the matters contained herein, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Agreement may be amended or modified in any manner whatsoever except by an agreement in writing by duly authorized officers of each of the parties hereto. J. Invalid or Unenforceable Provisions. In the event that any provision of this Agreement shall be found by an arbitrator or court of competent jurisdiction to be invalid or otherwise unenforceable, the remaining portions hereof shall continue in full force and effect. EXECUTED as an instrument under seal as of the day and date first above written. [Licensee name] [signature and title of Licensee representative] [Licensor name] [signature and title of Licensor representative]
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 43
§5.35
INTELLECTUAL PROPERTY LAW
D. [5.35] Exclusive Patent License Agreement EXCLUSIVE PATENT LICENSE AGREEMENT This AGREEMENT dated as of [execution date] (Effective Date), by and between [licensor’s name], having a place of business at [address] (Licensor), and [licensee’s name], a corporation organized under the laws of [business’ location] and having a place of business at [address] (Licensee). WHEREAS, Licensor is the Assignee of Serial No. ____________, for a U.S. patent application, entitled [patent title] and filed on [date], and related pending applications (Patent Applications), and has the right to license others under such rights; and WHEREAS, Licensee desires to acquire an exclusive license under the rights assigned to Licensor and potentially acquire an exclusive license under any patents that may issue relating to the Patent Applications; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, Licensor and Licensee agree as follows: 1. DEFINITIONS A. As used herein, “Licensed Product(s)” shall mean [patented device description] sold by Licensee that is covered by one or more of the Subsisting Claims of the Licensed Patents. B. As used herein, “Subsisting Claim” shall mean a claim of a Licensed Patent that has not been canceled, disclaimed, expired, or held invalid by a final judgment from which no further appeal can be taken. C. As used herein, “Licensed Patents” shall mean those U.S. patents issued from Serial No. ____________, for a U.S. patent entitled [patent title], and all foreign counterpart patents (if any), together with any continuations, continuations in part, divisionals, reissue patents, extensions, or reexamination certificates granted thereon. D. As used herein, “Subsidiary” shall mean a corporation, company, or other entity more than 50 percent of the outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) of which are, now or hereafter, owned or controlled, directly or indirectly, by a party hereto, but such corporation, company, or other entity shall be deemed to be a Subsidiary only as long as such ownership or control exists. E. As used herein, “Net Sales” shall mean the gross revenues received by Licensee from the sale of Licensed Products less any allowances for cash discounts and other trade and quantity discounts, credits for return to stock, credits given under a warranty, credits for replacements, and, if separately stated, any charges for packaging, shipping, and insurance, and any sales, use, and excise taxes.
5 — 44
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.35
F. As used herein, “Reporting Period” shall mean a six-month period ending June 30 and December 31 of each calendar year. 2. LICENSE GRANT A. Subject to Article 5B, Licensor hereby grants to Licensee a nontransferable (except as provided for in Article 9), exclusive license under the Licensed Patents to make, use, and sell Licensed Products. B. Licensor agrees not to assert any claim of infringement of any of the Licensed Patents against customers, mediate and immediate, of Licensee or its sublicensed Subsidiaries with respect to any Licensed Product obtained directly or indirectly from Licensee or its sublicensed Subsidiaries and for which the applicable royalty is paid pursuant to this Agreement. 3. EXTENSION OF LICENSE TO SUBSIDIARIES The license granted herein shall include the right of Licensee to sublicense only its Subsidiaries. Each Subsidiary so sublicensed shall be bound by the terms and conditions of this Agreement (except to the extent that the obligations of such terms and conditions are fulfilled on its behalf by Licensee). Any sublicense granted to a Subsidiary shall terminate on the date such sublicensed Subsidiary ceases to be a Subsidiary of the Licensee, or this Agreement is terminated under any of the provisions of Article 5, whichever is the earlier. 4. ROYALTIES A. Licensee shall pay to Licensor a royalty of ten percent of Net Sales for each Licensed Product made, used, or sold by Licensee. Licensee shall be required to pay such royalty in respect of each Licensed Product that, when made, used, or sold by Licensee or its sublicensed Subsidiaries would, but for the license granted hereunder, constitute infringement of the Licensed Patents subsisting in the country where such making, using, or selling occurs. However, only a single royalty payment is required to be made in respect of each Licensed Product, and such single royalty payment shall be required to be made only in respect of the first sale thereof. B. The payments specified in Article 4A are to be paid in United States dollars. When royalties are computed based on sales in a foreign currency, the currency exchange rate for such royalties shall be computed by calculating a monthly weighted average exchange rate for the applicable Reporting Period. C. Licensee agrees to maintain accurate records of its operations under this Agreement and shall require the maintenance of similar records by its sublicensed Subsidiaries. Within 30 days after each Reporting Period as long as this agreement is in force, Licensee shall submit to Licensor a report summarizing (1) the gross receipt for sales of Licensed Product by Licensee and its sublicensed Subsidiaries during such Reporting Period, (2) the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 45
§5.35
INTELLECTUAL PROPERTY LAW
computation of any royalty payable during that reporting period, and (3) the amount of royalty due for such Reporting Period, and with such report shall pay the amount of royalty due. D. Licensee and its sublicensed Subsidiaries shall permit the records prescribed under Article 4C to be inspected during regular business hours once during each year of this Agreement by auditors paid for by Licensor as to whom Licensee has no reasonable objection, but only to the extent necessary to verify the sums due and payable. 5. TERM OF AGREEMENT; TERMINATION A. Unless otherwise terminated as set forth below, this License shall continue in force until the later of the following dates: 1. the expiration date of the last-to-expire of all U.S. patents included in the Licensed Patents; or 2. the date as of which a last remaining claim of any U.S. patent included in the Licensed Patents is finally adjudicated (without further right of appeal available) to be invalid, provided no other valid U.S. patent is included in the Licensed Patents as of that date; B. Either party shall have the right to terminate this Agreement forthwith by written notice to the other party in the event that either party is in breach of any term or obligation hereunder and, following written notice given by a party identifying such breach, the other party fails to remedy that breach or, when the breach is incapable of remedy, the other party fails to make amends to the nonbreaching party’s satisfaction within a period of 30 days beginning with the date of said notice. 6. AGREEMENTS AND REPRESENTATIONS OF LICENSOR A. Licensor shall defend, indemnify, and hold Licensee harmless from and against any and all claims, actions, liabilities, losses, fines, penalties, costs, and expenses, including reasonable attorneys’ fees, arising out of any actual or alleged infringement of any patent or other proprietary right related to Licensee’s use of the Licensed Patents. B. If Licensor becomes aware of products that potentially infringe the Licensed Patents or is notified by Licensee of any such potentially infringing products, Licensor agrees to notify and allow Licensee to prosecute the alleged infringer(s) and to defend the Licensed Patents. Licensee may decline to prosecute the infringers, in which event Licensor may exercise its best efforts to prosecute said infringers at its own cost. Each party agrees to pay its own costs relating to such prosecution and to fully cooperate with the other in the prosecution of any potential infringer.
5 — 46
WWW.IICLE.COM
OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS
§5.35
C. If Licensee prosecutes a potential infringer under Article 6B above, all recoveries made shall belong to Licensee except for the royalty amount in Article 4 per infringing unit sold. If Licensor prosecutes an infringer, it may not settle with the infringer by licensing the infringer under the Licensed Property. D. Licensor agrees to provide Licensee all necessary technical assistance to support development, production, and marketing efforts in relation to Licensed Products. This technical assistance hereto shall be provided to Licensee exclusively throughout the term of this License Agreement. E. Licensor agrees to forward all Notices of Maintenance Fee Due for each of said Licensed Patents within ten days of receipt to the Licensee address listed in Article 8. F. Licensor represents and warrants that it has the full right and power to grant the license and release respectively set forth in Article 2 and that there are no outstanding agreements, assignments, or encumbrances inconsistent with the provisions of said license and release or with any other provisions of this Agreement. 7. OTHER OBLIGATIONS OF LICENSEE Licensee agrees to pay all maintenance fees due on said Licensed Patents within 30 days of receipt of a Notice of Maintenance Fee Due from Licensor. 8. NOTICES AND OTHER COMMUNICATIONS Any notice or other communication required or permitted to be made or given to either party shall be sufficiently made or given on the date of mailing if sent to such party by registered or certified mail (sent airmail or otherwise by the fastest service available) postage prepaid, addressed to a party at its address set forth below, or to such other address as the party may designate by written notice given to the other party. In the case of Licensee:
[Licensee representative address]
In the case of Licensor:
[Licensor representative address]
9. ASSIGNMENTS Licensor agrees not to assign any of the Licensed Patents to an unrelated third party unless such assignment is made subject to the terms and conditions of this Agreement and unless prior written consent is obtained from Licensee. Licensee shall not assign any of its rights or privileges under this Agreement without the prior written consent of Licensor, which consent will not be unreasonably withheld, except to a successor in ownership of all or substantially all of the assets of Licensee. The successor shall expressly assume in writing the performance of all of the terms and conditions of this Agreement to be performed by the successor as if it were named herein in place of Licensee. Any attempted assignment in derogation of the foregoing shall be void.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
5 — 47
§5.35
INTELLECTUAL PROPERTY LAW
10. CHOICE OF LAW This Agreement shall be construed, and the legal relationships between the parties hereto shall be determined, in accordance with the laws of the State of Illinois, United States of America. The parties also expressly submit to the jurisdiction of the courts of the State of Illinois for resolution of litigation relating to this Agreement. 11. MISCELLANEOUS A. LICENSOR AND LICENSEE SPECIFICALLY AGREE THAT IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES. B. No amendment or modification of this Agreement shall be valid or binding on the parties unless made in writing and signed by or on behalf of the party against whom enforcement is sought. C. This Agreement embodies the entire understanding of the parties and shall supersede all previous communications, representations, or understandings, either oral or written, between the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the parties intending to be legally bound, have caused this Agreement to be duly executed as follows: [Licensee company] [signature and title of representative of Licensee] [date of signing] [Licensor company] [signature and title of representative of Licensor] [date of signing]
5 — 48
WWW.IICLE.COM
Part II: Trademarks
6
Creation and Maintenance of Trademark Rights
BRADLEY L. COHN Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP Chicago
®
©COPYRIGHT 2017 BY IICLE .
6—1
INTELLECTUAL PROPERTY LAW
I. [6.1] Scope of Chapter II. [6.2] What Is a Trademark? III. [6.3] Governing Law IV. [6.4] Types of Marks and Trade Identity A. B. C. D.
[6.5] Classification and Secondary Meaning [6.6] Geographic Terms [6.7] Surnames Colors, Sounds, Smells, and Flavors 1. [6.8] Color 2. [6.9] Sound, Smell, and Flavor E. [6.10] Domain Names F. [6.11] Olympic Marks G. [6.12] Trade Dress and Product Configuration 1. [6.13] Functionality 2. [6.14] Distinctiveness 3. [6.15] Secondary Meaning V. Adoption and Use A. [6.16] Determining Availability Before Adoption B. [6.17] Establishing Trademark Rights 1. [6.18] Rights Through Use Alone 2. [6.19] Formative Rights Through Filing 3. [6.20] Rights Through Analogous Trademark Use or Public Usage C. [6.21] Priority D. [6.22] Using Trademarks and Service Marks Properly E. [6.23] Checklist for Adopting New Marks VI. Trademark Registration A. [6.24] Federal Registration 1. [6.25] Benefits of Federal Registration 2. [6.26] Acquisition and Maintenance of Federal Registrations a. [6.27] Marks Not Entitled to Registration (1) [6.28] Deceptive and deceptively misdescriptive marks
6—2
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
(2) [6.29] Primarily geographically deceptively misdescriptive marks b. [6.30] The Principal Register (1) [6.31] Descriptive, misdescriptive, geographic, and surname marks (2) [6.32] Trade dress c. [6.33] The Supplemental Register d. Application Process (1) [6.34] Filing (2) [6.35] Examination (3) [6.36] Approval (4) [6.37] Statement of use e. [6.38] Post-Registration Procedures 3. [6.39] Federal Administrative Proceedings a. [6.40] Opposition Proceedings b. [6.41] Cancellation Proceedings c. [6.42] Interference Proceedings d. [6.43] Concurrent Use Proceedings B. [6.44] State Trademark Registration VII. Use and Registration Outside the United States A. [6.45] Territoriality B. International Trademark Filings 1. [6.46] Paris Convention 2. [6.47] Madrid Protocol
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6—3
§6.1
INTELLECTUAL PROPERTY LAW
I. [6.1] SCOPE OF CHAPTER Trademark law is a branch of the broader law of unfair competition, the general purpose of which is to prevent a business from misrepresenting the nature or quality of its products or services, or passing off its products or services as the products or services of another. Trademark law encompasses brand names, corporate and trade names, logos, slogans, labels, packaging, distinctive product configuration — any means of identification that distinguish the source of products or services. This chapter explains what a trademark is, discusses how one establishes trademark rights, and sets out the elements of the trademark registration process.
II. [6.2] WHAT IS A TRADEMARK? Simply stated, a trademark consists of any word, name, symbol, figure, letter, or device used by a manufacturer or merchant to identify and distinguish its products from those manufactured or sold by others. McLean v. Fleming, 96 U.S. 245, 254, 24 L.Ed. 828 (1877). See 15 U.S.C. §1127. Because trademarks serve to identify a business and distinguish its products and services, courts and practitioners refer to trademarks as a form of “trade identity.” In common parlance, the term “trademark” refers to any source-identifying device, whether used in connection with products or with services. From a technical standpoint, however, “trademark” refers to a source-identifying feature that is used in connection with products, while a source-identifying feature used in connection with services is called a “service mark.” 15 U.S.C. §1127. A “collective mark” is a trademark or service mark used by members of a cooperative, association, or organization. Id. A “certification mark” is a mark used by a person other than the owner of the mark to certify regional origin, material, mode of manufacture, quality, accuracy, or other characteristics of the user’s goods or services or that the work on the goods or services was performed by members of a labor union. Id. Trademarks, service marks, collective marks, and certification marks are all called “marks” for short. Examples of trademarks are “Nike” for running shoes, “Shell” for gasoline, and the Morton’s Umbrella Girl for salt. Well-known service marks include “Citibank” for banking services, “Orkin” for pest control services, and McDonald’s Golden Arches to symbolize restaurant services. An example of a collective mark is “UAW,” indicating membership in the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America. A wellknown certification mark is the “UL” mark of Underwriters Laboratories, which indicates that products so marked, which are neither made nor sold by Underwriters Laboratories, have met certain safety requirements established by Underwriters Laboratories.
6—4
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.3
III. [6.3] GOVERNING LAW Trademark rights have their origin in the common law, and they arise out of use of a mark in connection with an ongoing business or trade. These rights may exist independent of any statute. Nonetheless, trademark rights today are primarily governed by federal law. Under its authority to regulate interstate commerce, Congress has enacted comprehensive federal legislation that incorporates common-law principles and adds significant statutory rules to the body of controlling trademark law. The relevant federal statute is the Trademark Act of 1946, ch. 540, 60 Stat. 427, codified at 15 U.S.C. §1051, et seq., and popularly known as the “Lanham Act.” The Lanham Act has been amended periodically since its passage. Extensive revisions were made by the Trademark Law Revision Act of 1988, Pub.L. No. 100-667, Title I, 102 Stat. 3935, in part to allow applications to register marks based on bona fide intent to use them rather than, as before, requiring actual use of a mark before an application to register the mark could be filed. See 15 U.S.C. §1051(b). The Federal Trademark Dilution Act of 1995, Pub.L. No. 104-98, 109 Stat. 985 (1996), and the Anticybersquatting Consumer Protection Act, Pub.L. No. 106-113, Div. B, §1000(a)(9), 113 Stat. 1536 (1999), enacting Title III of the Intellectual Property and Communications Omnibus Reform Act of 1999, S. 1948, 106th Cong, 1st Sess. (1999)), added causes of action for dilution and cybersquatting, respectively. See 15 U.S.C. §§1125(c), 1125(d)(1)(A). In 2002, the Madrid Protocol Implementation Act, Pub.L. No. 107-273, Div. C, Title III, Subtitle D, 116 Stat. 1913 (2002), added provisions relating to the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (Madrid Protocol), which is discussed in §6.47 below. See 15 U.S.C. §1141, et seq. Congress subsequently amended federal dilution law through the Trademark Dilution Revision Act of 2006, Pub.L. No. 109-312, 120 Stat. 1730. Each state also has its own laws regulating trademarks, including unfair competition statutes, deceptive trade practices acts, and common-law principles. See Gardner v. Clark Oil & Refining Corp., 383 F.Supp. 151, 153 (E.D.Wis. 1974) (federal trademark law does not preempt state trademark laws). In Illinois, for example, statutes governing trademark matters include the Trademark Registration and Protection Act, 765 ILCS 1036/1, et seq., the Counterfeit Trademark Act, 765 ILCS 1040/0.01, et seq., and the Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1, et seq. As federal rights and remedies are generally coextensive with or broader than state law rights, federal law principles predominate in virtually every analysis of modern trademark rights in the United States. For example, it is common practice in trademark enforcement actions for plaintiffs to plead causes of action under both state and federal law, yet when it comes to trademark enforcement, most, if not all, state trademark, unfair competition, and deceptive trade practices laws simply track federal trademark jurisprudence. See, e.g., TMT North America, Inc. v. Magic Touch GmbH, 124 F.3d 876, 881 (7th Cir. 1997). A notable exception is state antidilution laws, which are discussed in Chapter 8 of this handbook.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6—5
§6.4
INTELLECTUAL PROPERTY LAW
IV. [6.4] TYPES OF MARKS AND TRADE IDENTITY To be protectable, a mark must be distinctive. Deere & Co. v. MTD Holdings Inc., No. 00 Civ. 5936(LMM), 2004 WL 324890 (S.D.N.Y. Feb. 19, 2004). That is, it must identify the source and distinguish the trademark owner’s goods or services from the goods or services of its competitors. Distinctiveness depends on what the mark is and the goods or services with which it is used. For example, the word “apple” is unable to function as a mark to distinguish one person’s brand of apples from those of other orchard owners. When used in connection with computers, however, “Apple” is a distinctive mark functioning to distinguish one manufacturer’s machines from its competitors’. The term “secondary meaning” is a common-law expression meaning “distinctiveness” or “source-indicating significance.” For example, “Sub-Zero” has a secondary meaning (i.e., sourceindicating significance) for a particular manufacturer’s refrigerator. Its primary meaning, that is, its language significance, is a level or measurement that falls below zero. A. [6.5] Classification and Secondary Meaning Word and logo marks are often classified according to one of the following categories in the spectrum of distinctiveness: coined; fanciful; arbitrary; suggestive; descriptive; or generic. The court in Big O Tire Dealers, Inc. v. Goodyear Tire & Rubber Co., 408 F.Supp. 1219, 1243 (D.Colo. 1976), aff’d as modified, 561 F.2d 1365 (10th Cir. 1977), gave the following explanatory jury instruction for the various classification of words used in trademark law: In trademark usage, words can be classified according to the degree of their distinctiveness. A coined word is an artificial word which has no language meaning except as a trademark. EXXON is a coined word used by an oil company. A fanciful word is like a coined word in that it is invented for the sole purpose of functioning as a trademark and it differs from the coined word only in that it may bear a relationship to another word or it may be an obsolete word. FAB is a shortened version for fabulous and is a fanciful word used for detergent. An arbitrary word is one which is in common linguistic use but when used with the goods in issue it neither suggests nor describes any ingredient, quality or characteristic of those goods. OLD CROW for whiskey is an example of an arbitrary word. A suggestive word is one which suggests what the product is without actually being descriptive of it.
6—6
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.5
STRONGHOLD for threaded nails is suggestive of their superior holding power. A merely descriptive word is one which draws attention to the ingredients, quality or nature of the product. TENDER VITTLES as applied to cat food is descriptive. A generic word is one which is the language name for the product. BUTTER is the language word for butter. There can be no trademark rights in a generic term. They remain in the public domain as a part of our language. The right to protection of a trademark comes from its use to identify the product. We speak of strong and weak marks in terms of the amount of use necessary to create protected rights. Words which are coined, fanciful or arbitrary are distinctive almost from their first use. Suggestive words are also protected as trademarks when used distinctively for particular products. Words which are merely descriptive do not obtain protection solely from their use as a trademark. Such words must first acquire distinctiveness from the effect of the owner’s efforts in the marketplace. This is what is called the development of secondary meaning; that is a merely descriptive term used as a trademark must have been so used that this primary significance in the minds of the consuming public is not the product itself but the identification of it with a single source. [Emphasis in original.] Marks classified as coined, fanciful, arbitrary, or suggestive are deemed “inherently distinctive” and may be immediately accorded protection under trademark law. See, e.g., Money Store v. Harriscorp Finance, Inc., 689 F.2d 666 (7th Cir. 1982) (“THE MONEY STORE” suggestive for lending and financial services); Blazon, Inc. v. Blazon Mobile Homes Corp., 416 F.2d 598 (7th Cir. 1969) (“Blazon” for sports equipment is arbitrary). Descriptive marks are not considered inherently distinctive but may acquire distinctiveness or secondary meaning over time through advertising, sales, and use. Descriptive marks that have acquired secondary meaning are also granted trademark protection. See, e.g., Thompson Medical Co. v. Pfizer Inc., 753 F.2d 208, 216 – 217 (2d Cir. 1985). Factors courts consider in determining whether a descriptive mark has acquired secondary meaning include (1) sales volume; (2) the amount and manner of advertising; (3) the length, manner, and exclusivity of use; (4) consumer testimony; (5) consumer surveys; (6) unsolicited media coverage; and (7) proof of intentional copying by others. See, e.g., Sugar Busters LLC v. Brennan, 177 F.3d 258, 269 (5th Cir. 1999). None of these factors is dispositive. Laudatory terms such as “best,” “premier,” and “supreme” are normally treated as descriptive terms and are not protectable as a mark or as part of a mark without proof of secondary meaning.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6—7
§6.6
INTELLECTUAL PROPERTY LAW
Platinum Home Mortgage Corp. v. Platinum Financial Group, Inc., 149 F.3d 722, 727 (7th Cir. 1998) (“platinum” is a self-laudatory mark lacking secondary meaning because “little imagination” is required to associate it with “superiority and quality service”). Generic terms, such as “Butter” for butter, are neither inherently distinctive nor capable of acquiring distinctiveness and thus are granted no trademark protection. A.J. Canfield Co. v. Honickman, 808 F.2d 291 (3d Cir. 1986) (“chocolate fudge” as mark for diet chocolate soda is generic and hence unprotectable); Hunt Masters, Inc. v. Landry’s Seafood Restaurant, Inc., 240 F.3d 251 (4th Cir. 2001) (“The Crab House” is generic for restaurants that serve crab dishes). For marks made up of two or more words or elements, genericness must be evaluated by looking at the mark as a whole rather than simply considering whether the constituent parts are each generic. Mil-Mar Shoe Co. v. Shonac Corp., 75 F.3d 1153, 1161 (7th Cir. 1996) (“Warehouse Shoes” generic for retail shoe stores); In re American Fertility Society, 188 F.3d 1341, 1347 (Fed.Cir. 1999) (test is not whether constituent parts of mark are generic but whether primary significance of entire mark is viewed as referring to genus of product or service with which it is used). Designs and logos common in an industry also may be deemed generic and unprotectable. Kendall-Jackson Winery, Ltd. v. E. & J. Gallo Winery, 150 F.3d 1042 (9th Cir. 1998) (finding concept of grape leaf design generic for wine). B. [6.6] Geographic Terms Defining rights and the scope of exclusivity for geographic terms, such as Scotch, American, and New York, can be difficult. First, fairness dictates that these terms be available for all residents of a defined location to use. Second, geographic terms are often used merely to indicate the region from which the products or services originate, rather than as identifiers of a single business. Thus, geographic terms are generally treated as descriptive trademarks, meaning that they may be protectable only if secondary meaning has developed. Resorts of Pinehurst, Inc. v. Pinehurst National Corp., 148 F.3d 417 (4th Cir. 1998) (“PINEHURST” mark for resort and golf services had acquired secondary meaning). There are, however, two exceptions to this general rule. First, geographic terms that would not appear to the public to be descriptive of the origin of the goods or services may be protectable without proof of secondary meaning. See, e.g., In re Jacques Bernier, Inc., 894 F.2d 389 (Fed.Cir. 1990) (reversing refusal to register “RODEO DRIVE” for perfume when there was no evidence that people would believe applicant’s perfume originated on Rodeo Drive in Beverly Hills). Second, when a geographic term or element of a mark is likely to mislead the public as to the origin of the goods or services, such a mark is not protectable, and its use may even be enjoined. Black Hills Jewelry Manufacturing Co. v. Gold Rush, Inc., 633 F.2d 746 (8th Cir. 1980) (enjoining use of mark “Black Hills Gold” when defendant’s jewelry was not made in South Dakota); Scotch Whiskey Ass’n v. Consolidated Distilled Products, Inc., 210 U.S.P.Q. (BNA)
6—8
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.8
639, 1981 WL 40524 (N.D.Ill. 1981) (“Loch-A-Moor” for American-made liqueur deceptively suggested it was product of Scotland). C. [6.7] Surnames Surnames such as “Ford,” “Sears,” and “McDonald’s” are among the most famous marks in the country. Yet surnames, like geographic terms, pose special problems when used as trademarks. The notion that a person should be able to use his or her name to identify his or her goods or business seems fair and reasonable. On the other hand, consumer confusion would surely result if anyone with the name “Ford” were permitted today to manufacture and sell automobiles under that name. Surnames are generally treated as descriptive trademarks, and secondary meaning must be shown to establish protectable rights. E. & J. Gallo Winery v. Pasatiempos Gallo, S.A., 905 F.Supp. 1403, 1413 (E.D.Cal. 1994) (secondary meaning shown through long use, extensive advertising, and widespread public recognition). However, rare surnames and historical surnames are sometimes deemed inherently distinctive marks because the primary significance of these marks to the purchasing public is not merely a surname. Lucien Piccard Watch Corp. v. Since 1868 Crescent Corp., 314 F.Supp. 329, 331 (S.D.N.Y. 1970) (names of historical persons, like “Da Vinci,” are registrable, provided primary connotation of mark is historical person); In re Benthin Management GmbH, 37 U.S.P.Q.2d (BNA) 1332, 1995 WL 789509 (T.T.A.B. 1995) (“BENTHIN” surname protectable as mark without proof of secondary meaning). Similarly, marks consisting of personal names may be deemed inherently distinctive when the public is unlikely to view the mark as simply a person’s name. Peaceable Planet, Inc. v. Ty, Inc., 362 F.3d 986, 988 – 992 (7th Cir. 2004) (finding “Niles” suggestive mark for plush toy in shape of camel even though “Niles” can be person’s first name). When trademark infringement actions have arisen over surname marks, courts have frequently disfavored blanket injunctions against a person’s use of his or her name. Instead, they have looked for other solutions, such as requiring a defendant to use a first name with the surname mark or requiring a notice or disclaimer of relationship. E. & J. Gallo Winery v. Gallo Cattle Co., 967 F.2d 1280, 1288 (9th Cir. 1992); Joseph Scott Co. v. Scott Swimming Pools, Inc., 764 F.2d 62, 67 (2d Cir. 1985). D. Colors, Sounds, Smells, and Flavors 1. [6.8] Color Until 1995, there was considerable debate and disagreement among the courts as to whether color alone could serve as a trademark. Compare Campbell Soup Co. v. Armour & Co., 175 F.2d 795 (3d Cir. 1949) (denying protection to Campbell’s red-and-white can label), and Nutrasweet Co. v. Stadt Corp., 917 F.2d 1024 (7th Cir. 1990) (denying protection for color blue for plaintiff’s sugar-substitute package), with In re Owens-Corning Fiberglas Corp., 774 F.2d 1116 (Fed.Cir. 1985) (finding color pink for insulation material registrable as trademark given nonfunctionality and strong showing of secondary meaning).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6—9
§6.9
INTELLECTUAL PROPERTY LAW
In the landmark case Qualitex Co. v. Jacobson Products Co., 514 U.S. 159, 131 L.Ed.2d 248, 115 S.Ct. 1300 (1995), the Supreme Court resolved this issue by holding that colors are protectable as trademarks. Color trademarks, however, can never be inherently distinctive; thus, protection for a color trademark requires proof of secondary meaning. Wal-Mart Stores, Inc. v. Samara Brothers, Inc., 529 U.S. 205, 146 L.Ed.2d 182, 120 S.Ct. 1339, 1344 (2000). As indicated in Qualitex, a color that is merely functional for the goods or services with which it is used cannot be protected. 115 S.Ct. at 1306. A product feature such as a color will be deemed functional when it is essential to the use or purpose of the product or affects the cost or quality of the product or if “exclusive use of the feature would put competitors at a significant non-reputation-related disadvantage.” 115 S.Ct. at 1304. Thus, for example, the color pink was found functional and therefore not protectable for bandages. In re Ferris Corp., 59 U.S.P.Q.2d (BNA) 1587, 2000 WL 33417507 (T.T.A.B. 2000) (pink is one of few superior Caucasian flesh colors for bandages and thus is functional and unprotectable). See also Deere & Co. v. MTD Holdings Inc., No. 00 Civ. 5936(LMM), 2004 WL 324890 (S.D.N.Y. Feb. 19, 2004) (denying protection for colors green and yellow for lawn and garden products on functionality grounds). 2. [6.9] Sound, Smell, and Flavor Distinctive sounds and even smells may also serve as trademarks. See Qualitex Co. v. Jacobson Products Co., 514 U.S. 159, 131 L.Ed.2d 248, 115 S.Ct. 1300, 1303 (1995) (noting long-standing trademark registration for NBC’s three chimes). In In re Clarke, 17 U.S.P.Q.2d (BNA) 1238, 1990 WL 354572, *1 (T.T.A.B. 1990), the United States Patent and Trademark Office (USPTO) permitted registration of “a high impact, fresh, floral fragrance reminiscent of Plumeria blossoms” as a mark for sewing thread and embroidery yarn. In reaching its decision, the Trademark Trial and Appeal Board (TTAB) observed that the applicant’s advertisements focused on the scent of the product and that the nature of the product was such that the scent would not be functional. The TTAB also noted that scents for products such as perfumes, colognes, or scented household products would not be accorded similar protection. Other fragrance trademarks the USPTO has approved for registration include a vanilla scent for office supplies, orchard fruit fragrances for cleaning preparations, and strawberry scent for lubricants and motor fluids. On other occasions, however, the USPTO has denied protection to sensory marks. For example, the USPTO refused registration for the scent of “combusted nitro methane racing fuel” for candles on the grounds that the scent was not inherently distinctive and would not be perceived as a mark. See USPTO Application Serial No. 77207143. Similarly, the USPTO refused registration for a mint scent for face masks on the grounds that the scent was merely functional and did not serve as a trademark indicating the source of the goods. Moreover, in a case of first impression, the USPTO refused to register “an orange flavor” as a trademark for a pharmaceutical product, finding the orange flavor to be functional in that it disguised the unpleasant taste of the pharmaceutical preparation and questioning whether flavor could ever serve as an indicator of source. In re N.V. Organon, 79 U.S.P.Q.2d (BNA) 1639, 2006 WL 1723556 (T.T.A.B. 2006). See also Nextel Communications, Inc. v. Motorola, Inc., 91 U.S.P.Q.2d (BNA) 1393 (T.T.A.B. 2009) (refusing registration of electronic chirp for cellular telephones when sound mark was not inherently distinctive and lacked secondary meaning).
6 — 10
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.12
E. [6.10] Domain Names Internet uniform resource locator (URL) addresses, commonly known as “domain names,” may be protectable trademarks, depending on how they are used. No trademark protection is afforded to the beginning of a URL (“http://www”), however, or to top-level Internet domain name elements (e.g., “.com” or “.org”). In re CyberFinancial.Net, Inc., 65 U.S.P.Q.2d (BNA) 1789, 2002 WL 1980117 (T.T.A.B. 2002). Domain names that appear prominently on products or, when used to promote services, appear prominently in advertising or on the website itself may constitute valid marks. See 1 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §7:17.1 (4th ed. 1996). If, however, a domain name is simply used as a URL for a website and does not appear prominently on the website itself, in advertising, or on the domain name owner’s products, the domain name will likely not qualify for trademark protection. In re Eilberg, 49 U.S.P.Q.2d (BNA) 1955, 1998 WL 1015894 (T.T.A.B. 1998). As with merely descriptive or generic word marks, a domain name consisting of a merely descriptive or generic term to sell that type of product or service may be given little or no trademark protection. See, e.g., In re Martin Container, Inc., 65 U.S.P.Q.2d (BNA) 1058, 2002 WL 1285909 (T.T.A.B. 2002) (denying registration for “CONTAINER.COM” for purchasing or renting metal shipping containers); CyberFinancial.Net, supra (upholding United States Patent and Trademark Office’s refusal to register “BONDS.COM” on grounds of mere descriptiveness); In re Steelbuilding.com, 415 F.3d 1293 (Fed.Cir. 2005) (finding “STEELBUILDING.COM” not generic, but descriptive without secondary meaning). F. [6.11] Olympic Marks Pursuant to the Ted Stevens Olympic and Amateur Sports Act, Pub.L. No. 105-225, 112 Stat. 1253 (1998), codified at 36 U.S.C. §220501, et seq., Congress has conferred on the United States Olympic Committee exclusive rights to certain words and symbols, including “Olympic,” “PanAmerican,” and the five interlocking rings design. 36 U.S.C. §220506(a). No one may use these marks in trade, to induce the sale of any products or services, or to promote any theatrical or athletic performance without authorization from the United States Olympic Committee. 36 U.S.C. §220506(c). A “grandfather” exception exists for persons who have used these marks since before 1950, and a geographic exception is made for persons operating a business primarily west of the Cascade Mountains in the State of Washington, who use the word “Olympic” to refer to the nearby mountains or geographic region. 36 U.S.C. §220506(d). Although this Act appears to impinge on ordinary language usage, it has withstood First Amendment challenge. See San Francisco Arts & Athletics, Inc. v. United States Olympic Committee, 483 U.S. 522, 97 L.Ed.2d 427, 107 S.Ct. 2971 (1987). G. [6.12] Trade Dress and Product Configuration Trade identity protection can also extend to a product’s “trade dress,” meaning either its packaging or its overall appearance and configuration. An example of protectable product
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 11
§6.13
INTELLECTUAL PROPERTY LAW
packaging is the distinctive shape of a Michelob beer bottle. An example of a protectable product configuration is the design and appearance of Ferrari automobiles. Ferrari S.P.A. Esercizio Fabriche Automobili E Corse v. Roberts, 944 F.2d 1235 (6th Cir. 1991). A product’s trade dress is protectable when it is (1) not functional and (2) distinctive. 1. [6.13] Functionality Trade dress rights attach to a product’s packaging and configuration only when the packaging or configuration is nonfunctional. Woodsmith Publishing Co. v. Meredith Corp., 904 F.2d 1244 (8th Cir. 1990) (plaintiff’s alleged trade dress for how-to magazine, i.e., two-color photographic processing, type styles, how-to diagrams and instructions, brown three-ring binders, ink drawings, and classic magazine cover format, held functional and common to many publications in the field); TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23, 149 L.Ed.2d 164, 121 S.Ct. 1255 (2001) (dual spring design of sign held functional and not protectable). Product trade dress is deemed functional when it is essential to the use or purpose of the product or affects the cost or quality of the product. Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 72 L.Ed.2d 606, 102 S.Ct. 2182, 2187 n.10 (1982); Jay Franco & Sons, Inc. v. Franek, 615 F.3d 855 (7th Cir. 2010) (design of round beach towel functional). A utility patent for the product will be strong evidence that its design is functional. TrafFix, supra, 121 S.Ct. at 1260 (expired utility patent for design of highway sign strong evidence of its functionality). Evidence of a variety of third-party designs for the same kind of product may be useful in showing nonfunctionality. AM General Corp. v. DaimlerChrysler Corp., 311 F.3d 796 (7th Cir. 2002); PAF S.r.l. v. Lisa Lighting Co., 712 F.Supp. 394 (S.D.N.Y. 1989) (finding plaintiff’s desk lamp design nonfunctional when there were hundreds of other lamp configurations). If the product configuration is deemed functional, however, the existence of alternative designs will not change this finding. TrafFix, supra, 121 S.Ct. at 1262. 2. [6.14] Distinctiveness Product packaging will be deemed inherently distinctive when it consists of inherently distinctive elements, such as the short, brightly colored plastic bottle for Tide laundry detergent. Wal-Mart Stores, Inc. v. Samara Brothers, Inc., 529 U.S. 205, 146 L.Ed.2d 182, 120 S.Ct. 1339, 1344 (2000); Fiji Water Co. v. Fiji Mineral Water USA, LLC, 741 F.Supp.2d 1165 (C.D.Cal. 2010) (design of water bottle inherently distinctive); Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 120 L.Ed.2d 615, 112 S.Ct. 2753 (1992) (proof of secondary meaning not required to prevail on claim under §43(a) of Lanham Act, 15 U.S.C. §1125(a), when trade dress at issue — decor of Mexican-themed restaurant — was inherently distinctive); In re Frankish Enterprises Ltd., 113 U.S.P.Q.2d (BNA) 1964, 2015 WL 1227729, *4 (T.T.A.B. 2015) (trade dress for services can be inherently distinctive). In contrast to product packaging, product-configuration trade dress can never be inherently distinctive. Product configuration is entitled to protection only when acquired distinctiveness or
6 — 12
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.15
secondary meaning is shown. Wal-Mart, supra, 120 S.Ct. 1344 (product design, as opposed to product packaging, can never be inherently distinctive). Prior to the Supreme Court’s decision in Wal-Mart, there had been considerable confusion and disagreement among the courts in determining the extent to which product configuration trade dress is protectable. Compare Ashley Furniture Industries, Inc. v. SanGiacomo N.A. Ltd., 187 F.3d 363 (4th Cir. 1999) (endorsing application of traditional word mark distinctiveness categories — generic, descriptive, suggestive, arbitrary, or fanciful — to product configuration case), with Duraco Products, Inc. v. Joy Plastic Enterprises, Ltd., 40 F.3d 1431 (3d Cir. 1994) (setting forth three-part test to determine if product configuration is inherently distinctive). See also Two Pesos, supra, 112 S.Ct. at 2759 – 2760 (noting conflict among circuits on protectability for trade dress). 3. [6.15] Secondary Meaning Product packaging that is not inherently distinctive and any product configuration must be shown to possess secondary meaning to be protectable. Factors relevant to establishing secondary meaning for trade dress are similar to those considered in determining secondary meaning for descriptive marks, such as (a) the amount of sales; (b) the amount and manner of advertising; (c) the exclusivity, length, and manner of use; (d) direct consumer testimony; (e) consumer surveys; (f) the established place in the market; and (g) proof of intentional copying. See Herman Miller, Inc. v. Palazzetti Imports & Exports, Inc., 270 F.3d 298, 311 – 312 (6th Cir. 2001); PAF S.r.l. v. Lisa Lighting Co., 712 F.Supp. 394, 403 – 408 (S.D.N.Y. 1989) (finding lamp design had secondary meaning, based on evidence of extensive sales and advertising, unsolicited media coverage, and defendant’s intentional copying). No single factor is determinative in the analysis. Herman Miller, supra, 270 F.3d at 312. “Look-for advertising,” which calls attention to a design element or product configuration, can enhance claims to secondary meaning if the advertising is done correctly. See, e.g., L.A. Gear, Inc. v. Thom McAn Shoe Co., No. 88 Civ. 6444(RJW), 1989 WL 282850, *12 (S.D.N.Y. Apr. 20, 1989) (finding that “image advertising” that highlighted shoe’s design supported finding of secondary meaning), rev’d in part on other grounds, 988 F.2d 1117 (Fed.Cir. 1993); Clamp Manufacturing Co. v. Enco Manufacturing Co., 870 F.2d 512 (9th Cir. 1989) (plaintiff’s “KANTTWIST” cantilevered clamp configuration had acquired secondary meaning by being prominently featured in plaintiff’s advertising and promotional efforts). Conversely, the absence of look-for advertising may hinder a claim for trade dress protection. See, e.g., Yankee Candle Co. v. Bridgewater Candle Co., 99 F.Supp.2d 140 (D.Mass. 2000) (finding no secondary meaning in trade dress when plaintiff pointed to no advertising that emphasized product design as product identifier); Turtle Wax, Inc. v. First Brands Corp., 781 F.Supp. 1314 (N.D.Ill. 1991) (finding no secondary meaning when advertising campaign only displayed but did not emphasize product design). Also, advertising that calls attention to a product design to tout its utilitarian advantages may defeat claims to protection for the product’s configuration. See, e.g., Continental Laboratory Products, Inc. v. Medax International, Inc., 114 F.Supp.2d 992, 1001 (S.D.Cal. 2000) (advertising space-saving advantages of product design “does not engender consumer
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 13
§6.16
INTELLECTUAL PROPERTY LAW
identification with the [product] design”); Thomas & Betts Corp. v. Panduit Corp., 65 F.3d 654, 662 (7th Cir. 1995) (“To the extent this advertising draws attention to the [product configuration] at all, as opposed to the clearly functional barbed locking mechanism, it is only to tout claimed functional and aesthetic advantages.”). Evidence that a defendant intentionally copied a plaintiff’s trade dress may support a plaintiff’s position that its trade dress has acquired distinctiveness. See, e.g., Weber-Stephen Products LLC v. Sears Holding Corp., 116 U.S.P.Q.2d (BNA) 1927, 2015 WL 5161347, *1 (N.D.Ill. 2015).
V. ADOPTION AND USE A. [6.16] Determining Availability Before Adoption Before adopting and using a new mark, it is advisable to perform or obtain a trademark “search,” the purpose of which is to determine if there is a mark already in use, registered, or subject to a pending application that may conflict with the proposed mark. As discussed in Chapter 8 of this handbook, a newcomer who adopts a mark confusingly similar to one already in the marketplace can be enjoined from further use by the owner of the senior mark and may be assessed monetary penalties. Thus, analyzing the availability of and risk associated with a new mark before the mark is adopted is highly recommended. A comprehensive search for confusingly similar marks should cover (1) federal registrations and applications, (2) state registrations, and (3) common-law usage disclosed by trade directories, publicly available business records, Internet searches, and the like. Complete records of federal registrations and applications are maintained at the United States Patent and Trademark Office in Washington, DC. Many records, including a database of current and past registrations and applications, can also be searched through the USPTO’s website, www.uspto.gov. In addition, there are companies that provide trademark search services, with varying degrees of detail depending on price. While not infallible, private search services often provide a degree of thoroughness that exceeds what lawyers or laypersons can reasonably accomplish on their own. Trademark searches are not only highly desirable and customarily obtained and analyzed by practitioners in the field, but also may be evidence of good faith in a subsequent infringement action. W.W.W. Pharmaceutical Co. v. Gillette Co., 984 F.2d 567, 575 (2d Cir. 1993) (“Good faith can be found if a defendant has selected a mark which reflects the product’s characteristics, has requested a trademark search or has relied on the advice of counsel.”). B. [6.17] Establishing Trademark Rights Traditionally, trademark rights have been based on first and continuous use of a mark in commerce in connection with goods or services. For goods, “use” means a bona fide sale or shipment of marked products; for services, “use” means the mark appears in connection with the advertising or promotion of the services and the services are provided. 15 U.S.C. §1127. The rationale for awarding trademark rights based on first and continuous use is that (1) the use of an
6 — 14
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.18
indicia of source engenders marketplace awareness, (2) awareness results in symbolized goodwill, and (3) the use of any indicia by others should be restricted to the extent that it is likely to result in a deceptive diversion of the symbolized goodwill. Ownership in the past, therefore, was governed by a race to the marketplace rather than a race to the United States Patent and Trademark Office to register the mark. See 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §16.5 (4th ed. 1996). While first and continuous use of a mark remains a valid basis for establishing protectable trademark rights, §1(b) of the Lanham Act, 15 U.S.C. §1051(b), provides an alternative basis. Under the statute, the first to apply to register a mark, with a bona fide intent to use it, is awarded a formative ownership right as of the date of the application. That formative right becomes viable when the applicant later begins using the mark in commerce. Even with this statutory scheme, ownership rights are still contingent on actual use. A prior user without a trademark registration has rights in its geographic area of use superior to any rights of a subsequent trademark registration owner. 15 U.S.C. §1057(c). 1. [6.18] Rights Through Use Alone As noted in §6.3 above, trademark rights arise through use of a mark in connection with one’s goods or services. These rights are commonly referred to as “common-law rights.” Emergency One, Inc. v. American Fire Eagle Engine Co., 332 F.3d 264, 267 (4th Cir. 2003) (“At common law, trademark ownership is acquired by actual use of the mark in a given market.”). Commonlaw rights are limited to the geographic area in which the mark is used and, in some circumstances, a zone of natural expansion into which the trademark owner is likely to extend use. Spartan Food Systems, Inc. v. HFS Corp., 813 F.2d 1279, 1282 (4th Cir. 1987) (“common law rights are restricted to the locality where the mark is used and to the area of probable expansion”). Some courts have been reluctant to extend common-law protection to areas of natural or probable expansion, however, when the senior user’s mark had no public recognition in the area of intended expansion and the junior user did not act in bad faith in selecting its mark. See, e.g., Raxton Corp. v. Anania Associates, Inc., 635 F.2d 924, 927 – 930 (1st Cir. 1980). Particularly with regard to small businesses or new products, questions arise as to the nature and amount of use of a mark that must be made to create common-law rights. Even a small amount of use in commerce may sustain trademark rights if followed by continuous commercial utilization. Allard Enterprises, Inc. v. Advanced Programming Resources, Inc., 146 F.3d 350, 359 (6th Cir. 1998) (use of mark “on at least one fax, on at least one resume, and in numerous other solicitations” in attempt to conduct genuine commercial transactions constitutes bona fide use in commerce). The use must be “open” rather than internal (i.e., a sale or shipment has to be made to the relevant class of purchasers or prospective purchasers) as a trademark is intended to identify the source to the public and distinguish the goods from those manufactured or sold by others. Blue Bell, Inc. v. Farah Manufacturing Co., 508 F.2d 1260 (5th Cir. 1975) (internal shipments to sales managers and token use of mark on clothes sold under different brand not use in commerce); Avakoff v. Southern Pacific Co., 765 F.2d 1097 (Fed.Cir. 1985) (shipment of products from contract manufacturer to trademark owner insufficient to create awareness of trademark in minds of consuming public).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 15
§6.19
INTELLECTUAL PROPERTY LAW
Moreover, use of the mark has to be sufficient in quantity to establish recognition of the mark among relevant consumers. Lucent Information Management, Inc. v. Lucent Technologies, Inc., 186 F.3d 311 (3d Cir. 1999) (single sale of $323.50 with nonpublic promotional efforts and no advertising expenditures not sufficient to establish trademark rights); Zazú Designs v. L’Oréal, S.A., 979 F.2d 499 (7th Cir. 1992) (few bottles of plaintiff’s product sold over counter in one location and few more mailed to friends in Texas and Florida did not link mark with plaintiff’s product in minds of consumers or put other producers on notice); Natural Footwear Ltd. v. Hart, Schaffner & Marx, 760 F.2d 1383, 1398 – 1399 (3d Cir. 1985) (insufficient sales and marketing activities do not establish common-law trademark rights). There is a common myth that mailing a label, prototype, or item to oneself creates trademark rights; it does not. Indeed, even initial sales to friends and family may be insufficient to establish trademark rights. Jaffe v. Simon & Schuster, Inc., 3 U.S.P.Q.2d (BNA) 1047, 1987 WL 124312, *4 (S.D.N.Y. 1987) (“[The plaintiff’s] early transactions consisted solely of nominal or token sales to personal friends and relatives. Such transactions do not constitute ‘such a bona fide commercial operation as would entitle it to claim ownership of the mark.’ ”), quoting Merry Hull & Co. v. Hi-Line Co., 243 F.Supp. 45, 52 (S.D.N.Y. 1965). Legitimate trademark use requires that the trademark be affixed to or used in conjunction with the merchandise actually intended to bear the mark in commercial transactions (i.e., bona fide commercial use) rather than mock-ups or “token” uses in an attempt to reserve rights in a mark. Compare Blue Bell, supra (initial use of mark on different type of clothing than was ultimately intended to bear mark was not bona fide use of mark), with Ralston Purina Co. v. OnCor Frozen Foods, Inc., 746 F.2d 801 (Fed.Cir. 1984) (use of mark with cat food that was not final formulation of product eventually offered was sufficient to establish rights). Because product development and marketing can take years before sales commence, in the past some companies tried to preserve future trademarks by “token use” programs consisting of periodic shipments of products bearing the mark. Courts regarded these “token use” programs as suspect. See, e.g., La Societe Anonyme des Parfums Le Galion v. Jean Patou, Inc., 495 F.2d 1265 (2d Cir. 1974) (sale of 89 bottles of “SNOB” perfume over 20-year period held insufficient to maintain trademark rights). In addition, legitimate trademark use requires that the goods be sold in compliance with applicable laws. See, e.g., CreAgri, Inc. v. USANA Health Sciences, Inc., 474 F.3d 626 (9th Cir. 2007) (denying trademark protection for plaintiff’s “Olivenol” mark when plaintiff’s “Olivenol” tablets were sold with inaccurate labels that violated Federal Food, Drug and Cosmetic Act, ch. 675, 52 Stat. 1040 (1938)). 2. [6.19] Formative Rights Through Filing Filing an intent-to-use application for federal registration now establishes formative trademark rights as of the date of application. Once a bona fide use of the mark is made and the intent-to-use application matures to registration, the applicant is awarded nationwide priority dating back to the filing date of the application. 15 U.S.C. §1057(c). These nationwide rights are not absolute, however. They are subject to (a) the common-law rights of any third-party
6 — 16
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.20
trademark owner that has been using its mark since before the application filing date, (b) any prior registrations or pending applications owned by third parties, and (c) rights accrued through a prior, foreign application, if the foreign trademark owner timely files an application with the United States Patent and Trademark Office. Id. Rights accrued through a foreign application arise under an international treaty called the Paris Convention for the Protection of Industrial Property, March 20, 1883 (Paris Convention), www.wipo.int/treaties/en/text.jsp?file_id=288514. See §6.46 below. Under the Paris Convention, a foreign national that has filed a trademark application overseas may obtain the filing date of its foreign application as its priority date in the United States if (a) the U.S. filing is made within six months of the filing of the foreign application and (b) the application conforms to the requirements of U.S. trademark law and the applicant states that it has a bona fide intent to use the mark in U.S. commerce. See §44(d) of the Lanham Act, 15 U.S.C. §1126(d). Thus, for example, assume a Canadian company filed an application to register a trademark in Canada on January 15, 2017. If, by July 15, 2017, that company files an intent-to-use application in the United States for the identical mark and goods and claims the priority of the Canadian application under §44(d), that company’s priority date in the United States would be January 15, 2017. Significantly, however, a foreign national that files an intent-to-use application beyond the six-month date of its foreign filing is not entitled to claim the priority date of its earlier foreign filing.
PRACTICE POINTER
File intent-to-use applications promptly to give your client the earliest possible priority date.
3. [6.20] Rights Through Analogous Trademark Use or Public Usage Historically, first affixation of a mark on the goods themselves, not first use in advertising, was the controlling factor in determining trademark rights. Western Stove Co. v. Geo. D. Roper Corp., 82 F.Supp. 206 (S.D.Cal. 1949). This “first to affix” rule has given way to a principle that emphasizes consumer expectations. Under current jurisprudence, rights analogous to trademark rights can arise through use of a mark in advertising and publicity sufficient to create public identification of the mark with the trademark owner. See, e.g., Specht v. Google Inc., 758 F.Supp.2d 570, 585 – 587 (N.D.Ill. 2010) (press release and extensive media coverage sufficient to establish trademark rights); Marvel Comics Ltd. v. Defiant, Division of Enlightened Entertainment Ltd., 837 F.Supp. 546, 549 (S.D.N.Y. 1993) (announcement of “Plasmer” title to 13 million comic book readers and promotion at annual trade convention sufficient to establish protectable trademark rights though no sales had yet been made); New West Corp. v. NYM Company of California, Inc., 595 F.2d 1194, 1200 (9th Cir. 1979) (substantial advertising and subscription orders established rights despite absence of actual sales); WarnerVision Entertainment Inc. v. Empire of Carolina Inc., 915 F.Supp. 639, 646 (S.D.N.Y.) (toy manufacturer’s promotional efforts insufficient to establish priority of use when efforts consisted
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 17
§6.21
INTELLECTUAL PROPERTY LAW
of few presentations and order from one buyer), aff’d in pertinent part, vacated in part, 101 F.3d 259 (2d Cir. 1996). Rights can also arise when the public creates and uses a source-identifying word to refer to a particular company’s product even when the company has not itself used the mark as a sourceidentifier in connection with its own products. See, e.g., Johnny Blastoff, Inc. v. Los Angeles Rams Football Co., 188 F.3d 427, 434 (7th Cir. 1999) (“St. Louis Rams” mark used by media and public gave rise to protectable rights); Coca-Cola Co. v. Busch, 44 F.Supp. 405 (E.D.Pa. 1942) (public’s use of “Coke” created rights in Coca-Cola even though company had not used mark itself); American Stock Exchange, Inc. v. American Express Co., 207 U.S.P.Q. (BNA) 356, 1980 WL 30139, *9 (T.T.A.B. 1980) (“where the public has come to associate a term with a particular company and/or its goods and services as a result, for example, of use of the term in the trade and by the news media, that company has a protectable property right in the term even if the company itself has made no use of the term”). C. [6.21] Priority The concept of priority is important in trademark law because the senior user or registrant of a mark has the right to exclude newcomers from using confusingly similar marks in the marketplace. As discussed in §6.19 above, a trademark owner’s priority date is easily determined when based on the filing of a federal intent-to-use application or an application under §44(d) of the Lanham Act, 15 U.S.C. §1126(d). When two parties are contemporaneously and independently attempting to develop rights in the same or similar marks through use, not filing, the issue is more complicated. In these circumstances, common-law priority rights are established through use of the mark sufficient to create public recognition in specific geographic areas, as discussed in §§6.18 and 6.20 above. D. [6.22] Using Trademarks and Service Marks Properly Proper use is essential to creating and maintaining trademark rights. The Lanham Act defines what constitutes legitimate and proper use in commerce for a trademark and service mark: The term “use in commerce” means the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark. For purposes of this chapter, a mark shall be deemed to be in use in commerce — (1) on goods when — (A) it is placed in any manner on the goods or their containers or the displays associated therewith or on the tags or labels affixed thereto, or if the nature of the goods makes such placement impracticable, then on documents associated with the goods or their sale, and (B) the goods are sold or transported in commerce, and
6 — 18
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.23
(2) on services when it is used or displayed in the sale or advertising of services and the services are rendered in commerce, or the services are rendered in more than one State or in the United States and a foreign country and the person rendering the services is engaged in commerce in connection with the services. 15 U.S.C. §1127. Thus, for products, trademark owners should use their marks prominently 1. on the product itself; 2. on tags or labels affixed to the product; 3. on containers, packaging, or displays for the product; or 4. when the above methods are not practical, on documents closely associated with the use, promotion, or sale of the product, such as instructional manuals. In connection with services, a mark should be displayed prominently in the advertising or sales process. Significant confusion exists among laypersons regarding use of the “TM,” “SM,” and “®” symbols. Trademark owners may use the “TM” or “SM” symbol next to a trademark or service mark, respectively, to give notice to others of a claim of trademark rights. In re Industrial Washing Machine Corp., 201 U.S.P.Q. (BNA) 953, 1979 WL 24829 (T.T.A.B. 1979) (use of “TM” symbol shows intent to claim word as trademark); Graham Webb International v. Helene Curtis Inc., 17 F.Supp.2d 919 (D.Minn. 1998) (failure to include “TM” symbol is evidence that term was being used as descriptor, not as trademark). Use of the “TM” and “SM” symbols does not confer any substantive rights and is not required, but their use may be beneficial. By contrast, the “®” symbol can be used only in connection with a federally registered mark. 15 U.S.C. §1111. Improper use of the federal registration symbol that is deliberate and intended to mislead the public is fraud. Copelands’ Enterprises, Inc. v. CNV, Inc., 945 F.2d 1563 (Fed.Cir. 1991) (use with intent to deceive of registration symbol for unregistered mark is grounds for denying registration for otherwise registrable mark). Thus, the “®” symbol should be used only after the mark is registered and only in connection with the goods or services for which the mark is registered. E. [6.23] Checklist for Adopting New Marks When a client has adopted or wishes to adopt a new mark, the practitioner will want to undertake the following recommended steps: 1. Identify the mark. Confirm whether it will be used alone or in conjunction with a logo, design, or other marks.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 19
§6.24
INTELLECTUAL PROPERTY LAW
2. Identify the products or services with which the mark will be used and the geographic scope of intended use. 3. Determine whether the client has already begun using the mark. If so, obtain specimens of this use and identify the date the mark was first used in commerce. 4. Determine whether any elements of the mark are generic, descriptive, functional, or otherwise unprotectable. 5. Perform or obtain a trademark clearance search. 6. Investigate potential conflicts disclosed by the search. 7. Assess any risk for the new mark based on the clearance search results and advise the client of these risks. 8. Consider applying to register the mark.
VI. TRADEMARK REGISTRATION A. [6.24] Federal Registration Ownership of a federal trademark registration is not necessary to enforce trademark rights. A trademark owner seeking to enforce rights in a common-law mark may sue in federal court under §43(a) of the Lanham Act, 15 U.S.C. §1125(a). Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 120 L.Ed.2d 615, 112 S.Ct. 2753, 2757 (1992). As discussed in §6.25 below, federal registration, however, does provide significant benefits. 1. [6.25] Benefits of Federal Registration The benefits that accrue from federal registration on the United States Patent and Trademark Office’s Principal Register (see §§6.30 – 6.32 below) include the following: a. nationwide constructive use (i.e., priority) as of the date of application (15 U.S.C. §1057(c)); b. prima facie evidence of the registration’s validity, of the registrant’s ownership of the mark, and of the registrant’s exclusive right to use the mark in commerce in connection with the goods or services specified in the registration certificate (15 U.S.C. §1057(b)); c. constructive notice of the registrant’s claim of ownership of the mark (15 U.S.C. §1072); d. the right, after continuous use of the mark for five consecutive years after registration, to have the registration become incontestable (15 U.S.C. §1065);
6 — 20
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.25
e. the right to enhanced remedies and relief in cases of counterfeiting (15 U.S.C. §1116(d)(1)); f.
the right to request that U.S. Customs and Border Protection officials bar the importation of goods bearing infringing trademarks (15 U.S.C. §1124); and
g. a complete bar to any claim for dilution brought under state or common law (15 U.S.C. §1125(c)(6)). With registration, the public is charged with constructive notice of the trademark owner’s claim of rights. Thus, a third party’s use of a mark confusingly similar to a federally registered mark cannot be justified or defended by a claim of good faith or lack of knowledge of the registered mark. 15 U.S.C. §1057(c); Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358 (2d Cir. 1959). Moreover, a registration is accorded nationwide effect, preserving the registrant’s right to move into any area of the country at a later date without fear of having the right usurped by a newcomer in a geographically remote area. Armand’s Subway, Inc. v. Doctor’s Associates, Inc., 604 F.2d 849 (4th Cir. 1979). Cf. Lone Star Steakhouse & Saloon, Inc. v. Alpha of Virginia, Inc., 43 F.3d 922, 931 – 932 (4th Cir. 1995) (court will enjoin newcomer only if senior registrant is likely to enter, or has entered, newcomer’s territory). This nationwide priority right dates back to the filing of the application. 15 U.S.C. §1057(c). As noted in §6.19 above, however, this nationwide priority right may be subject to the rights of prior users, registrants, or applicants. The owner of a mark registered on the Principal Register that has been used for five consecutive years after registration is entitled to file an affidavit to obtain incontestability status for the registration. 15 U.S.C. §1065. A registration that is incontestable constitutes conclusive evidence of the registrant’s exclusive right to use the mark on the goods or services described in the registration. 15 U.S.C. §1115(b). An incontestable trademark registration is subject only to the following specific defenses: a. fraud (the registration or incontestability was obtained fraudulently); b. abandonment (the mark has been abandoned due to nonuse and intent not to resume use or through uncontrolled licensing); c. misrepresentation (the mark is being used in a manner that misrepresents the source of goods); d. fair use (third parties may make good-faith, descriptive, non-trademark use of a term that is the subject of an incontestable registration); e. prior use (a third party that began use of a confusingly similar mark before the registrant’s priority date is entitled to continue using its mark although its rights will be no greater than the geographic area in which it has continuously used the mark); f.
antitrust violations (the trademark owner is attempting to exercise trademark rights in a manner that violates the antitrust laws);
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 21
§6.26
INTELLECTUAL PROPERTY LAW
g. functionality (no protection is accorded to trade dress that is functional); h. genericness (the mark was generic at the time of registration or has become generic for the goods or services with which it is used); and i.
equitable defenses (principles including laches, estoppel, and acquiescence). Id.
Because descriptiveness is not one of the enumerated defenses, a defendant in a trademark infringement action cannot claim that a plaintiff’s incontestable mark is merely descriptive. Park ’N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 83 L.Ed.2d 582, 105 S.Ct. 658, 663 (1985). 2. [6.26] Acquisition and Maintenance of Federal Registrations The Lanham Act provides for two trademark registers: the Principal Register (15 U.S.C. §1051) and the Supplemental Register (15 U.S.C. §1091). a. [6.27] Marks Not Entitled to Registration A mark is not registrable on either the Principal Register or the Supplemental Register if it consists of or comprises the following: 1. immoral, deceptive, or scandalous matter; 2. matter that disparages or falsely suggests a connection with persons, living or dead, institutions, beliefs, or national symbols; 3. a geographic indication that, when used in connection with wines or spirits, identifies a place other than the origin of the goods; 4. the flag, coat of arms, or insignia of any nation, state, or municipality; 5. a name, portrait, or signature identifying any living individual without the person’s written consent or identifying any deceased President of the United States during the life of a surviving spouse except by written permission of the spouse; 6. a mark likely to be confused with a federally registered mark or mark or tradename previously used in the United States and not abandoned; 7. a mark that, when used in connection with the goods or services of the owner, is primarily geographically deceptively misdescriptive of them if the mark had not acquired distinctiveness before December 8, 1993 (the effective date of the North American Free Trade Agreement Implementation Act, Pub.L. No. 103-182, 107 Stat. 2057 (1993)); or 8. in the case of trade dress or product configuration, a mark that, as a whole, is functional. 15 U.S.C. §§1052, 1091(a).
6 — 22
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.29
The statutory provisions denying registration for immoral, scandalous, and disparaging marks are currently facing First Amendment challenge. See In re Tam, 808 F.3d 1321 (Fed.Cir. 2015) (Lanham Act provision denying registration to disparaging marks is unconstitutional), cert. granted, 2016 WL 1587871 (Sept. 29, 2016). A purported mark that is simply a generic name for the goods or services to which it is applied is also unregistrable. BellSouth Corp. v. DataNational Corp., 60 F.3d 1565, 1569 (Fed.Cir. 1995). Moreover, a mark found to dilute the distinctiveness of a famous mark under federal law will be refused registration, or if such a mark is already registered, this registration may be canceled. 15 U.S.C. §1052. Dilution is discussed in Chapter 8 of this handbook. (1)
[6.28] Deceptive and deceptively misdescriptive marks
As indicated in §6.27 above, marks that are deceptive cannot be registered. A mark is deceptive when (a) the mark misdescribes the goods, (b) purchasers are likely to believe the misrepresentation, and (c) the misrepresentation would materially affect the public’s decision to purchase the goods. Bureau National Interprofessionnel Du Cognac v. International Better Drinks Corp., 6 U.S.P.Q.2d (BNA) 1610, 1988 WL 252488 (T.T.A.B. 1988). Examples of marks held to be deceptive include “LOVEE LAMB” for seat covers not made of lambskin (In re Budge Manufacturing Co., 857 F.2d 773 (Fed.Cir. 1988)) and “SILKEASE” for clothing not made of silk (In re Shapely, Inc., 231 U.S.P.Q. (BNA) 72, 1986 WL 83693 (T.T.A.B. 1986)). By contrast, when a mark contains a misdescriptive element but the misrepresentation would not materially affect the public’s purchasing decision, the mark is not deemed deceptive, but rather only “deceptively misdescriptive.” 15 U.S.C. §1052(e). An example of a deceptively misdescriptive mark is “Glass Wax” for a glass cleaner that does not contain wax. Gold Seal Co. v. Weeks, 129 F.Supp. 928 (D.D.C. 1955) (finding mark deceptively misdescriptive as customers were satisfied with product regardless of whether it contained wax), aff’d per curiam sub nom. S.C. Johnson & Son, Inc. v. Gold Seal Co., 230 F.2d 832 (D.C.Cir. 1956). Deceptively misdescriptive marks, unlike deceptive marks, may be capable of registration on either the Principal Register or the Supplemental Register, as discussed more fully in §§6.30 – 6.33 below. (2)
[6.29] Primarily geographically deceptively misdescriptive marks
Marks that are “primarily geographically deceptively misdescriptive” are also unregistrable, as noted in §6.27 above. 15 U.S.C. §1052(e). The test for “primarily geographically deceptively misdescriptive” marks is identical to the test for deceptive marks. That is, a mark is deemed primarily geographically deceptively misdescriptive when (a) the primary significance of the mark is a generally known geographic location, (b) the consuming public is likely to believe the place identified by the mark indicates the origin of the goods bearing the mark when in fact the goods do not come from this place, and (c) the misrepresentation would materially affect a consumer’s purchasing decision. In re California Innovations, Inc., 329 F.3d 1334, 1341 (Fed.Cir. 2003); In re Compania de Licores Internacionales S.A., 102 U.S.P.Q.2d (BNA) 1841, 1843, 2012 WL 1267898 (T.T.A.B. 2012) (refusing registration of “OLD HAVANA” for rum that does not originate in Havana, Cuba).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 23
§6.30
INTELLECTUAL PROPERTY LAW
It is important to note an apparent inconsistency in terminology. A mark is considered “deceptively misdescriptive” when the deception is not material; yet with “primarily geographically deceptively misdescriptive” marks, the deception does have to be material. b. [6.30] The Principal Register The Principal Register is the primary register of the United States Patent and Trademark Office and the repository for the vast majority of federally registered marks. (1)
[6.31] Descriptive, misdescriptive, geographic, and surname marks
A mark that is either (a) merely descriptive, (b) deceptively misdescriptive, (c) primarily geographically descriptive, or (d) primarily merely a surname is not registrable on the Principal Register unless it “has become distinctive of the applicant’s goods in commerce” (i.e., if it has acquired secondary meaning). 15 U.S.C. §1052(f). As evidence of distinctiveness, the United States Patent and Trademark Office may accept proof of substantially exclusive and continuous use of the mark in commerce for a period of five years preceding the date when distinctiveness is claimed. Id. As discussed in §6.5 above, evidence of secondary meaning can also be offered through proof of substantial sales, advertising, media publicity, consumer surveys, and other indicia of public awareness or recognition. Platinum Home Mortgage Corp. v. Platinum Financial Group, Inc., 149 F.3d 722 (7th Cir. 1998). Some marks are considered so descriptive, however, that no claim or evidence of distinctiveness will be accepted. In re Boston Beer Company Limited Partnership, 198 F.3d 1370 (Fed.Cir. 1999) (proposed mark “The Best Beer In America” so highly laudatory that it could not function as trademark and was unregistrable). As noted in §6.6 above, a geographic term may be inherently distinctive and thus immediately registrable on the Principal Register when the mark would not appear to the public to be descriptive of the origin of the products or services. For surname marks, the critical question in evaluating registrability is whether the public views the surname as identifying a single, particular source for the goods or services identified in the application. The initial burden is on the USPTO to show that the mark is primarily merely a surname. If such a showing is made, the burden shifts to the applicant to prove either that the public would not consider the mark a surname or that the mark has acquired secondary meaning. In re Hutchinson Technology Inc., 852 F.2d 552, 553 – 554 (Fed.Cir. 1988). If an applicant is able to demonstrate either that the public would not view the mark as primarily merely a surname or that the surname has secondary meaning, the surname mark will be approved by the USPTO. If the applicant fails to make such a showing, the surname will not be permitted registration on the Principal Register. In re Etablissements Darty et Fils, 759 F.2d 15 (Fed.Cir. 1985) (upholding Trademark Trial and Appeal Board’s refusal to register mark “DARTY” because it is primarily merely surname). If the mark is already in use, however, the mark may be registered on the Supplemental Register. See §6.33 below.
6 — 24
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.34
Even if part of a mark is primarily merely a surname, the mark as a whole may be registrable. See, e.g., Hutchinson, supra, 852 F.2d at 554 (“HUTCHINSON TECHNOLOGY” for computer components registrable). (2)
[6.32] Trade dress
Trade dress that is nonfunctional and distinctive may be registered on the Principal Register. As discussed in §6.14 above, a product configuration can never be inherently distinctive. Registration of a product configuration is thus permitted only upon a showing that the configuration has acquired distinctiveness. Consequently, applications to register product configurations should always be filed on the basis of prior use of the trade dress in commerce and should not be filed on an intent-to-use basis. c. [6.33] The Supplemental Register Marks that are capable of distinguishing an applicant’s goods but that do not qualify for registration on the Principal Register may be eligible for registration on the Supplemental Register. 15 U.S.C. §1091(a). Marks falling into this category are those that are merely descriptive, deceptively misdescriptive, primarily geographically descriptive, or primarily merely a surname and that have not yet acquired distinctiveness. 15 U.S.C. §§1091(a), 1091(c), 1052. Also, to qualify for registration on the Supplemental Register, the applicant must be using the mark in commerce. 15 U.S.C. §1091(a). Thus, applications to register a mark on the Supplemental Register are not accepted on an intent-to-use basis. Registration on the Supplemental Register confers none of the presumptions or evidentiary benefits afforded by a registration on the Principal Register. 15 U.S.C. §1094. The benefits of a registration on the Supplemental Registration are that (1) it entitles the registrant to use the “®” symbol in association with its mark; (2) it will be revealed in a search of United States Patent and Trademark Office Records, thus giving notice of the registrant’s claim of rights; (3) the USPTO will not approve registration of any mark confusingly similar to a mark on the Supplemental Register, and (4) for U.S. citizens, it permits a trademark owner to file an application for a mark otherwise not registrable on the Principal Register and use the filing date of that application as its priority date for filing in foreign countries. For more information on foreign trademark filings, see §§6.46 and 6.47 below. Once a mark registered on the Supplemental Register has acquired distinctiveness, the registrant may apply to register the mark on the Principal Register. 15 U.S.C. §1095. d. Application Process (1)
[6.34] Filing
The first step in seeking a federal registration is to file a verified written application with the United States Patent and Trademark Office, accompanied by a drawing of the mark and the statutory filing fee. See 37 C.F.R. §2.32. The application can be signed by the owner of the trademark or the owner’s attorney. 37 C.F.R. §2.33(a). An application can be filed by mail, hand
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 25
§6.35
INTELLECTUAL PROPERTY LAW
delivery, or electronically through the USPTO’s website, www.uspto.gov. Paper forms are also available through the website. If the mark is already being used in commerce when the application is filed, the applicant can file a use-based application by providing the dates the mark was first used anywhere and first used in commerce in or with the United States and a specimen showing use of the mark, such as a picture of the product or product packaging or, for a service mark, advertising materials. 37 C.F.R. §2.34(a)(1). If the application is filed on an intent-to-use basis, the applicant does not supply a specimen of use or first-use date at the time of the application. 37 C.F.R. §2.34(a)(2). If the applicant is already using the mark but wants to file the application without waiting to collect its first-use dates and a specimen of use, it can file the application on an intent-to-use basis and provide its first-use dates and specimen in a later filing. See §6.37 below. An additional basis for filing an application is available to non-U.S. companies and citizens under §44 of the Lanham Act, 15 U.S.C. §1126. Under §44(d), a foreign national may file a U.S. application based on its ownership of a foreign application for the same mark and goods filed within the previous six months and thereby gain as its U.S. priority date the filing date of the foreign application, provided the foreign national declares that it has a bona fide intent to use the mark in U.S. commerce. 15 U.S.C. §1126(d). Under §44(e), a foreign national may file an application based on its ownership of a trademark registration in its country of origin, provided the applicant declares that it has a bona fide intent to use the mark in U.S. commerce. 15 U.S.C. §1126(e). An applicant proceeding under §44(d) or §44(e) is entitled to obtain a federal registration without having to show use of its mark in U.S. commerce, but only after the applicant has filed a certified copy of its foreign registration. Id. (2)
[6.35] Examination
The United States Patent and Trademark Office assigns each application to an examining attorney who reviews the application to ensure that it conforms to applicable rules and regulations and to determine whether the mark is registrable. As part of this determination, for example, the examining attorney will consider whether the mark consists in whole or in part of merely descriptive elements and whether the mark is confusingly similar to a mark already registered or subject to a prior-filed, pending application. The examining attorney will use as a guide the USPTO’s TRADEMARK MANUAL OF EXAMINING PROCEDURE (Oct. 2016), which is a reference work on practices and procedures for prosecuting trademark applications in the USPTO. This manual is available at the USPTO’s website, https://tmep.uspto.gov/RDMS/TMEP/current. If the examining attorney finds a technical defect in the application or believes part or all of the mark is not registrable, the examining attorney will refuse registration and issue a nonfinal office action to the applicant explaining the grounds for refusal. An applicant has six months from the date of the nonfinal office action to resolve any technical defects or convince the examining attorney to withdraw the refusal to register. 37 C.F.R. §2.62.
6 — 26
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.37
If no response to the office action is filed, the application will be deemed abandoned. If a response to the nonfinal office action is filed and the applicant’s clarifications and arguments are accepted, the examining attorney will approve the application. If the examining attorney rejects the applicant’s arguments, the examining attorney will issue a final refusal. In some instances, when an applicant has raised new issues as part of its clarifications and arguments, the examining attorney will issue another nonfinal office action. After a final refusal is issued, an applicant has six months to convince the examining attorney to withdraw the refusal and approve the application or else the applicant must file an appeal to the Trademark Trial and Appeal Board, the administrative law tribunal of the USPTO. If the applicant takes no action within six months after a final refusal is issued, the application will be deemed abandoned. Id. (3)
[6.36] Approval
If the application is in good form and the examining attorney believes the mark is registrable, the examining attorney will approve the application for publication in the Trademark Official Gazette of the United States Patent and Trademark Office. 15 U.S.C. §1062(a). The Trademark Official Gazette is published every week and is available by subscription and at many public libraries throughout the country. It is also available at www.uspto.gov/trademark/guides-andmanuals/manuals-guides-official-gazette. When an application appears in the Trademark Official Gazette, any person who believes he or she would be damaged by the issuance of the registration has 30 days from the date of publication to file an opposition to the registration or to request an extension of time to oppose. 15 U.S.C. §1063(a). If the application is use-based and no opposition or extension request is filed within the deadline, a certificate of registration will issue. 15 U.S.C. §1063(b). If the application was filed on an intent-to-use basis and no opposition was filed, the applicant receives a notice of allowance. Id. (4)
[6.37] Statement of use
For an intent-to-use application to mature to registration, the applicant must demonstrate use of the mark in commerce. This can be done either before the application is approved for publication or after a notice of allowance has issued. If the applicant commences use of the mark before the application is approved for publication, the applicant can file what is called an “amendment to allege use,” stating the date of first use in commerce and providing a specimen of use. 15 U.S.C. §1051(c). See also 37 C.F.R. §2.76. Such a filing, if accepted by the United States Patent and Trademark Office, effectively converts the application into a use-based application. If an amendment to allege use is not filed and the application is not opposed when published, the USPTO will issue a notice of allowance. The applicant must commence use of the mark and file a document called a “statement of use” within six months of the issuance of the notice of allowance. 15 U.S.C. §1051(d)(1); 37 C.F.R. §2.88(a). The initial six-month period can be extended for an additional six months upon written application, reconfirming the bona fide intentto-use, and payment of applicable fees. 15 U.S.C. §1051(d)(2); 37 C.F.R. §2.89(a). Additional six-month extensions may be obtained, up to a total of three years from the date of the notice of allowance, upon similar applications and fee payments, plus showings of good cause. 15 U.S.C.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 27
§6.38
INTELLECTUAL PROPERTY LAW
§1051(d)(2); 37 C.F.R. §2.89(e). Failure to file a timely extension of time or statement of use will result in abandonment of the application. 15 U.S.C. §1051(d)(4); 37 C.F.R. §2.88(k). Like an amendment to allege use, a statement of use must indicate the date the applicant first used the mark in commerce and must be accompanied by a specimen showing use of the mark. 15 U.S.C. §1051(d)(1); 37 C.F.R. §2.88(b). e. [6.38] Post-Registration Procedures A trademark registration remains in force for ten years, provided that, within the one-year period directly preceding the six-year anniversary of the registration date, the registrant files an affidavit attesting to continued use of the mark. 15 U.S.C. §§1058(a), 1058(b). This affidavit must show, with support by specimens, that the mark is still in use in commerce in connection with all the specified goods or services or that nonuse is due to special circumstances and not due to any intention to abandon the mark. 15 U.S.C. §1058(b). If the affidavit is not filed, the registration will be canceled by the United States Patent and Trademark Office. 15 U.S.C. §1058(a). If the affidavit is filed only as to some of the goods or services identified in the registration, the registration will be partially canceled as to the other goods or services. At any time after the five-year anniversary of the registration date, a registrant can file a declaration for incontestability status. 15 U.S.C. §1065. To obtain incontestability status for a registration, the mark must have been used for five consecutive years after registration, and the registrant must declare that there has been no final decision adverse to the registrant’s claim of ownership in or right to register the mark and that there is no pending USPTO or court proceeding involving the registrant’s rights in the mark. Id. At the expiration of the initial ten-year period, a registration may be renewed for successive periods of ten years upon the filing of a proper declaration of use and notice of renewal. 15 U.S.C. §1059(a). 3. [6.39] Federal Administrative Proceedings Challenges to the scope or registrability of a trademark application or registration can be brought before the administrative law tribunal of the United States Patent and Trademark Office, the Trademark Trial and Appeal Board. 15 U.S.C. §1067(a). These proceedings are concerned only with whether a mark is registrable or, if registered, whether the registration should be canceled. The TTAB has no authority to award monetary relief or to issue injunctions to prevent use of infringing marks. Notably, TTAB decisions concerning likelihood of confusion can have a preclusive effect in subsequent district court infringement actions. B&B Hardware, Inc. v. Hargis Industries, Inc., ___ U.S. ___, 191 L.Ed.2d 222, 135 S.Ct. 1293 (2015). In B&B Hardware, the Supreme Court held that “so long as the other ordinary elements of issue preclusion are met, when the issues adjudicated by the TTAB are materially the same as those before a district court, issue preclusion should apply.” 135 S.Ct. at 1302 – 1310.
6 — 28
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.40
The four basic inter partes proceedings are opposition, cancellation, interference, and concurrent use. 15 U.S.C. §1067. They are quasi-judicial proceedings and generally follow the format of a federal civil action as to pleadings, motion practice, discovery, record, argument, and decision. In lieu of trial, however, the parties submit their evidence and arguments by brief. Once the trial briefs have been submitted, oral hearing may be had before the TTAB, much like an oral argument in a court action. A final decision of the TTAB may be either appealed to the Court of Appeals for the Federal Circuit (called, until 1982, when its jurisdiction was enlarged, the Court of Customs and Patent Appeals) or reviewed by a U.S. district court. 15 U.S.C. §1071. If the case is appealed to the Federal Circuit, however, the appellee may elect instead to have the case reviewed by a district court. 15 U.S.C. §1071(a)(1). The rules governing proceedings before the TTAB are compiled in the TRADEMARK TRIAL AND APPEAL BOARD MANUAL OF PROCEDURE (June 2016), which is available at https://tbmp.uspto.gov/RDMS/TBMP/current (case sensitive). a. [6.40] Opposition Proceedings When an application is published in the Trademark Official Gazette, persons who believe they would be damaged by the registration have 30 days from the date of publication to file a notice of opposition. 15 U.S.C. §1063(a). Under a rule imposed as of November 2, 2003, a party can extend the time to file a notice of opposition up to 180 days from the date of publication in the Official Gazette. 37 C.F.R. §2.102(c). This 180-day period consists of the initial 30-day period plus up to 150 days of extensions. The extensions can be obtained in one of two ways: (1) by filing for a 30-day extension as a matter of course, for an additional 60 days beyond that for good cause, and for a final 60-day extension thereafter with the applicant’s consent; or (2) by filing for a 90-day extension for good cause, followed by a final 60-day extension thereafter with the applicant’s consent. Id. Extension requests can be filed directly through the United States Patent and Trademark Office’s website, www.uspto.gov. A notice of opposition may be filed by “[a]ny person who believes that he would be damaged by the registration of a mark.” 15 U.S.C. §1063(a). An opposition may thus be initiated, for example, by the following persons: 1. the owner of a prior registration or application to oppose registration of a confusingly similar mark; 2. the owner of prior, common-law trademark rights to oppose registration of a confusingly similar mark; 3. the owner of a famous mark to oppose registration of a mark that is likely to dilute the famous mark, either by blurring or tarnishment; or 4. one who uses in a non-trademark, descriptive, generic, or geographic manner a word or term now sought to be registered by another.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 29
§6.41
INTELLECTUAL PROPERTY LAW
Opposition may also be based on a trade name or use of a term in advertising. Knickerbocker Toy Co. v. Faultless Starch Co., 467 F.2d 501 (C.C.P.A. 1972). Standing has also been extended to persons who seek to prevent registration of marks that they deem scandalous or derogatory. Ritchie v. Simpson, 170 F.3d 1092 (Fed.Cir. 1999); Harjo v. Pro Football, Inc., 30 U.S.P.Q.2d (BNA) 1828, 1994 WL 262249 (T.T.A.B. 1994). If the opposition is successful, the trademark will be refused registration. 37 C.F.R. §2.136. A mark approved for the Supplemental Register cannot be opposed, but after the registration issues, persons who believe they may be damaged by the registration may petition to cancel it. 15 U.S.C. §1092. A sample notice of opposition can be found in Chapter 8 of this handbook. b. [6.41] Cancellation Proceedings A cancellation petition may be filed by “any person who believes that he is or will be damaged . . . by the registration of a mark.” 15 U.S.C. §1064. Cancellation proceedings are brought against existing registrations; by comparison, opposition proceedings are brought against pending applications. If a potential opposer misses the final date to file the notice of opposition, the attack must be by way of a cancellation action. The cancellation proceeding is essentially the same as an opposition and, with certain exceptions, must be brought within five years of the date of registration. If cancellation is sought after five years of registration, it then may be based only on the grounds specified in §14 of the Lanham Act, 15 U.S.C. §1064 (i.e., that the mark has become generic for any of the goods or services for which it is registered, that the mark is functional, that the mark has been abandoned, that the registration was fraudulently obtained, that the mark is being used so as to misrepresent the source of the goods or services, or that the registration was obtained contrary to the provisions of §2(a), §2(b), §2(c), or §4 of the Lanham Act, 15 U.S.C. §§1052(a) – 1052(c), 1054). c. [6.42] Interference Proceedings Interference proceedings involve conflicting applications or registrations and are extremely rare. Institution of such a proceeding requires a petition to the Director of the United States Patent and Trademark Office, who can declare an interference only upon a showing of extraordinary circumstances. 15 U.S.C. §1066; 37 C.F.R. §2.91(a). The primary issue considered in an interference is priority of use. 37 C.F.R. §2.96. As a matter of practice, disputes between applicants and registrants that involve priority-of-use issues are normally resolved through opposition or cancellation actions. d. [6.43] Concurrent Use Proceedings While federal registrations are generally nationwide in scope, occasionally there are goodfaith, concurrent uses of the same or similar marks for the same or similar goods in geographically remote areas. Because the marks are used in different areas, there may be little
6 — 30
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.44
likelihood of confusion between the parties or their respective products and services. In these situations, an applicant may institute a concurrent use proceeding to establish the scope of the parties’ respective rights. Concurrent use registrations, which contain geographic or product and service limitations, may be issued by the United States Patent and Trademark Office. The USPTO may also issue concurrent registrations when a court finds more than one person entitled to use the same or a similar mark in commerce. 15 U.S.C. §1052(d). B. [6.44] State Trademark Registration Most if not all states maintain their own trademark registries. State trademark filings and registrations are usually handled by the Secretary of State’s offices. Unlike federal registrations, which provide a range of procedural and substantive advantages, state trademark registrations provide fewer benefits. In the proper circumstances, however, state trademark registrations do provide certain value, including the following: 1. State trademark registrations are relatively inexpensive to obtain and renew. 2. Applications are subject to little or no examination procedure. 3. State trademark registrations may provide notice to third parties of the trademark owner’s claim of rights. In Illinois, for example, state trademark registrations are governed by the Trademark Registration and Protection Act, 765 ILCS 1036/1, et seq., which provides that a trademark owner must have already begun using the mark in the ordinary course of trade before a trademark application can be filed. See 765 ILCS 1036/15. Thus, no intent-to-use applications are permitted. This “use” requirement is common among state trademark registries. “Use” of a mark tracks the Lanham Act definition and federal jurisprudence. Indeed, the Trademark Registration and Protection Act expressly states that “the construction given the federal [Lanham] Act shall be examined as persuasive authority for interpreting and construing this Act.” 765 ILCS 1036/90. As under federal law, the Trademark Registration and Protection Act prohibits registration of a mark that is scandalous, disparaging, merely descriptive, or primarily geographically deceptively misdescriptive; that is merely a surname; that consists of national, state, or municipal flags or insignia; or that is likely to cause confusion with another registered mark. 765 ILCS 1036/10. The term of a state registration varies by state, usually between five and twenty years. In Illinois, a registration must be renewed every five years. 765 ILCS 1036/30. State trademark registries are public and can be searched. Thus, a practitioner performing or obtaining a clearance search to uncover potential conflicts with a prospective mark will often want a review of state trademark databases included in the search results.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 31
§6.45
INTELLECTUAL PROPERTY LAW
VII. USE AND REGISTRATION OUTSIDE THE UNITED STATES A. [6.45] Territoriality Trademark rights are territorial, and rights in a foreign country will be governed by that country’s laws. Significant disparities exist in trademark availability, enforcement, and registration practice throughout the world. Thus, if a client seeks to use or enforce a mark outside the United States, consultation with a trademark lawyer in the relevant country is advised. B. International Trademark Filings 1. [6.46] Paris Convention As noted in §6.19 above, the United States is a party to an international trademark treaty called the Paris Convention for the Protection of Industrial Property. Under the Paris Convention, a U.S. citizen owning a federal trademark application who applies to register the same mark in any Paris Convention country within six months of the filing of the U.S. application receives the priority date of the U.S. application. See Paris Convention art. 4. Thus, for example, a U.S. citizen who filed a U.S. trademark application on January 15, 2017, can file an identical application in Mexico on or before July 15, 2017, and for priority purposes, the Mexican application will be treated as filed on January 15, 2017. 2. [6.47] Madrid Protocol Since November 2, 2003, the United States has also participated in an international treaty for trademark filings called the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks, June 27, 1989 (Madrid Protocol), www.wipo.int/wipo lex/en/wipo_treaties/text.jsp?file_id=283484. Under the Madrid Protocol, U.S. citizens and companies can file trademark applications in other Protocol member states directly through the United States Patent and Trademark Office. 15 U.S.C. §1141a. Before November 2003, a U.S. citizen or company wishing to file these applications needed to hire lawyers in each separate country to file the applications. It is important to distinguish between the Madrid Agreement Concerning the International Registration of Marks, April 14, 1891 (Madrid Agreement), www.wipo.int/treaties/en/ registration/madrid, and the Madrid Protocol. The United States is a member of the Madrid Protocol but not the Madrid Agreement. Thus, U.S. citizens can file applications through the USPTO only in those countries that are also members of the Madrid Protocol. Madrid Protocol member states include major industrialized nations such as Australia, China, Japan, and the United Kingdom, as well as emerging and developing nations such as Colombia, Vietnam, and the Philippines. A complete list of Madrid Protocol member states can be found at the World Intellectual Property Organization’s website at www.wipo.int/export/sites/www/treaties/en/ documents/pdf/madrid_marks.pdf. Possible advantages of using the Madrid Protocol may be (a) administrative ease, by having one central mechanism and office for filing and renewing foreign registrations, and (b) financial savings, by avoiding the cost of hiring separate lawyers in each country to file applications.
6 — 32
WWW.IICLE.COM
CREATION AND MAINTENANCE OF TRADEMARK RIGHTS
§6.47
To file applications through the Madrid Protocol, the applicant simply designates the countries in which registration is sought and pays the appropriate filing fees. 15 U.S.C. §1141a. The applications are then sent to the trademark offices for each of the designated countries. Each trademark office will conduct its own review of the application to determine registrability. As in the United States, an office action or opposition is possible in any of the countries designated. In the event that an applicant receives an office action or opposition, the applicant may need to hire local attorneys in that country to handle the matter. Significantly, the Madrid Protocol provides only a system for filing applications — applicants are responsible for performing any prefiling searches to determine whether a mark is available in a particular country and for determining what trademark use requirements a particular country has. Information on procedures for filing applications under the Madrid Protocol can be found through the USPTO’s website, www.uspto.gov.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
6 — 33
7
Transfer or Loss of Trademark Rights
BRADLEY L. COHN Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP Chicago
®
©COPYRIGHT 2017 BY IICLE .
7—1
INTELLECTUAL PROPERTY LAW
I. [7.1] Scope of Chapter II. Transfer of Trademark Rights A. [7.2] Assignment 1. [7.3] Requirements for a Valid Assignment 2. [7.4] Federal Registrations and Applications 3. [7.5] Sample Form of Assignment 4. [7.6] Bankruptcy Estate of Trademark Owner 5. [7.7] Effect of Assignment B. [7.8] Security Interest C. [7.9] Licensing 1. [7.10] Benefits 2. Features and Requirements of a Valid License a. [7.11] Basic Form and Scope b. [7.12] License Agreement Terms c. [7.13] Quality Control (1) [7.14] Lack of quality control (2) [7.15] Sample measures d. [7.16] Disclosure or Notice 3. [7.17] Franchise 4. [7.18] Licensor’s Tort Liability for Defective Licensed Products III. [7.19] Loss of Rights A. [7.20] Cessation of Use 1. [7.21] Effect of Abandonment Through Nonuse 2. [7.22] Enduring (or Residual) Goodwill 3. [7.23] Use on Slightly Different Product 4. [7.24] Alterations or Amendments to Mark B. [7.25] Genericness 1. [7.26] Test 2. [7.27] Burden and Methods of Proof 3. [7.28] Establishing Rights in Lost Marks 4. [7.29] Tips To Avoid “Genericide” C. [7.30] Uncontrolled (or Naked) Licensing
7—2
WWW.IICLE.COM
TRANSFER OR LOSS OF TRADEMARK RIGHTS
§7.3
I. [7.1] SCOPE OF CHAPTER This chapter explores underlying principles and common methods for assigning or licensing trademark rights and actions or omissions that may cause a loss of trademark rights.
II. TRANSFER OF TRADEMARK RIGHTS A. [7.2] Assignment Trademark rights, like tangible property, can be assigned or sold by the owner. 1. [7.3] Requirements for a Valid Assignment For a valid trademark assignment, the trademark must be assigned along with the goodwill of the business symbolized by the mark or the part of the business connected with the use of the mark. 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §18:2 (4th ed. 2015); 15 U.S.C. §1060(a)(1); Ford Motor Co. v. Thermoanalytics, Inc., 116 U.S.P.Q.2d (BNA) 1934, 2015 WL 6522857, *4 (E.D.Mich. 2015) (while goodwill was not explicitly spelled out in assignment, it was implied when trademark was assigned with broad property grant of all “other intellectual or industrial property rights”). Assignment of the goodwill or connected business along with the mark is critically important. Failure to assign the goodwill or business associated with a mark is considered an assignment “in gross” and may void the assignment. PepsiCo, Inc. v. Grapette Co., 416 F.2d 285, 287 (8th Cir. 1969); Sugar Busters LLC v. Brennan, 177 F.3d 258, 265 (5th Cir. 1999).
PRACTICE POINTER
When preparing trademark assignment documents, always include a recitation that the mark is being assigned along with the goodwill of the business symbolized by the mark or along with the part of the business connected with the use of the mark.
Insisting that a mark be assigned with the intangible concept of “goodwill” may appear to be an empty formalism. The rule is based on the notion that a mark symbolizes the reputation of its owner and distinguishes its associated products or services from those of others. If a mark were freely transferable without its associated business or goodwill, there would be no guarantee of continuity between the products, services, and reputation associated with the mark before and after assignment, and consumer expectations would thus be undermined. Accordingly, the purpose of requiring an assignment of the goodwill or connected business along with the mark itself is to prevent consumers from being misled as to the nature or quality of the designated product or service. Green River Bottling Co. v. Green River Corp., 997 F.2d 359, 362 (7th Cir. 1993); Marshak v. Green, 746 F.2d 927, 929 (2d Cir. 1984). The requirement that a mark be assigned with its goodwill means that to constitute a valid assignment, the assignee must use the mark with a product or service having “substantially the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
7—3
§7.4
INTELLECTUAL PROPERTY LAW
same characteristics” as the assignor’s product. Sugar Busters, supra, 177 F.3d at 266 (no goodwill transferred when assignor had used mark for retail store services for products for diabetics but assignee used mark on diet book), quoting PepsiCo, supra, 416 F.2d at 288. As long as a substantial similarity exists between the products or services of the assignor and assignee, courts will likely consider the trademark assignment valid even without any transfer of tangible assets. Sands, Taylor & Wood Co. v. Quaker Oats Co., 978 F.2d 947, 956 (7th Cir. 1992) (“transfer of a mark need not be accompanied by the transfer of any physical or tangible assets in order to be valid”); In re Roman Cleanser Co., 802 F.2d 207, 208 – 209 (6th Cir. 1986) (“goodwill” does not mean machinery necessary to make products, when assignee received product formulas and customer lists); Defiance Button Machine Co. v. C & C Metal Products Corp., 759 F.2d 1053, 1059 (2d Cir. 1985). Sometimes a trademark owner purchases or obtains by assignment a competing or potentially conflicting mark to eliminate a commercial risk or clear the marketplace of a possible infringement. In these circumstances, the substantial similarity requirement becomes immaterial since the party acquiring the mark intends for the competing or potentially conflicting mark to become abandoned. Any assignment of rights in a federal registration or application must be in writing. 15 U.S.C. §1060(a)(3). There is no requirement, however, that the assignment of common-law trademark rights be in writing. 1 Anne Gilson, GILSON ON TRADEMARKS §3.06(3) (2014).
PRACTICE POINTER
To avoid uncertainty and preserve clear title, reduce all trademark assignments to writing.
2. [7.4] Federal Registrations and Applications Trademark registrations and pending applications can be assigned. Indeed, when a trademark is assigned, any companion applications or registrations for the trademark should also be assigned to the new owner. Failure to assign any such application or registration will not nullify the assignment of the mark but may void the application or registration. Under these circumstances, the owner of record for these filings would no longer be using the mark or have any intention to use it. As noted §7.3 above, federal law requires that any assignment of a trademark application or registration be in writing. 15 U.S.C. §1060(a)(3). Assignments of federal trademark applications and registrations can be recorded with the United States Patent and Trademark Office (USPTO). Recordation provides important benefits, such as alerting third parties to the true owner of the trademark rights and supplying proper contact information for official notices regarding the application or registration. Moreover, recordation within three months of the assignment provides protection against subsequent assignments of the mark by the former owner to bona fide purchasers for value without notice. 15 U.S.C. §1060(a)(4).
7—4
WWW.IICLE.COM
TRANSFER OR LOSS OF TRADEMARK RIGHTS
§7.5
PRACTICE POINTER
Practitioners should promptly record the assignment of a federal trademark application or registration with the USPTO. The USPTO’s website, www.uspto.gov, enables practitioners to record assignments online.
Caution must be exercised before purchasing or assigning a pending federal application that was filed on an intent-to-use basis. An intent-to-use application may be properly assigned only if (a) the applicant has already filed an amendment to allege use or a statement of use or (b) the application is being assigned to a successor of an ongoing or existing business of the applicant (or portion thereof) to which the mark pertains. 15 U.S.C. §1060(a)(1). Failure to follow the requirements of this provision will result in the pending application or resulting registration being deemed void and of no value or effect. Clorox Co. v. Chemical Bank, 40 U.S.P.Q.2d (BNA) 1098, 1996 WL 579826 (T.T.A.B. 1996). The purpose of this provision is to prevent trafficking in trademark applications (much as we see today with domain names that people register not intending to use but rather to sell to the highest bidder). See 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §18:13 (4th ed. 2015). Although based on sound policy reasons, this provision is a trap for the honest but unwary. Thus, in assignments involving intent-to-use applications, practitioners will want to ensure that either (a) an amendment to allege use or a statement of use has been filed before the assignment or (b) the entirety of the relevant business (or the portion thereof related to the mark in question) is assigned with the application. 3. [7.5] Sample Form of Assignment ASSIGNMENT WHEREAS, [trademark owner], a Delaware corporation with offices at [trademark owner location], has adopted and used the mark [trademark name] in commerce and registered that mark with the United States Patent and Trademark Office, which registration was granted Registration No. ____________; and WHEREAS, [trademark owner] wishes to assign the mark subject to the above-identified registration, as well as the goodwill of the business connected with the use of and symbolized by the mark [trademark name]; and WHEREAS, [potential buyer], a Delaware corporation located at [potential buyer location], desires to acquire said mark and the registration therefor; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, [trademark owner] does hereby assign to [potential buyer] all right, title, and interest in and to the mark [trademark name], and the federal registration therefor, U.S. Reg. No. ____________, together with the goodwill of the business symbolized by the mark and all rights to sue and recover for past and present infringements.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
7—5
§7.6
INTELLECTUAL PROPERTY LAW
Signed in [signing location] this [signing date]. [trademark owner] By: ______________________________ Name: ___________________________ Title: ____________________________ 4. [7.6] Bankruptcy Estate of Trademark Owner Goodwill can survive bankruptcy of the trademark owner and the winding down of the trademark owner’s business. Thus, trademarks can be validly transferred through a bankruptcy sale. See, e.g., Automated Productions, Inc. v. FMB Maschinenbaugesellschaft mbH & Co., 34 U.S.P.Q.2d (BNA) 1505, 1994 WL 513626 (N.D.Ill. 1994). Significantly, the rules regarding assignment of marks apply in bankruptcy and insolvency proceedings; thus, a mark should be transferred or sold only in connection with the business or goodwill connected with the mark. Johanna Farms, Inc. v. Citrus Bowl, Inc., 468 F.Supp. 866, 879 – 880 (E.D.N.Y. 1978). 5. [7.7] Effect of Assignment Once the assignment is made, the “assignee steps into the shoes of the assignor.” Premier Dental Products Co. v. Darby Dental Supply Co., 794 F.2d 850, 853 (3d Cir. 1986). See also Money Store v. Harriscorp Finance, Inc., 689 F.2d 666, 674 – 675 (7th Cir. 1982). In other words, the assignee assumes all rights and interests of the former trademark owner, as well as any weaknesses or defects in the acquired trademark rights. Thus, for example, an assignee receives the priority rights of the previous trademark owner. Carnival Brand Seafood Co. v. Carnival Brands, Inc., 187 F.3d 1307, 1310 (11th Cir. 1999). By the same token, the assignee of a trademark that the assignor had already abandoned receives no better rights than the former owner had at the time of the assignment. Pilates, Inc. v. Current Concepts, Inc., 120 F.Supp.2d 286, 310 – 311 (S.D.N.Y. 2000) (when assignor had gone out of business and abandoned mark, assignor subsequently had no goodwill to assign, and thus later purported assignment of mark was in gross and invalid). When an assignee receives an invalid assignment of a mark, the assignee can establish rights in the mark only as of the date the assignee begins using the mark in commerce. B. [7.8] Security Interest Like tangible property, interests in trademarks (which are intangible property) can be used as security or collateral for a debt or loan. RESTATEMENT (THIRD) OF UNFAIR COMPETITION §34, cmt. e (1995). A security interest is not an assignment, however, and thus “does not affect the debtor’s ownership or priority in the use of the mark.” Id. Instead, a security interest in a trademark is treated as a conditional assignment or agreement for future assignment. L’il Red Barn, Inc. v. Red Barn System, Inc., 322 F.Supp. 98, 106 – 107 (N.D.Ind. 1970), aff’d per curiam, 174 U.S.P.Q. (BNA) 193 (7th Cir. 1972). Thus, no goodwill is or should be transferred at the time the security interest agreement is entered into. 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §18:7 (4th ed. 2014).
7—6
WWW.IICLE.COM
TRANSFER OR LOSS OF TRADEMARK RIGHTS
§7.10
If the trademark owner-debtor defaults and the creditor enforces the security interest, the goodwill must pass with the mark to avoid an assignment in gross. In re Roman Cleanser Co., 802 F.2d 207, 211 (6th Cir. 1986) (Thomas, J., concurring). Thus, at a minimum, a secured party should require in the security agreement that both the mark and its attendant goodwill constitute the collateral. As discussed in §7.3 above, physical assets need not be transferred with the goodwill to effect a valid assignment of a mark. To avoid abandonment of the mark through an invalid assignment, however, an assignee must ensure that there is substantial similarity between the products or services provided under the mark before and after the transfer. Thus, a creditor who seeks a security interest in a mark may also want to secure other assets of the debtor or otherwise take action that will enable a subsequent user of the mark to provide substantially similar products and services. At least one authority recommends that “[a] creditor who seeks to obtain the full value of a trademark as collateral must therefore obtain an interest not only in the trademark, but also in the associated line of business through a security interest in physical assets or other aspects of the debtor’s business sufficient to permit continuity in the use of the designation.” RESTATEMENT (THIRD) OF UNFAIR COMPETITION §34, cmt. e (1995). See Roman Cleanser, supra, 802 F.2d at 208 – 209 (assignment to creditor valid when creditor received product formulas and customer lists with mark). Security interests in trademarks, whether the trademark is registered or not, may be perfected through state Uniform Commercial Code filings. MCCARTHY, supra. When a federal registration covers a mark subject to a security interest, the security interest may also be filed with the United States Patent and Trademark Office. 37 C.F.R. §3.11(a); USPTO, TRADEMARK MANUAL OF EXAMINING PROCEDURE §503.02 (Oct. 2016), www.uspto.gov/trademark/guides-and-manuals/tmep-archives. Likewise, when a mark is subject to a state registration, the creditor may also be able to record the security interest with the state registry. C. [7.9] Licensing A trademark license is an agreement whereby a trademark owner authorizes another entity to use the owner’s mark. Unlike an assignment, in which ownership of the mark passes to another entity, a license is an arrangement in which the trademark owner retains ownership interest in the mark. Through a trademark license, a trademark owner can expand use of its mark into new products and services, extend its rights and reputation geographically, and obtain financial benefits such as royalties and licensing fees. 1. [7.10] Benefits As indicated in §7.9 above, a trademark license can be an extremely valuable tool for creating and expanding trademark rights and reaping financial reward by exploiting the goodwill and reputation in a mark. Use of a mark by a licensee inures to the benefit of the trademark owner. 15 U.S.C. §1055. This means that, from a trademark rights perspective, any licensed use is deemed to be use by the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
7—7
§7.11
INTELLECTUAL PROPERTY LAW
trademark owner. Indeed, a trademark owner can rely strictly on licensees to maintain and develop the owner’s trademark rights. For example, a business can file a federal intent-to-use trademark application and then effect use of the mark by licensing the mark to another, without ever using the mark itself. When a licensee uses the mark in connection with products or services not previously sold by the trademark owner, or expands use of the mark to new geographic markets, this use simultaneously extends the trademark owner’s rights, as long as the use is within the scope of the license. See, e.g., Cotton Ginny, Ltd. v. Cotton Gin, Inc., 691 F.Supp. 1347, 1354 (S.D.Fla. 1988) (in licensing arrangement, goodwill symbolized by trademark is owned by licensor even though created by licensee’s efforts, and geographic market for licensor’s use is expanded by use of licensee); Denison Mattress Factory v. Spring-Air Co., 308 F.2d 403, 409 (5th Cir. 1962) (“A trademark owner may extend the territory in which he has the right to exclusive use of his trademark, either by expanding his own operations, or he may introduce his trademark and create a demand for his variety of goods in new territory, by licenses subject to his control.”). 2. Features and Requirements of a Valid License a. [7.11] Basic Form and Scope A trademark license can be oral or written. It is advisable, however, to reduce all trademark licenses to writing to eliminate uncertainty over the parties’ respective rights and obligations. A license can be exclusive or nonexclusive as to the marks involved, the products or services licensed, and the geographic areas covered by the license. Whether a license is exclusive or nonexclusive with respect to these variables depends on many factors, such as the parties’ bargaining power, economic opportunities and expectations, and the royalty or licensing fees agreed on. A license also should have an established duration or be terminable upon certain conditions. b. [7.12] License Agreement Terms License agreements take many forms, depending on the relationship of the parties, the marks being licensed, and the economic interests involved. Careful consideration should be given to the drafting of license agreements. Failure to anticipate problems or provide for foreseeable business contingencies can cause serious rifts in the licensor-licensee relationship. When this happens, a licensor may find the reputation and goodwill of its mark in the hands of a disgruntled licensee, or the licensee may face potential loss of investment and business if the license is not renewed or is terminated prematurely. On the other hand, a license agreement that clearly delineates the parties’ respective obligations and provides guidance for the parties’ expectations may help foster a constructive and profitable commercial relationship. Basic license agreements often include the following provisions: 1. identification of the parties; 2. identification of the licensed mark;
7—8
WWW.IICLE.COM
TRANSFER OR LOSS OF TRADEMARK RIGHTS
§7.12
3. specification of the licensed products or services; 4. the term, or length of time, of the license; 5. the geographic area for which the license is granted; 6. an indication of whether the license is exclusive or nonexclusive; 7. quality control requirements; and 8. royalty or licensing fee payments. License agreements may also cover such topics as the following: 1. requirements as to correct trademark usage; 2. trademark policing and enforcement responsibilities; 3. the licensee’s recognition of the licensor’s trademark rights and agreement not to contest or undermine these rights; 4. accounting and reporting requirements; 5. assignability of the license agreement; 6. any limitations on sublicensing; 7. a “best efforts” clause, under which a licensee agrees to exercise its best efforts to promote and sell the licensed products or services; 8. automatic or conditional termination options; 9. notice-and-cure provisions in the event of breach; 10. minimum sales requirements; 11. indemnification and commercial liability insurance coverage; and 12. a sell-off period after the license expires. Other terms common to license agreements, as with other commercial agreements, include merger clauses, forum selection and choice-of-law provisions for resolving disputes, and conditions for amendment.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
7—9
§7.13
INTELLECTUAL PROPERTY LAW
c. [7.13] Quality Control Among the most critical features of a trademark license is the quality control exercised by the trademark owner-licensor. A licensor must exercise control over the nature and quality of licensed goods or services. The principle behind the quality control requirement is to ensure that the licensed products are of the same quality that the public has come to expect of products provided under the mark so that consumers are not deceived into buying a product different from what they reasonably expect. AmCan Enterprises, Inc. v. Renzi, 32 F.3d 233, 235 (7th Cir. 1994). If a trademark owner licenses another to use its trademark but does not exercise control over the nature or quality of the licensed products or services, the owner negates the source-identifying function of the trademark. Failure to exercise this control is called “naked” or “uncontrolled” licensing, and it occurs when the licensor allows its licensee to provide goods and services under the license without the licensor’s restricting or reviewing the nature or quality of the licensed goods in any way. Stanfield v. Osborne Industries, Inc., 52 F.3d 867, 871 (10th Cir. 1995); Eva’s Bridal Ltd. v. Halanick Enterprises, Inc., 639 F.3d 788 (7th Cir. 2011). A licensor’s failure to exercise quality control is viewed as working a deception on the public and may result in complete abandonment and forfeiture of the licensor’s trademark rights. First Interstate Bancorp v. Stenquist, 16 U.S.P.Q.2d (BNA) 1704, 1990 WL 300321 (N.D.Cal. 1990). “Quality control” does not mean that the licensed products will or must be of high quality; rather, it ensures only that the nature and quality of the licensed products are consistent with and predictable to the licensor’s standards. 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §18:55 (4th ed. 2015). The nature and degree of quality control will vary with the type of product, service, and market involved. (1)
[7.14] Lack of quality control
A licensor that fails to exercise quality control and thus permits uncontrolled licensing may be deemed to have lost its trademark rights through abandonment. TMT North America, Inc. v. Magic Touch GmbH, 124 F.3d 876, 885 (7th Cir. 1997). For example, in Barcamerica International USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002), the licensor had granted a license for use of its mark on wine. The licensor engaged in random tastings of the licensee’s wine but otherwise relied on the licensee’s reputation for producing excellent wine. There was no evidence that the licensor’s tastings were systematic, the licensor had no knowledge of the licensee’s quality control standards, and the licensor made no other efforts to assess or supervise the quality of the licensee’s wine. The Ninth Circuit found that the licensor had engaged in uncontrolled licensing through its lack of quality control, and the licensor’s mark was held abandoned. Similarly, in First Interstate Bancorp v. Stenquist, 16 U.S.P.Q.2d (BNA) 1704, 1990 WL 300321 (N.D.Cal. 1990), the licensor was a real estate services firm, and the license agreement it entered into did not contain any controls or restrictions on use of the licensed mark other than to require the licensee to warrant that he or she was a real estate broker in good standing. The licensor did not supervise the licensee or the licensee’s employees in the performance of their
7 — 10
WWW.IICLE.COM
TRANSFER OR LOSS OF TRADEMARK RIGHTS
§7.15
work, and the licensor was not involved in the sales procedures or operations of the licensee’s business. Under these circumstances, the court found that the licensor had abandoned its service mark rights through uncontrolled licensing. Inclusion of a quality control provision in a license agreement may not be enough by itself; the licensor should expect to actually exercise quality review. On the other hand, the lack of an express contractual provision governing quality control procedures is not fatal if quality control is actually undertaken. Barcamerica, supra, 289 F.3d at 596. When circumstances reveal that the licensor and the licensee have a close working relationship, adequate quality control may exist even in the absence of a formal agreement on quality control. Taco Cabana International, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1121 – 1122 (5th Cir. 1991) (licensor and licensee had close working relationship for eight years); Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1017 – 1018 (9th Cir. 1985) (adequate quality control found based on, inter alia, licensor’s involvement in manufacture of licensed products and ten-year working relationship with licensee). While a licensor must exercise quality control or risk loss of trademark rights, there have been special circumstances in which courts have found that a licensor was justified in relying on a licensee’s quality control efforts. See, e.g., Embedded Moments, Inc. v. International Silver Co., 648 F.Supp. 187, 194 (E.D.N.Y. 1986) (history of “trouble-free manufacture” and prior relationship between licensor and licensee), quoting Syntex Laboratories, Inc. v. Norwich Pharmacal Co., 315 F.Supp. 45, 56 (S.D.N.Y. 1970). These circumstances are atypical, however, and a licensor’s interests will generally be served and protected better by direct attention to quality control. (2)
[7.15] Sample measures
Because the penalty for lack of quality control is forfeiture of trademark rights, actual quality control and express quality control provisions should be an integral part of any licensing arrangement. Failure to include and follow these provisions in a written license is not per se fatal but creates risk and uncertainty. Importantly, the quality control requirement “does not give a licensor control over the day-today operations of a licensee beyond that necessary to ensure uniform quality of the product or service in question.” Oberlin v. Marlin American Corp., 596 F.2d 1322, 1327 (7th Cir. 1979). Adequate quality control measures can include the following: a. regular submission of samples for review and the right to insist on correction of defects; b. review of advertising and promotional material; c. the right to inspect a licensee’s facilities; d. guidelines for the manufacture of licensed products; e. maintenance of product testing records;
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
7 — 11
§7.16
f.
INTELLECTUAL PROPERTY LAW
reporting of consumer or government complaints; and
g. termination of the license for substandard products or services. d. [7.16] Disclosure or Notice Licensed products and services do not need to identify the licensor but may properly bear only the licensed mark and the licensee’s name. 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §18:45 (4th ed. 2014); Financial Matters, Inc. v. PepsiCo, Inc., 806 F.Supp. 480, 482 n.2 (S.D.N.Y. 1992) (“It is well-established that the public need not know the name of the trademark owner for [there] to be goodwill in a mark, nor does the name of the owner have to appear on the product itself.”). Under some circumstances, a licensor may want the public to know that certain products or services are provided under license. One benefit in providing this notice would be to capitalize on a trademark owner’s renown or reputation to increase the salability of the product. Another benefit would be to educate the public so that imitations, knock-offs, and infringements can be avoided. Common forms of notice include statements on products or promotional material, such as “Licensed product of ABC Corporation” or “XYZ operates as an authorized licensee of ABC Corporation.” 3. [7.17] Franchise While a trademark license may be an element of a broader franchise agreement, a franchise requires more than just a simple trademark license. Generally speaking, a franchise exists when the trademark owner exercises significant control over the franchisee’s business, method of operation, or marketing plan or system. 2 Anne Gilson, GILSON ON TRADEMARKS §6.05[1] (2009). Franchise arrangements are governed by rules and regulations of the Federal Trade Commission, as well as applicable state franchise laws. In Illinois, for example, franchise arrangements are subject to the Franchise Disclosure Act of 1987, 815 ILCS 705/1, et seq. 4. [7.18] Licensor’s Tort Liability for Defective Licensed Products A licensor’s potential liability for defective licensed products varies by state. In many jurisdictions, a trademark licensor is not automatically liable in tort for defects in licensed products. Patterson v. Central Mills, Inc., 112 F.Supp.2d 681, 692 – 693 (N.D. Ohio 2000); Yoder v. Honeywell Inc., 104 F.3d 1215 (10th Cir. 1997) (and cases cited therein); Oberlin v. Marlin American Corp., 596 F.2d 1322 (7th Cir. 1979) (mere use of trademark by licensee will not usually subject licensor to responsibility for acts of its licensee under principal-agent theory); In re Temporomandibular Joint (TMJ) Implants Product Liability Litigation, 113 F.3d 1484 (8th Cir. 1997) (“A standard trademark agreement, in and of itself, does not establish an affirmative duty to inspect that could result in tort liability to third parties.”). For example, in Dzhunaydov v. Emerson Electric Co., No. 12-CV-2188 (FB) (RER), 2016 WL 1069067 (E.D.N.Y. Mar. 17, 2016), Emerson Electric owned the trademark “Ridgid” for construction tools. Emerson licensed the brand to Home Depot for a line of power tools, including a table saw. While operating a
7 — 12
WWW.IICLE.COM
TRANSFER OR LOSS OF TRADEMARK RIGHTS
§7.18
Ridgid-brand table saw, the plaintiff was injured and sued Emerson and Home Depot, among others. On Emerson’s motion for summary judgment, the court noted that under New York law, a “trademark licensor cannot be held liable for injuries caused by a defective product bearing its label where the licensor did not design, manufacture, sell, distribute or market the allegedly defective item.” 2016 WL 1069067 at *1, quoting D’Onofrio v. Boehlert, 221 A.D.2d 929, 635 N.Y.S.2d 384, 385 (1995). The license agreement with Home Depot revealed that Emerson retained quality control authority over the Ridgid mark, but there was no evidence that Emerson actually exercised any control over the design or manufacture of the saw. Thus, the court granted summary judgment for Emerson. An exception to this rule exists when the trademark owner is significantly involved in the manufacturing, marketing, or distribution of the licensed product. Under these circumstances, a trademark licensor or franchisor may be held liable for personal injuries and property damage resulting from defective products and services supplied by licensees and franchisees. See, e.g., Kosters v. Seven-Up Co., 595 F.2d 347, 353 (6th Cir. 1979) (“Liability is based on the franchisor’s control and the public’s assumption, induced by the franchisor’s conduct, that it does in fact control and vouch for the product.”); Torres v. Goodyear Tire & Rubber Co., 163 Ariz. 88, 786 P.2d 939 (1990); RESTATEMENT (THIRD) OF TORTS: PRODUCTS LIABILITY §14, cmt. d (1998). More recent decisions have confirmed this approach. See, e.g., Aquarulo v A.O. Smith, No. CV095024498S, 2011 WL 7095179 (Conn.Super. Dec. 30, 2011) (unpublished; text available on Westlaw); Lou v. Otis Elevator Co., 77 Mass.App.Ct. 571, 933 N.E.2d 140, 148, review denied, 458 Mass. 1108 (2010). It appears that Illinois currently follows the majority view on licensor tort liability, though for a brief time this seemed in doubt. In 1979, the Illinois Supreme Court found that a trademark licensor could be liable for use of its mark on a defective licensed product, even when the defendant was not involved in the distribution of the product. Connelly v. Uniroyal, Inc., 75 Ill.2d 393, 389 N.E.2d 155, 27 Ill.Dec. 343 (1979). Three years later, however, Connelly was circumscribed by the Illinois Supreme Court’s decision in Hebel v. Sherman Equipment, 92 Ill.2d 368, 442 N.E.2d 199, 205, 65 Ill.Dec. 888 (1982), in which the court appears to have adopted the majority view: While [the Connelly] opinion did state that a defendant’s participation in the chain of distribution was not an essential element for strict liability to apply . . . the reference was to the fact that a defendant such as Uniroyal who is not in the direct chain of sale leading from manufacturer to consumer may nonetheless be so integrally involved in the overall producing and marketing enterprise that strict liability will follow. [Citation omitted.] With regard to a licensor’s liability for negligence in cases of defective licensed products, the Indiana Supreme Court’s decision in Kennedy v. Guess, Inc., 806 N.E.2d 776 (Ind. 2004), is noteworthy. In Kennedy, a case of first impression in Indiana, Guess, Inc., had licensed another entity to produce and distribute umbrellas bearing the “Guess” mark. One of these umbrellas allegedly caused injury to a consumer, who sued the umbrella distributor and Guess. Guess moved for summary judgment on the ground that it did not have liability as a trademark licensor. The Indiana Supreme Court rejected this argument and held that under Indiana common law,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
7 — 13
§7.19
INTELLECTUAL PROPERTY LAW
those who license their trademarks for use on products that cause injury may have negligence liability proportionate to their role in the product’s design, manufacturing, and distribution.
PRACTICE POINTER
Trademark owners who are concerned about their liability for the defective products of their licensees should consider incorporating provisions in the license agreement requiring indemnification by the licensee or requiring the licensee to purchase liability insurance for the benefit of the licensor.
III. [7.19] LOSS OF RIGHTS Trademark rights are acquired through use of a mark as an indicator of source. See Chapter 6 of this handbook. As a corollary, trademark rights may be lost when either (a) the mark is no longer being used or (b) the mark is being used but no longer serves as a source indicator because the mark has become a generic term or because the mark was the subject of uncontrolled licensing. A. [7.20] Cessation of Use As noted in §6.17 of this handbook, the existence of trademark rights depends on bona fide use of the mark in commerce. Consequently, trademark rights may be lost when the owner discontinues use of the mark. Loss of trademark rights through nonuse is called “abandonment.” The purpose of the doctrine of abandonment is to prevent the hoarding of marks and to permit reuse of terms that have fallen out of the public consciousness and thus are no longer serving as indicia of source. Under the Trademark Act of 1946, ch. 540, 60 Stat. 427, popularly known as the Lanham Act, a mark is deemed abandoned when “its use has been discontinued with intent not to resume such use.” 15 U.S.C. §1127. Nonuse of a mark for three consecutive years constitutes prima facie evidence of abandonment. Id. “Use” of a mark means bona fide use in the ordinary course of trade and not use merely to reserve rights in the mark. Id. Trademarks cannot be reserved or “warehoused,” and thus to avoid abandoning its rights, a trademark owner must have bona fide use or a genuine intent to resume use in the reasonably foreseeable future. Silverman v. CBS, Inc., 870 F.2d 40, 46 (2d Cir. 1989); AmBrit, Inc. v. Kraft, Inc., 812 F.2d 1531, 1550 (11th Cir. 1986); Exxon Corp. v. Humble Exploration Co., 695 F.2d 96, 101 (5th Cir. 1983) (“The [Lanham] Act does not allow the preservation of a mark solely to prevent its use by others.”). Significantly, a temporary cessation of business or of use of a mark does not automatically and immediately terminate rights in the mark. Defiance Button Machine Co. v. C & C Metal Products Corp., 759 F.2d 1053, 1060 (2d Cir. 1985) (“goodwill does not ordinarily disappear or completely lose its value overnight”); Seidelmann Yachts, Inc. v. Pace Yacht Corp., 14 U.S.P.Q.2d (BNA) 1497, 1989 WL 214497, **6 – 7 (D.Md. 1989) (no abandonment despite more than five years of nonuse), aff’d, 898 F.2d 147 (4th Cir. 1990). Rather, the hiatus in use must be accompanied by an intent not to resume use.
7 — 14
WWW.IICLE.COM
TRANSFER OR LOSS OF TRADEMARK RIGHTS
§7.22
When a case of prima facie abandonment is shown, however, a trademark owner cannot overcome the presumption of abandonment simply by asserting a subjective intent not to abandon. Rivard v. Linville, 133 F.3d 1446, 1449 (Fed.Cir. 1998). Instead, the trademark owner must “put forth evidence with respect to what activities it engaged in during the nonuse period or what outside events occurred from which an intent to resume use during the nonuse period may reasonably be inferred.” Imperial Tobacco Ltd. v. Philip Morris, Inc., 899 F.2d 1575, 1581 (Fed.Cir. 1990). 15 U.S.C. §1127 provides that intent not to resume use “may be inferred from circumstances.” Evidence of intent to resume use can take a variety of forms. See, e.g., Sands, Taylor & Wood Co. v. Quaker Oats Co., 978 F.2d 947, 956 (7th Cir. 1992) (continuing efforts to license mark were sufficient evidence of intent to resume use, rebutting prima facie case of abandonment); Roulo v. Russ Berrie & Co., 886 F.2d 931, 939 (7th Cir. 1989) (trademark owner’s presence at trade show and testimony that she would have marketed her product but for defendant’s launch of its infringing product line supported jury verdict of no abandonment). When the period of nonuse is modest, courts often find no abandonment if the nonuse was involuntary or good-faith efforts were made to resume use. See, e.g., Seidelmann, supra (trademark owner had declared bankruptcy and made continuous efforts to sell mark, and ultimate purchaser began using mark within reasonable period of time after purchase); Miller Brewing Co. v. Oland’s Breweries (1971) Ltd., 548 F.2d 349 (C.C.P.A. 1976) (financial difficulties and labor strike). 1. [7.21] Effect of Abandonment Through Nonuse A trademark owner that has abandoned its mark through nonuse has no rights to enforce against a third party. Also, once a mark is abandoned, any rights a trademark owner may subsequently possess in the mark will be newly acquired, and the priority will run only from the date when use was resumed with intent to continue this use. L. & J.G. Stickley, Inc. v. Canal Dover Furniture Co., 79 F.3d 258, 263 – 264 (2d Cir. 1996); Societe de Developments et D’Innovations des Marches Agricoles et Alimentaires-Sodima-Union de Cooperatives Agricoles v. International Yogurt Co., 662 F.Supp. 839, 850 – 851 (D.Or. 1987). Thus, if a trademark owner has abandoned its mark through nonuse, a later resumption of use cannot retroactively cure past abandonment. AmBrit, Inc. v. Kraft, Inc., 812 F.2d 1531, 1551 (11th Cir. 1986). These principles apply even when a party owns an existing federal registration governing the abandoned mark. In such circumstances, the party still has no trademark rights to enforce, and the registration is subject to cancellation on the ground of abandonment. 2. [7.22] Enduring (or Residual) Goodwill Products such as fire trucks, heavy farm equipment, and automobiles may be used, serviced, and maintained for many years. Thus, a mark affixed to one of these durable products may continue to have source-identifying significance to consumers long after the trademark owner has ceased selling products under the mark. In these instances, some courts have recognized the “residual goodwill” that remains with a mark and have declined to find abandonment despite prolonged periods of nonuse. Ferrari S.p.A. Esercizio Fabbriche Automobili e Corse v. McBurnie, 11 U.S.P.Q.2d (BNA) 1843, 1989 WL 298658, *8 (S.D.Cal. 1989). Cf. Emergency
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
7 — 15
§7.23
INTELLECTUAL PROPERTY LAW
One, Inc. v. American FireEagle, Ltd., 228 F.3d 531, 537 (4th Cir. 2000) (“Because fire trucks have very long lives (often twenty to thirty years), the mark stays visible, and the good will value of the mark persists long after production of trucks with that mark has ceased.”). Notably, however, not every court has embraced the concept of residual goodwill. Exxon Corp. v. Humble Exploration Co., 695 F.2d 96, 101 (5th Cir. 1983). 3. [7.23] Use on Slightly Different Product Generally, a change in the style or formula of a product sold under the same mark does not constitute an abandonment of rights in the mark. E.I. du Pont de Nemours & Co. v. G.C. Murphy Co., 199 U.S.P.Q. (BNA) 807, 1978 WL 21268 (T.T.A.B. 1978) (change in trademarked product from premium-priced paint to budget-type paint with slightly different formula did not constitute abandonment). Similarly, discontinuance of use of a mark on one product will not constitute abandonment if the trademark owner uses the mark on a related product and the product would be thought by the public to come from the same source. Lucien Piccard Watch Corp. v. Since 1868 Crescent Corp., 314 F.Supp. 329, 331 – 332 (S.D.N.Y. 1970) (no abandonment of mark when products with which mark used changed from key cases, wallets, billfolds, and eyeglass cases to money clips, jewelry boxes, memo pads, and notebooks). 4. [7.24] Alterations or Amendments to Mark When a mark is altered, amended, or modernized, no abandonment will occur if the new version of the mark creates the same commercial impression as the old version. Sands, Taylor & Wood Co. v. Quaker Oats Co., 978 F.2d 947, 955 (7th Cir. 1992). Maintaining a continuity of rights when a mark is amended or modernized is sometimes called “tacking.” See Iowa Health System v. Trinity Health Corp., 177 F.Supp.2d 897, 920 – 923 (N.D. Iowa 2001). Small changes in the presentation or appearance of the mark are generally permissible for tacking purposes. See Navistar International Transportation Corp. v. Freightliner Corp., 52 U.S.P.Q.2d (BNA) 1074, 1998 WL 1120389, *4 n.9 (N.D.Ill. 1998). However, if changes to a trademark materially alter its character, a court may find that use of the new trademark cannot be tacked onto use of the former trademark for continuity of use purposes. See, e.g., Specht v. Google, Inc., 758 F.Supp.2d 570, 583 – 585 (N.D.Ill. 2010) (use of “ANDROID DUNGEON” cannot be tacked onto former use of “ANDROID DATA” to establish continuous use of “ANDROID” trademark). B. [7.25] Genericness A mark that is simply the generic name for the product or service with which it is used cannot be protected. Trademark rights will be lost when a mark that was previously source-identifying becomes the generic term for the product or service with which it is used. Singer Manuf’g Co. v. June Manuf’g Co., 163 U.S. 169, 41 L.Ed. 118, 16 S.Ct. 1002 (1896). This common-law principle is reflected in the Lanham Act, under which a mark is deemed abandoned when “any course of conduct of the owner, including acts of omission as well as commission, causes the mark to become the generic name for the goods or services on or in connection with which it is used or otherwise to lose its significance as a mark.” 15 U.S.C. §1127.
7 — 16
WWW.IICLE.COM
TRANSFER OR LOSS OF TRADEMARK RIGHTS
§7.27
Well-known generic terms that started out as trademarks include “cellophane,” “escalator,” and “thermos.” These terms now denote the products themselves, rather than the sources of the products. Examples of other brand names lost when they passed into general language use are yellow pages, Murphy bed, and shredded wheat. 1. [7.26] Test To determine whether a mark has become generic, the critical inquiry is the primary significance of the mark to the relevant consumers. 15 U.S.C. §1064(3). Genericness is established when the primary significance of the mark to relevant consumers of the product or service is to identify any products or services of this type and not those specifically associated with the trademark owner. Glover v. Ampak, Inc., 74 F.3d 57, 59 (4th Cir. 1996) (finding “White Tail” not generic for pocket knives; “if [defendant] had carried his burden, we would find evidence in the record which establishes that when purchasers walk into retail stores and ask for white tails, they regularly mean any brand of pocket or hunting knife, and not specifically [plaintiff’s] products”). Thus, “a party who seeks to establish that a mark has become generic must (1) identify the class of product or service to which use of the mark is relevant; (2) identify the relevant purchasing public of the class of product or service; and (3) prove that the primary significance of the mark to the relevant public is to identify the class of product or service to which the mark relates.” Id. See also Union National Bank of Texas, Laredo, Texas v. Union National Bank of Texas, Austin, Texas, 909 F.2d 839, 846 – 847 (5th Cir. 1990) (purported mark must be examined in light of product or service to which it is applied and audience to which relevant product or service is directed). 2. [7.27] Burden and Methods of Proof When a trademark is the subject of a federal registration, it is presumed not to be generic. Coca-Cola Co. v. Overland, Inc., 692 F.2d 1250, 1254 (9th Cir. 1982). Thus, a challenger attempting to prove that a registered mark is generic bears the burden of proof on the issue. Pebble Beach Co. v. Tour 18 I, Ltd., 942 F.Supp. 1513, 1537 (S.D.Tex. 1996), aff’d, 155 F.3d 526 (5th Cir. 1998). When a mark is unregistered, the burden is on the trademark owner to prove that its mark is not generic. Mil-Mar Shoe Co. v. Shonac Corp., 75 F.3d 1153, 1156 (7th Cir. 1996). Evidence courts have considered in determining whether a mark is generic includes dictionary definitions, the plaintiff’s usage of the mark, use by the media, exclusivity of use, testimony of purchasers or persons in the trade, and consumer surveys. Loglan Institute, Inc. v. Logical Language Group, Inc., 962 F.2d 1038, 1041 (Fed.Cir. 1992) (genericness found when, inter alia, trademark owner used its own mark in generic manner); Mil-Mar Shoe, supra, 75 F.3d at 1159; Ty, Inc. v. Jones Group, Inc., 98 F.Supp.2d 988, 994 (N.D.Ill. 2000), aff’d, 237 F.3d 891 (7th Cir. 2001); Frito-Lay, Inc. v. Bachman Co., 704 F.Supp. 432, 440 (S.D.N.Y. 1989). Testimony of language experts may also be permitted concerning the origin and use of a word by the public. WSM, Inc. v. Hilton, 724 F.2d 1320, 1329 (8th Cir. 1984) (“opry” generic for country music performances).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
7 — 17
§7.28
INTELLECTUAL PROPERTY LAW
3. [7.28] Establishing Rights in Lost Marks Language use changes over time. Thus, it is possible to claim protectable rights in a mark that had once been lost as a generic term. In Singer Manufacturing Co. v. June Manufacturing Co., 163 U.S. 169, 41 L.Ed. 118, 16 S.Ct. 1002 (1896), the Supreme Court found that the mark “Singer” had become generic for sewing machines. Thus, a customer who ordered “a Singer” ordered a sewing machine of any make. By 1952, however, the public usage had changed, and “Singer” was held to have become once again the trademark of a single company. Singer Manufacturing Co. v. Redlich, 109 F.Supp. 623 (S.D.Cal. 1952). Significantly, this analysis involved a situation in which the trademark owner’s mark became generic and was later sought to be reclaimed as a trademark. At least one court has found that this analysis does not apply when a manufacturer attempts to claim as a trademark a generic term that was never originally a trademark. Harley-Davidson, Inc. v. Grottanelli, 164 F.3d 806, 811 – 812 (2d Cir. 1999) (finding “hog” generic for motorcycles). The Harley-Davidson court noted that the Singer-type analysis is applicable only when a term was originally a brand name and that it does not stand for the proposition that a commonly used name for a product can be appropriated by one seller. But see Opryland USA Inc. v. Great American Music Show, Inc., 970 F.2d 847 (Fed.Cir. 1992), in which the court observed that while the Eighth Circuit had ruled “opry” a generic term for country music shows in 1984 (WSM, Inc. v. Hilton, 724 F.2d 1320 (8th Cir. 1984)), Opryland was not estopped from showing a possible change in circumstances concerning the public perception of “opry.” Accord Miller’s Ale House, Inc. v. Boynton Carolina Ale House, LLC, 745 F.Supp.2d 1359, 1370 – 1371 (S.D.Fla. 2010) (noting that prior finding of genericness can be challenged if there has been change in circumstances). 4. [7.29] Tips To Avoid “Genericide” Trademark owners should take affirmative steps to avoid a mark’s descent into genericness. Among the techniques that can be employed are the following: a. use of the TM symbol (when a federal registration is not needed) or ® symbol (if the trademark owner has a federal registration); b. use of the term “brand” following the mark (e.g., “Scotch brand tape”); c. notice of trademark ownership in footnotes (e.g., “ABC is a trademark of XYZ Corporation.”); d. use of advertising slogans that identify the mark as being associated with a single source (e.g., “If it doesn’t say Xerox, it’s not a Xerox Corporation copier.”); e. immediate objections to misuse in the media, in dictionaries or encyclopedias, or by competitors or others in the industry; f.
7 — 18
educational advertisements explaining the popularity of the name but emphasizing its status as a trademark;
WWW.IICLE.COM
TRANSFER OR LOSS OF TRADEMARK RIGHTS
§7.30
g. use of the mark on a variety of products (e.g., “Frigidaire” on a number of appliances, not just refrigerators); h. use of the mark with the appropriate generic term (e.g., “Kleenex facial tissues”) (note that it is particularly important that the owner of the rights in a patented product have an alternative “generic” name available that the public can use when the patent expires); i.
differentiating the mark in text by use of bold, capitals, underlining, italics, color, or different font and size; and
j.
avoiding use of the mark in possessive or plural forms or in a verb or noun form.
Not only may use of these techniques prevent a mark from becoming a generic term, but it also may help build a useful evidentiary record against any claim that the mark is generic. See, e.g., E.I. DuPont de Nemours & Co. v. Yoshida International, Inc., 393 F.Supp. 502 (E.D.N.Y. 1975) (finding “TEFLON” not generic for nonstick finishes and citing trademark owner’s advertising and trademark protection program); Ty, Inc. v. Jones Group, Inc., 98 F.Supp.2d 988 (N.D.Ill. 2000) (finding “BEANIE” not generic for plush toys and noting that trademark owner had rigorous trademark enforcement program and did not use its mark generically), aff’d, 237 F.3d 891 (7th Cir. 2001). C. [7.30] Uncontrolled (or Naked) Licensing A party may also lose its trademark rights through uncontrolled licensing. Uncontrolled licensing is deemed an abandonment of rights because the trademark owner’s failure to exercise quality control over its licensed products or services negates the sourceidentifying function of the mark. For a fuller discussion of uncontrolled licensing, see §§7.13 and 7.14 above.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
7 — 19
8
Enforcement, Remedies, and Defenses in Trademark and Unfair Competition Law
BRADLEY L. COHN Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP Chicago
®
©COPYRIGHT 2017 BY IICLE .
8—1
INTELLECTUAL PROPERTY LAW
I. [8.1] Scope of Chapter II. [8.2] Trademark Protection and Enforcement A. [8.3] Value of Protection B. Infringement 1. [8.4] Terminology 2. [8.5] Governing Law 3. [8.6] Test a. [8.7] Strength of Plaintiff’s Mark b. [8.8] Similarity of Marks (1) [8.9] Appearance (2) [8.10] Sound (3) [8.11] Connotation c. [8.12] Similarity of Goods or Services d. [8.13] Channels of Trade e. [8.14] Degree of Purchaser Care f. [8.15] Intent g. [8.16] Actual Confusion 4. [8.17] Reverse Confusion 5. [8.18] Initial Interest Confusion 6. Third-Party Liability for Infringement a. [8.19] Contributory Infringement b. [8.20] Personal Driving Force C. Counterfeiting 1. [8.21] In General 2. [8.22] Enforcement a. [8.23] Seizure Orders b. [8.24] Special Monetary Relief D. False Designation of Origin or Description of Fact 1. [8.25] Misrepresentations and Unfair Competition 2. Direct and Reverse Passing Off a. [8.26] Direct Passing Off b. [8.27] Reverse Passing Off E. [8.28] False Advertising F. [8.29] Dilution 1. [8.30] Types of Dilution 2. [8.31] Governing Law 3. Test a. [8.32] State Law b. [8.33] Federal Law 4. [8.34] First Amendment and Non-Trademark Uses 8—2
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
G. [8.35] Cybersquatting 1. [8.36] Anticybersquatting Consumer Protection Act a. [8.37] Test b. [8.38] In Rem Actions c. [8.39] Relief 2. [8.40] Dispute Resolution Policies H. [8.41] Proceedings Before the United States Patent and Trademark Office I. [8.42] Surveys and Consumer Reaction Tests 1. [8.43] Elements for Proper Survey 2. [8.44] Precedents J. [8.45] Cease-and-Desist Letters 1. [8.46] Content 2. [8.47] Precautions a. [8.48] Declaratory Judgment b. [8.49] Delay K. [8.50] Insurance Coverage III. [8.51] Remedies A. Equitable Relief 1. [8.52] Injunctions a. [8.53] Geographic Issues b. [8.54] Disclaimer c. [8.55] Temporary Restraining Orders and Preliminary Injunctions 2. [8.56] Recall, Seizure, Barred Importation, and Destruction of Infringing Articles B. [8.57] Monetary Relief 1. [8.58] Accounting of Profits 2. [8.59] Damages a. [8.60] Treble Damages b. [8.61] Punitive Damages 3. [8.62] Attorneys’ Fees IV. Defenses A. [8.63] Fair Use 1. [8.64] Descriptive, or Classic, Fair Use 2. [8.65] Nominative Fair Use 3. [8.66] Comparative Advertising 4. [8.67] Repackaged, Repaired, Altered, or Lawfully Copied Products
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8—3
INTELLECTUAL PROPERTY LAW
B. [8.68] Estoppel 1. [8.69] Laches a. [8.70] Knowledge b. [8.71] Delay c. [8.72] Detrimental Reliance or Prejudice d. [8.73] Effect on Relief e. [8.74] Preliminary Injunction f. [8.75] Inevitable Confusion 2. [8.76] Acquiescence 3. [8.77] Progressive Encroachment C. [8.78] Concurrent Use D. Importation of Goods Originally Intended for Sale Outside the United States (Gray Market Goods) 1. [8.79] In General 2. [8.80] Issues 3. [8.81] Avenues for Relief a. [8.82] Civil Action b. [8.83] U.S. Customs and Border Protection c. [8.84] International Trade Commission V. Appendix — Sample Forms A. [8.85] Cease-and-Desist Letter B. [8.86] Complaint for Trademark Infringement, False Designation of Origin, Unfair Competition, and Deceptive Trade Practices C. [8.87] Notice of Opposition
8—4
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.3
I. [8.1] SCOPE OF CHAPTER The goals of modern trademark law are (a) to permit a trademark owner to conserve, maintain, and extend the reputation and goodwill of its business as symbolized by the trademark and (b) to protect the public from the likelihood of confusion, mistake, or deception as to the source, nature, or quality of products and services. Facets of these goals are treated in Chapters 6 and 7 of this handbook, which examine how a trademark owner can develop, exploit, and preserve its trademark rights. This chapter focuses on trademark enforcement, which involves both the trademark owner’s interest in protecting its reputation and goodwill and the public’s right to be free of confusion or deception in the marketplace. The chapter explores legal options and principles a trademark owner can employ to protect its rights and the public interest and also discusses common defenses to legal actions brought under the trademark laws.
II. [8.2] TRADEMARK PROTECTION AND ENFORCEMENT Trademark law protects against the likelihood of confusion, mistake, or deception among consumers as to the source, nature, or quality of a merchant’s products or services. Deceptively simple, this is the essential statement of what trademark protection is all about under federal and state statutes and the common law. Thus, if a party’s branding or advertising creates a likelihood that consumers will be confused or deceived about the source, nature, or quality of its products or services, an aggrieved trademark owner or competitor may have a claim for relief. A common avenue of enforcement is the claim of trademark infringement. Infringement occurs when one merchant’s trademark is confusingly similar to another’s. Other claims that may arise when there is a likelihood of confusion include counterfeiting, false designation of origin, unfair competition, deceptive trade practices, and false advertising. Notably, there is a cause of action that protects a trademark owner’s interests even without any showing of likely confusion. This cause of action is called “dilution.” Dilution law protects a trademark against tarnishment or loss of distinctiveness. The elements and issues of proof for these claims are discussed in §§8.4 – 8.34 below. A. [8.3] Value of Protection Vigilance in asserting trademark rights is an extremely important part of brand development and business preservation. This vigilance allows a business to 1. build a distinctive trade identity for marketing and brand awareness purposes; 2. protect against injury to goodwill or reputation; 3. prevent financial loss caused by a competitor’s false or deceptive advertising or sale of products under a confusingly similar mark;
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8—5
§8.4
INTELLECTUAL PROPERTY LAW
4. preserve trademark rights, as lack of enforcement may lead to an erosion of rights (see §8.7 below); and 5. deter potential future infringers. B. Infringement 1. [8.4] Terminology Trademark infringement arises when one merchant’s mark is sufficiently similar to that of another so as to be likely to cause confusion, mistake, or deception among relevant consumers as to the source or sponsorship of the merchant’s goods. When the mark at issue is used in connection with services as opposed to goods, practitioners will often use the expression “service mark infringement.” Likewise, when the confusing similarity involves trade dress or product configuration, practitioners will commonly refer to this as “trade dress infringement.” 2. [8.5] Governing Law Infringement claims can be brought under federal, state, or common law. Usually, practitioners plead claims under all three. Infringement claims under federal law are brought under the Trademark Act of 1946, ch. 540, 60 Stat. 427, popularly known as the Lanham Act. A claim of infringement of a federally registered mark can be brought under 15 U.S.C. §1114 and a claim of infringement of an unregistered mark under 15 U.S.C. §1125(a). Trademark infringement claims may also be asserted under state trademark, unfair competition, or deceptive trade practice statutes. See, e.g., the Trademark Registration and Protection Act, 765 ILCS 1036/1, et seq., the Counterfeit Trademark Act, 765 ILCS 1040/0.01, et seq., and the Uniform Deceptive Trade Practices Act, 815 ILCS 510/1, et seq. State and commonlaw principles regarding trademark infringement generally track federal jurisprudence. See, e.g., TMT North America, Inc. v. Magic Touch GmbH, 124 F.3d 876, 881 (7th Cir. 1997). The vast majority of modern trademark infringement actions are brought in federal court, and thus federal jurisprudence has more precedents and is more developed than state law jurisprudence. 3. [8.6] Test To prove trademark infringement, a plaintiff must demonstrate (a) ownership of prior, protectable trademark rights and (b) a likelihood of confusion between the parties’ uses of their respective marks. International Kennel Club of Chicago, Inc. v. Mighty Star, Inc., 846 F.2d 1079, 1084 (7th Cir. 1988). See Chapter 6 of this handbook for a discussion on determining and proving ownership of trademark rights. The question of likelihood of confusion inquires as to the state of mind of nameless consumers faced with purchasing decisions. Rarely is resolution of this question black or white. A determination must be made as to whether an appreciable amount of confusion as to source will result from the use of an accused mark.
8—6
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.7
Courts weigh various factors to determine whether confusion is likely. International Kennel, supra, 846 F.2d at 1087. No one factor is dispositive, and the weight accorded to each factor varies by the circumstances of the case. Id. The following are the most common factors analyzed by the courts: a. the strength of the plaintiff’s trademark; b. the similarity of the parties’ marks; c. the similarity of the parties’ respective goods or services; d. the parties’ respective marketing channels; e. the degree of care exercised by consumers when purchasing the parties’ products or services; f.
the defendant’s intent in adopting its mark; and
g. evidence of actual confusion, if any. Each federal circuit has established its own test, and some tests include additional factors. See, e.g., Polaroid Corp. v. Polarad Electronics Corp., 287 F.2d 492, 495 (2d Cir. 1961); Frisch’s Restaurants, Inc. v. Elby’s Big Boy of Steubenville, Inc., 670 F.2d 642, 648 (6th Cir. 1982); AMF Inc. v. Sleekcraft Boats, 599 F.2d 341, 348 – 349 (9th Cir. 1979). a. [8.7] Strength of Plaintiff’s Mark When courts and practitioners speak of a mark as strong or weak, they are describing the trademark’s effectiveness in identifying the source of the trademark owner’s products or services. A mark that is strong is better able to distinguish and identify a particular merchant’s products or services than a mark that is weak. The relative strength of a mark depends on (1) the degree of distinctiveness of the mark and its elements and (2) the extent to which the mark is known to relevant consumers by virtue of sales, advertising, and promotion. With respect to the degree of distinctiveness, marks that are coined, fanciful, or arbitrary are considered inherently strong, while marks that are comprised of merely descriptive terms tend to be weak. Virgin Enterprises Ltd. v. Nawab, 335 F.3d 141, 147 (2d Cir. 2003). See §6.5 of this handbook for an explanation of the spectrum of distinctiveness for marks. Numerous third-party uses of marks identical or similar to the plaintiff’s may indicate that the plaintiff’s mark or its elements are not distinctive and thus weaken the plaintiff’s mark. Bliss Salon Day Spa v. Bliss World LLC, 268 F.3d 494, 496 (7th Cir. 2001) (extensive use of “Bliss” marks for similar services made it unlikely consumers would associate defendant’s mark with that of plaintiff); Halo Management, LLC v. Interland, Inc., 308 F.Supp.2d 1019, 1034 (N.D.Cal. 2003) (noting that when there is crowded field of similar marks for similar products, “the ability of any member of this field to prevent use by others is relatively weak”). Thus, active enforcement of trademark rights may be important to prevent the erosion of those rights.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8—7
§8.8
INTELLECTUAL PROPERTY LAW
As for the second element, the extent to which the mark is known, marks that are well-known or famous to the relevant consumers are considered stronger than relatively unknown marks. Relevant facts in this determination include the length of time that the mark has been used and the amount of sales, advertising, and promotion connected with the mark. Century 21 Real Estate Corp. v. Sandlin, 846 F.2d 1175 (9th Cir. 1988). Strong marks are generally given a broader scope of protection than weaker marks. Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 462 (7th Cir. 2000) (finding “PROZAC,” as fanciful mark, entitled to “the highest protection”); Frisch’s Restaurant, Inc. v. Shoney’s Inc., 759 F.2d 1261, 1264 (6th Cir. 1985) (“The more distinct a mark, the more likely is the confusion resulting from its infringement, and, therefore, the more protection it is due.”); Miles Laboratories, Inc. v. Naturally Vitamin Supplements, Inc., 1 U.S.P.Q.2d (BNA) 1445, 1986 WL 83319 (T.T.A.B. 1986) (“ONE A DAY” mark for vitamins and nutritional supplements “extremely well known” due to extensive advertising and sales for 45 years and, therefore, entitled to broad protection). Thus, when a plaintiff’s mark is strong, infringement may be found even when the parties’ respective marks and products are not identical. See, e.g., Caesars World, Inc. v. Caesar’s Palace, 490 F.Supp. 818, 825 (D.N.J. 1980) (confusion likely between use of “Caesars” for casino services and hairdressing services). By comparison, weak marks are generally afforded a narrow scope of protection; thus, infringement may be found only when the parties’ marks and products are very similar. See, e.g., First Savings Bank, F.S.B. v. First Bank System, Inc., 101 F.3d 645, 655 (10th Cir. 1996) (“When the primary term is weakly protected to begin with, minor alterations may effectively negate any confusing similarity between the two marks.”); General Mills, Inc. v. Kellogg Co., 824 F.2d 622, 626 – 627 (8th Cir. 1987) (no confusing similarity between “APPLE RAISIN CRISP” and “OATMEAL RAISIN CRISP,” both for cereals, when plaintiff’s mark was weak). b. [8.8] Similarity of Marks The parties’ marks do not have to be identical to find trademark infringement. The test is whether the marks are confusingly similar. Courts look at various elements of marks to determine whether marks are similar, including the appearance of the mark, the sound of the mark, and the mark’s connotation. This analysis is sometimes referred to as “sight, sound, and meaning.” Infringement may be found on the basis of only one of these elements, but appearance is usually given the most weight. (1)
[8.9] Appearance
When analyzing the similarity of the appearance of marks, it is necessary to consider the marks in their entireties, rather than breaking them down into separate parts. Daddy’s Junky Music Stores, Inc. v. Big Daddy’s Family Music Center, 109 F.3d 275, 283 (6th Cir. 1997). That being said, if one word or feature of a mark is the more dominant or salient element, this portion of the mark is often given more weight in this analysis. Packard Press, Inc. v. Hewlett-Packard Co., 227 F.3d 1352, 1357 (Fed.Cir. 2000) (proper to give greater weight to “PACKARD” as dominant element of mark “PACKARD TECHNOLOGIES” as “ ‘technology’ is highly suggestive/merely descriptive with respect to the services at issue”); Meridian Mutual Insurance Co. v. Meridian Insurance Group, Inc., 128 F.3d 1111, 1115 – 1116 (7th Cir. 1997) (finding “Meridian” most salient element of parties’ marks).
8—8
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
(2)
§8.12
[8.10] Sound
When marks sound or are pronounced the same, confusion may result even if the marks are visually different. Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 462 (7th Cir. 2000) (“PROZAC” and “HERBROZAC”); Han Beauty, Inc. v. Alberto-Culver Co., 236 F.3d 1333, 1337 (Fed.Cir. 2001) (plaintiff’s family of “TRES-” marks, including “TRESemme,” “TRESchic,” and “TRESprofessional,” and defendant’s mark “TREVIVE”). (3)
[8.11] Connotation
Confusion is more likely when the parties’ marks have similar meanings or connotations. See, e.g., AMF Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979) (“Slickcraft” versus “Sleekcraft”); American Home Products Corp. v. Johnson Chemical Co., 589 F.2d 103, 107 (2d Cir. 1978) (“ROACH MOTEL” versus “ROACH INN”). When a mark contains a foreign word whose English meaning will likely be known to relevant consumers, the court will consider the English translation of the term in assessing the similarity of the parties’ marks. In re American Safety Razor Co., 2 U.S.P.Q.2d (BNA) 1459, 1987 WL 123818 (T.T.A.B. 1987) (“BUENOS DIAS” for soap confusingly similar to “GOOD MORNING” for shaving cream). c. [8.12] Similarity of Goods or Services The more similar the parties’ goods, the more likely infringement will be found, but even when the parties’ goods or services are different or not competitive, infringement may be found. The critical question is whether the parties’ products are sufficiently related that consumers are likely to believe that they come from the same source when marketed under identical or confusingly similar marks. Planetary Motion, Inc. v. Techplosion, Inc., 261 F.3d 1188, 1201 – 1202 (11th Cir. 2001) (e-mail software and e-mail services); Helene Curtis Industries, Inc. v. Church & Dwight Co., 560 F.2d 1325, 1331 (7th Cir. 1977) (deodorant and baking soda). Goods or services that are used with one another, such as wine and cheese, are often considered complementary and thus are more likely to be adjudged sufficiently related. E. & J. Gallo Winery v. Gallo Cattle Co., 967 F.2d 1280, 1291 (9th Cir. 1992) (wine, cheese, and salami complementary products). However, the fact that goods or services may be used with one another does not necessarily mean that infringement will be found. See, e.g., Knaack Manufacturing Co. v. Rally Accessories, Inc., 955 F.Supp. 991, 1000 (N.D.Ill. 1997) (no confusion between plaintiff’s “WEATHER GUARD” tool boxes for automobiles and defendant’s “WeatherGUARD” automobile covers, when, inter alia, plaintiff’s mark was weak and parties’ products were noncompetitive and functionally unrelated); Edison Brothers Stores, Inc. v. Cosmair, Inc., 651 F.Supp. 1547 (S.D.N.Y. 1987) (while plaintiff’s shoes and defendant’s perfume may have been complementary fashion items, confusion unlikely when, inter alia, plaintiff’s mark was weak and parties’ respective products were targeted to different consumers in different channels of trade).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8—9
§8.13
INTELLECTUAL PROPERTY LAW
d. [8.13] Channels of Trade If goods are advertised and sold through the same marketing channels, it is more likely that consumers will associate them with the same source, increasing the likelihood of confusion. Checkpoint Systems, Inc. v. Check Point Software Technologies, Inc., 269 F.3d 270, 288 – 289 (3d Cir. 2001). In part, this is because consumers will encounter the products in the same marketing environment, increasing the consumers’ mental association between the goods. It is also possible that goods sold through different outlets will be confused when the target consumers are the same, or the same consumers are likely to encounter both parties’ marks. See Frehling Enterprises, Inc. v. International Select Group, Inc., 192 F.3d 1330, 1339 (11th Cir. 1999) (finding likelihood of confusion between home furniture products sold through high-end retail outlets and furniture sold through mass market retail outlets). e. [8.14] Degree of Purchaser Care When goods and services are inexpensive or are “impulse” items, consumers are presumed to exercise little care before making their purchases. In these circumstances, confusion or mistake as to source is deemed more likely. Maxim’s Ltd. v. Badonsky, 772 F.2d 388, 393 (7th Cir. 1985). When the parties’ products are such that a consumer would exercise a great deal of care before purchasing (e.g., when the products are very expensive), confusion as to source is less likely. Checkpoint Systems, Inc. v. Check Point Software Technologies, Inc., 269 F.3d 270 (3d Cir. 2001) (consumers likely to exercise higher standard of care in purchasing parties’ respective securityrelated products); Astra Pharmaceutical Products, Inc. v. Beckman Instruments, Inc., 718 F.2d 1201, 1206 – 1207 (1st Cir. 1983). f.
[8.15] Intent
The courts also consider whether the defendant intended to confuse consumers in adopting its accused mark. Meridian Mutual Insurance Co. v. Meridian Insurance Group, Inc., 128 F.3d 1111, 1120 (7th Cir. 1997). Even if a defendant adopted its mark in good faith, however, it will not be saved from a finding of infringement when the other factors indicate that confusion is likely. Thus, evidence of bad-faith intent is not necessary to prove infringement. Daddy’s Junky Music Stores, Inc. v. Big Daddy’s Family Music Center, 109 F.3d 275, 287 (6th Cir. 1997) (defendant’s lack of bad faith is irrelevant if consumers are likely to be confused). On the other hand, when it can be shown that a defendant selected its mark with an intent to exploit the plaintiff’s mark and goodwill, this will almost always be strong evidence of a likelihood of confusion and may lead to a presumption of infringement. Sally Beauty Co. v. Beautyco, Inc., 304 F.3d 964, 973 (10th Cir. 2002) (proof of intent leads to inference of likelihood of confusion); Fuji Photo Film Co. v. Shinohara Shoji Kabushiki Kaisha, 754 F.2d 591, 596 (5th Cir. 1985) (bad faith alone may support claim for infringement). When an exlicensee deliberately continues using a formerly licensed trademark, a court often finds the exlicensee liable for trademark infringement. See, e.g., Ford Motor Co. v. Thermoanalytics, Inc., 116 U.S.P.Q.2d 1934, 2015 WL 6522857 (E.D. Mich. 2015). Trademark owners often rely on circumstantial evidence to prove a defendant’s bad intent because direct evidence is rarely available. A defendant’s knowledge of a plaintiff’s rights may
8 — 10
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.17
prove a bad-faith intent to trade on the plaintiff’s mark, particularly when the plaintiff’s mark is strong and the parties’ products or services are similar. Compare Caesars World, Inc. v. Caesars Palace, 490 F.Supp. 818, 825 (D.N.J. 1980) (defendant’s visit to plaintiff’s hotel undermined defendant’s “innocent adoption” defense), with Packman v. Chicago Tribune Co., 267 F.3d 628, 642 (7th Cir. 2001) (no inference of bad faith, despite defendant’s knowledge of plaintiff’s trademark rights in phrase “the joy of six,” when defendant used phrase in its merely descriptive sense). g. [8.16] Actual Confusion The test for infringement is whether confusion is likely, not whether confusion has occurred. Thus, evidence of actual confusion is not necessary to prove a likelihood of confusion. Helene Curtis Industries, Inc. v. Church & Dwight Co., 560 F.2d 1325, 1330 (7th Cir. 1977). When this evidence exists, however, it is generally accorded substantial weight. Meridian Mutual Insurance Co. v. Meridian Insurance Group, Inc., 128 F.3d 1111, 1118 (7th Cir. 1997); Libman Co. v. Vining Industries, Inc., 69 F.3d 1360, 1365 (7th Cir. 1995). Actual confusion evidence is often difficult to obtain as consumers may not know they have been deceived or may be too embarrassed to come forward to admit their confusion. Accordingly, even a few instances of actual confusion may be considered highly probative of a likelihood of confusion. International Kennel Club of Chicago, Inc. v. Mighty Star, Inc., 846 F.2d 1079, 1087 (7th Cir. 1988). When the parties’ marks have coexisted over a significant period of time or with extensive sales, without any evidence of actual confusion, however, this coexistence may suggest that future confusion is unlikely. See, e.g., Nabisco v. Warner-Lambert Co., 32 F.Supp.2d 690, 699 (S.D.N.Y. 1999). The consideration given actual confusion evidence may also vary according to the particular circumstances of the case. In some circumstances, isolated instances of confusion may be discounted. Packman v. Chicago Tribune Co., 267 F.3d 628, 646 (7th Cir. 2001) (purported confusion was only among friends and family of plaintiff); Nutri/System, Inc. v. Con-Stan Industries, Inc., 809 F.2d 601, 606 (9th Cir. 1987) (discounting misdirection of several letters and checks given parties’ high volume of business). In a case in which the plaintiff must prove that its mark has acquired distinctiveness, evidence of actual confusion also may be relevant to show secondary meaning. If consumers mistakenly believe that the defendant’s product emanates from the plaintiff because of the trademark used, the confusion presumably occurred because the consumers viewed the plaintiff’s mark as indicating source. International Kennel Club, supra. 4. [8.17] Reverse Confusion The most common form of infringement is forward, or classic, confusion, in which a newcomer adopts a mark that exploits the goodwill of the more well-known senior trademark user. In these circumstances, because of the marketplace recognition of the senior user’s mark, the public is likely to believe that the newcomer’s goods under a confusingly similar mark come from the senior user.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 11
§8.18
INTELLECTUAL PROPERTY LAW
By contrast, “reverse confusion” occurs when the trademark used by a newcomer, because of the newcomer’s marketing power or popularity, overwhelms the same or a similar trademark used by a smaller, less well-known senior user. In these cases, the public is likely to believe the senior user’s goods originate from the newcomer. Reverse confusion, like forward or classic confusion, is actionable under the Lanham Act. Big O Tire Dealers, Inc. v. Goodyear Tire & Rubber Co., 408 F.Supp. 1219 (D.Colo. 1976), aff’d as modified, 561 F.2d 1365 (10th Cir. 1977). In Big O, the plaintiff, an organization with a net worth of $200,000, sold its “BIG FOOT” brand tires to 200 independent tire dealers in 14 states. The defendant, then the world’s largest tire manufacturer, subsequently adopted and used the mark “BIGFOOT” for a line of its tires, supported by a nationwide $9 million advertising campaign. The defendant was found guilty of infringement under a theory of reverse confusion. Because the circumstances of reverse confusion vary from those found in a case of forward confusion, some courts weigh the relevant factors differently in a reverse confusion case. See, e.g., Fisons Horticulture, Inc. v. Vigoro Industries, Inc., 30 F.3d 466, 479 (3d Cir. 1994) (strength of plaintiff’s mark not as important in confusion analysis because plaintiff is acknowledged to be less well-known than defendant). 5. [8.18] Initial Interest Confusion The Internet has led to the popularity of an infringement theory called “initial interest confusion,” although the theory is applied in other contexts as well. As described by the United States Court of Appeals for the Ninth Circuit, “Initial interest confusion is customer confusion that creates initial interest in a competitor’s product. Although dispelled before an actual sale occurs, initial interest confusion impermissibly capitalizes on the goodwill associated with a mark and is therefore actionable trademark infringement.” Playboy Enterprises, Inc. v. Netscape Communications Corp., 354 F.3d 1020, 1025 (9th Cir. 2004). In the Internet context, initial interest confusion may arise when a party uses someone else’s trademark (a) in a domain name that leads to the party’s own website, (b) as a metatag for the party’s website, or (c) as a keyword for Internet searches or advertising that promotes the party’s products. See, e.g., Brookfield Communications, Inc. v. West Coast Entertainment Corp., 174 F.3d 1036, 1057 (9th Cir. 1999) (use of plaintiff’s mark in domain name and metatag); Playboy Enterprises, supra (use of plaintiff’s mark as keyword for other companies’ advertising). See also Dwyer Instruments, Inc. v. Sensocon, Inc., 873 F.Supp.2d 1015, 1033 (N.D.Ind. 2012) (repeated use of plaintiff’s trademark on defendant’s website could cause “initial customer confusion,” though evidence must be presented to support this theory). In each of these situations, the use of another’s trademark leads consumers to a website where they discover not the products sold under the trademark, but rather the products of a competitor or other merchant. Of course, the misdirected consumers can leave this website, or the consumers may realize the difference between the parties’ respective products before making a purchase. But from the trademark owner’s perspective, the damage has been done: its trademark has been used to lure consumers to the advertising and promotion of someone else’s product or service. In Promatek Industries, Ltd. v. Equitrac Corp., 300 F.3d 808, 813 (7th Cir. 2002), the court stated, “Customers believing they are entering the first store rather than the second are still likely to mill around before they leave. The same theory is true for websites.”
8 — 12
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.19
In the non-Internet context, initial interest confusion may arise through use of a deceptively similar name or mark. See, e.g., Elvis Presley Enterprises, Inc. v. Capece, 141 F.3d 188, 204 (5th Cir. 1998) (defendant’s advertising and use of name “The Velvet Elvis” for its bar likely to create initial interest confusion, by drawing in consumers even though they might realize upon entering bar that it had no connection to plaintiff); Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254, 259 (2d Cir. 1987) (defendant’s use of its confusingly similar name would make it more likely that potential customer would listen to “cold phone call” and thus give defendant credibility during initial phase of promotion). When initial interest confusion is alleged, courts consider the infringement by analyzing the traditional likelihood of confusion factors. See, e.g., Playboy Enterprises, supra. Given the differing circumstances of potential confusion, however, some courts place more emphasis on one or more of these factors, such as the relatedness of the goods or consumer sophistication. See Checkpoint Systems, Inc. v. Check Point Software Technologies, Inc., 269 F.3d 270, 295 – 297 (3d Cir. 2001) (discussing factors emphasized in varying precedents). A plaintiff alleging initial interest confusion may be required to show more than simply the use of improper metatags or keywords and instead produce evidence showing that consumers have been or will be misdirected to the defendant’s website. Dwyer Instruments, supra. Indeed, clear language on websites and growing consumer familiarity with the way Internet search results are generated have made initial interest confusion a more difficult theory for plaintiffs to rely on in the Internet context. See, e.g., Multi Time Machine v. Amazon.com, Inc., 804 F.3d 930, 938 (9th Cir. 2015) (finding Amazon.com not liable under initial interest confusion theory, when “[t]he search results page makes clear to anyone who can read English that Amazon carries only the brands that are clearly and explicitly listed on the web page. The search results page is unambiguous — not unlike when someone walks into a diner, asks for a Coke, and is told ‘No Coke. Pepsi.’ . . . In light of the clear labeling Amazon uses on its search results page, no reasonable trier of fact could conclude that Amazon’s search results page would likely confuse a reasonably prudent consumer accustomed to shopping online as to the source of the goods being offered.”); 1-800 Contacts, Inc. v. Lens.com, Inc., 722 F.3d 1229, 1244 (10th Cir. 2013) (noting lack of evidence that defendant’s AdWord advertising on Google created initial interest confusion; AdWords data showed that only 1.5 percent of consumers searching for plaintiff’s products were actually lured into clicking on defendant’s AdWords advertisement). 6. Third-Party Liability for Infringement a. [8.19] Contributory Infringement Liability for trademark infringement may extend beyond the person using the infringing mark. Infringement liability may also be imposed on a third party, such as a manufacturer, who (1) induces or encourages the infringing conduct or (2) continues to supply its product to one whom it knows is engaging in trademark infringement. Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 72 L.Ed.2d 606, 102 S.Ct. 2182, 2188 (1982). Liability may also extend to a third party that participated in a scheme of trademark infringement carried out by another. Mini Maid Services Co. v. Maid Brigade Systems, Inc., 967 F.2d 1516, 1522 (11th Cir. 1992).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 13
§8.20
INTELLECTUAL PROPERTY LAW
In these cases, the person using the infringing mark is called a “direct infringer,” and the party encouraging or facilitating the conduct is called a “contributory infringer.” b. [8.20] Personal Driving Force When an individual, such as a corporate officer or entrepreneur, is the “moving, active, conscious force” behind a company’s infringing activities, this individual may also be held personally liable for the infringement. Chanel, Inc. v. Italian Activewear of Florida, Inc., 931 F.2d 1472, 1477 – 1478 (11th Cir. 1991), quoting Wilden Pump & Engineering Co. v. Pressed & Welded Products Co., 655 F.2d 984, 990 (9th Cir. 1981). See also Peaceable Planet, Inc. v. Ty, Inc., 185 F.Supp.2d 893, 896 (N.D.Ill. 2002). C. Counterfeiting 1. [8.21] In General Unauthorized look-alike products bearing deliberately copied trademarks are called “counterfeits.” “Counterfeiting” is the use of a mark for products or services that is identical to, or substantially indistinguishable from, a mark already used for these products or services. 15 U.S.C. §1116(d)(1)(B). Worldwide sales of counterfeit products are estimated to be in the multiple billions of dollars. Counterfeiting of trademarks encompasses a wide range of products, from designer handbags to power tools to medical devices, pharmaceuticals, automobile parts, and computer hardware and software. The damage caused by counterfeiting is two-fold: (a) the use of a spurious mark deprives the trademark owner of sales of legitimate products; and (b) counterfeit products are often of inferior quality and may pose public health and safety risks, thus damaging the trademark owner’s reputation. 2. [8.22] Enforcement Counterfeiting is a serious offense giving rise to substantial civil and criminal penalties. Penalties may be imposed not only for manufacturing counterfeit products, but also for knowingly trafficking or attempting to traffic in these products. When the copied mark is registered on the Principal Register of the United States Patent and Trademark Office, the Lanham Act provides additional protection and remedies for the trademark owner. 15 U.S.C. §1116(d). Trafficking in counterfeit products is also a “predicate act” that can result in liability under the Racketeer Influenced and Corrupt Organizations Act (RICO), Pub.L. No. 91-452, Title IX, 84 Stat. 941 (1970). See 18 U.S.C. §§1961(1), 2320. a. [8.23] Seizure Orders Under §34(d) of the Lanham Act, a trademark owner can seek an ex parte seizure order from a court to secure counterfeit goods before they can be disposed of. 15 U.S.C. §1116(d)(1). This
8 — 14
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.24
provision also allows seizure of the means to make the counterfeit marks and records relating to the manufacture, sale, and receipt of counterfeit goods. The procedures regarding such an order are spelled out in §34(d). To issue such a seizure order, a court must find that 1. no other adequate remedy exists; 2. the trademark owner has not publicized the requested seizure; 3. the trademark owner is likely to succeed in proving that the defendant has used a counterfeit mark; 4. immediate and irreparable injury would occur if the seizure were not ordered; 5. the products to be seized are at the place identified in the application for seizure; 6. the harm to the trademark owner outweighs the harm to the defendant; and 7. the defendant would destroy, move, hide, or otherwise make inaccessible to the court the allegedly counterfeit matter if advance notice of the seizure were provided. 15 U.S.C. §1116(d)(4)(B). To obtain a seizure order, a trademark owner must also post a bond as security against possible damage to the defendant if the court later determines that the seizure was wrongful. 15 U.S.C. §1116(d)(4)(A). If the seizure turns out to be wrongful, the defendant may recover its damages from the trademark owner. 15 U.S.C. §1116(d)(11). See, e.g., Waco International, Inc. v. KHK Scaffolding Houston Inc., 278 F.3d 523, 530 – 532 (5th Cir. 2002); Martin’s Herend Imports, Inc. v. Diamond & Gem Trading United States of America Co., 195 F.3d 765, 773 – 775 (5th Cir. 1999). U.S. Customs and Border Protection (CBP), a component of the Department of Homeland Security, can also assist in seizing counterfeit goods imported into the country. Owners of federal trademark registrations can record their registrations with CBP, and CBP will alert the owner if it seizes any suspected counterfeit items. See 19 C.F.R. pt. 133. b. [8.24] Special Monetary Relief In civil actions involving intentional counterfeiting, a plaintiff is entitled to an award of three times its damages or the defendant’s profits, whichever is greater, and reasonable attorneys’ fees, unless the court finds that there are “extenuating circumstances.” 15 U.S.C. §1117(b). Alternatively, the plaintiff may elect, in lieu of its damages or defendant’s profits, an award of statutory damages that can range from $1,000 to $200,000 per mark for each type of counterfeit product or service and up to $2 million if the use of the counterfeit mark was found to be willful. 15 U.S.C. §1117(c). Thus, for example, if a defendant made five identical jackets bearing a counterfeit reproduction of the “Nike” mark, the statutory damages (assuming no finding of willfulness) would be up to $200,000, not $1 million (5 × $200,000).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 15
§8.25
INTELLECTUAL PROPERTY LAW
Significantly, a defendant trafficking in counterfeit products may not be able to shield itself from liability by claiming that it did not know its products were counterfeit. Under certain circumstances, “willful blindness” is sufficient to satisfy the knowledge requirement of 15 U.S.C. §1117(b). Louis Vuitton S.A. v. Lee, 875 F.2d 584, 590 (7th Cir. 1989) (given fame of plaintiff’s brands and inferior and unusual qualities of merchandise in question, defendant retailer was obligated, at very least, to ask supplier whether merchandise she was buying was genuine or counterfeit). Moreover, a defendant of limited financial means should not expect to avoid serious civil penalties for counterfeiting simply by virtue of its economic condition. In Louis Vuitton, supra, the district court had granted the plaintiff permanent injunctive relief against a small and unsophisticated retailer of counterfeit merchandise but had denied the plaintiff monetary relief. Reversing the district court’s denial of monetary relief, the Seventh Circuit noted, “ ‘Equity’ is not a roving commission to redistribute wealth from large companies to small ones. The Lanham Act was not written by Robin Hood.” 875 F.2d at 589.
PRACTICE POINTER
If your client knows or is concerned that counterfeit products bearing its registered mark are or will be imported into the United States, consider recording your client’s federal trademark registration with U.S. Customs and Border Protection. See 19 C.F.R. pt. 133 or go to www.cbp.gov for more information.
D. False Designation of Origin or Description of Fact 1. [8.25] Misrepresentations and Unfair Competition A claim for unfair competition under federal law arises under §43(a) of the Lanham Act, which provides in pertinent part: Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which — (A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person . . . *** shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. 15 U.S.C. §1125(a)(1).
8 — 16
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.26
As noted in §8.5 above, infringement claims for unregistered common-law marks may be brought under this provision. Moreover, §43(a) has been interpreted to provide a federal cause of action against a variety of commercial misrepresentations and conduct causing likely confusion or deception in the marketplace. Thus, the prohibitions of §43(a) against a “false designation of origin” and a “false or misleading representation of fact” have been broadly implemented to prevent unfair competition. See, e.g., Black Hills Jewelry Manufacturing Co. v. Gold Rush, Inc., 633 F.2d 746 (8th Cir. 1980) (enjoining use of mark “Black Hills Gold” for jewelry that was not made of gold from the Black Hills of South Dakota); Bohsei Enterprises Co., U.S.A. v. Porteous Fastener Co., 441 F.Supp. 162, 164 (C.D.Cal. 1977) (falsely suggesting product is of domestic manufacture by failing to note true country of origin was actionable under §43(a)). As with infringement claims, a plaintiff seeking to prove false designation of origin and unfair competition must show that the defendant’s conduct is likely to cause confusion, mistake, or deception. Black Hills Jewelry, supra, 633 F.2d at 753. 2. Direct and Reverse Passing Off a. [8.26] Direct Passing Off Direct passing off occurs when a company sells its own products but solicits the sales for these products by advertising a sample or depiction of a product actually made by a competitor. See, e.g., Sublime Products, Inc. v. Gerber Products, Inc., 579 F.Supp. 248, 250 (S.D.N.Y. 1984) (“It is well established that using a photograph of another’s product to sell one’s own cheaper product is unfair competition under Section 43(a) [of the Lanham Act].”); Supelco, Inc. v. Alltech Associates, Inc., 1 U.S.P.Q.2d (BNA) 1149, 1986 WL 9282 (E.D.Pa. 1986) (defendant promoted its product by using picture of plaintiff’s product in its catalog because defendant’s product had not yet been completely manufactured). In the case of express direct passing off, the defendant delivers its own product without advising the consumer of the switch. In the case of implied direct passing off, the defendant truthfully tells the customer that it is receiving the defendant’s product, but the harm has already been done since the customer was lured by the advertising into believing that it would receive the plaintiff’s product shown in the promotion. See 4 Louis Altman and Malla Pollack, CALLMAN ON UNFAIR COMPETITION, TRADEMARKS, AND MONOPOLIES §22:30 (4th ed. 2016). Direct passing off can also occur by substitution of products, e.g., when a consumer requests a Pepsi and, without explanation, is given a Coke, or vice versa. Coca-Cola Co. v. Pace, 283 F.Supp. 291, 293 (W.D.Ky. 1968). Significantly, when the plaintiff’s product lacks secondary meaning or is functional in design, a court may refuse to award the plaintiff relief because there would be no source-identifying significance in displaying the plaintiff’s product. See Can Am Engineering Co. v. Henderson Glass, Inc., 620 F.Supp. 596, 602 – 603 (E.D.Mich. 1985) (when defendant used photograph of plaintiff’s unregistered product design to make sales of its own product, plaintiff was obligated to show product design was nonfunctional and either inherently distinctive or had secondary meaning in order to prevail under §43(a)); Atlantis Silverworks, Inc. v. 7th Sense, Inc., No. 96 Civ. 4058 (MBM), 1997 WL 128403, *10 (S.D.N.Y. 1997) (plaintiff’s claim for passing off under §43(a) failed when defendant used photographs of plaintiff’s rings in its catalog but sold its own; “the rings themselves do not indicate source because they are not inherently distinctive and have not acquired secondary meaning”).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 17
§8.27
INTELLECTUAL PROPERTY LAW
b. [8.27] Reverse Passing Off Reverse passing off arises when a merchant removes or obliterates the plaintiff’s trademark from the plaintiff’s products. In express reverse passing off, the defendant removes the plaintiff’s trademark and re-brands and sells the products under its own mark. Web Printing Controls Co. v. Oxy-Dry Corp., 906 F.2d 1202, 1203 – 1204 (7th Cir. 1990). In implied reverse passing off, the defendant removes the plaintiff’s mark and sells the product in an unbranded state. See 4 Louis Altman and Malla Pollack, CALLMAN ON UNFAIR COMPETITION, TRADEMARKS, AND MONOPOLIES §22:31 (4th ed. 2016); 4 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §25:8 (4th ed. 2013) (noting divergence of opinion as to whether implied reverse passing off is actionable). The harm of reverse passing off is that the plaintiff is deprived of the goodwill and reputational advantage that flows from having its mark associated with its products. Smith v. Montoro, 648 F.2d 602, 607 (9th Cir. 1981). Significantly, a claim for reverse passing off may not lie when a defendant copies the plaintiff’s uncopyrightable work and sells it under the defendant’s own name. Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23, 156 L.Ed.2d 18, 123 S.Ct. 2041 (2003). In Dastar, the defendant had substantially copied an entire television series created by plaintiff Twentieth Century Fox, modified it slightly, labeled the resulting product with a different name, and marketed it as its own product without attribution to Fox. The copyright in Fox’s television series had expired 20 years before, so the underlying work was in the public domain. Nevertheless, the Ninth Circuit found that Dastar’s “bodily appropriation” of Fox’s original television series was sufficient to establish reverse passing off under the Lanham Act. Twentieth Century Fox Film Corp. v. Entertainment Distributing, 34 Fed.Appx. 312, 314 (9th Cir. 2002). The United States Supreme Court reversed. Analyzing the allegation of reverse passing off, the Supreme Court observed: That claim would undoubtedly be sustained if Dastar had bought some of New Line’s Crusade videotapes and merely repackaged them as its own. Dastar’s alleged wrongdoing, however, is vastly different: it took a creative work in the public domain — the Crusade television series — copied it, made modifications (arguably minor), and produced its very own series of videotapes. 123 S.Ct. at 2046 – 2047. Concluding that the Lanham Act does not prohibit the unaccredited copying of an unprotectable work, the Supreme Court found that the defendant’s conduct did not constitute reverse passing off. E. [8.28] False Advertising Section 43(a) of the Lanham Act provides in pertinent part: Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which — ***
8 — 18
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.28
(B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. 15 U.S.C. §1125(a)(1). Courts have interpreted this provision as giving rise to a cause of action for false or deceptive advertising. See, e.g., Pizza Hut, Inc. v. Papa John’s International, Inc., 227 F.3d 489, 494 – 495 (5th Cir. 2000); Cashmere & Camel Hair Manufacturers Institute v. Saks Fifth Avenue, 284 F.3d 302, 310 (1st Cir. 2002). To prove false advertising, a plaintiff must show that 1. the defendant made a false or misleading representation of fact in commercial advertising about its own or another’s product; 2. the misrepresentation is material in that it is likely to influence purchasing decisions; 3. the misrepresentation actually deceives consumers or is likely to deceive an appreciable segment of the target audience; 4. the defendant injected the false or misleading advertising into interstate commerce; and 5. the plaintiff has been or is likely to be injured by the misrepresentation. Cashmere & Camel Hair, supra, 284 F.3d at 310 – 311; Logan v. Burgers Ozark Country Cured Hams Inc., 263 F.3d 447, 462 (5th Cir. 2001). When the challenged advertising is false on its face, the plaintiff may obtain injunctive relief simply by proving actual falsity. Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharmaceuticals Co., 290 F.3d 578, 586 – 587 (3d Cir. 2002) (use of advertising message “Night Time Strength” for heartburn medicine per se false by suggesting efficacy against heartburn at night); Coca-Cola Co. v. Tropicana Products, Inc., 690 F.2d 312, 318 (2d Cir. 1982) (visual and aural components of television ad suggesting defendant’s pasteurized and sometimes frozen orange juice was actually fresh-squeezed and unprocessed held false on its face). In evaluating whether an advertisement is literally false, a court will likely analyze the message in context, considering both words and images. Time Warner Cable, Inc. v. DIRECTV, Inc., 497 F.3d 144, 158 (2d Cir. 2007) (holding that if words and images necessarily imply false message, advertisement is literally false). When the advertising is alleged to be deceptive or misleading but not facially false, the plaintiff has the burden to prove that consumers have been, or are likely to be, misled. Abbott Laboratories v. Mead Johnson & Co., 971 F.2d 6, 14 (7th Cir. 1992) (finding defendant’s trademark “Ricelyte” made impliedly false claim when evidence demonstrated that consumers and physicians actually believed defendant’s product contained rice). This proof can be in the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 19
§8.29
INTELLECTUAL PROPERTY LAW
form of actual consumer testimony or survey evidence. See, e.g., Novartis, supra, 290 F.3d at 590. A presumption of deception may arise when there is proof that the defendant intended to deceive consumers. Cashmere & Camel Hair, supra, 284 F.3d at 316. F. [8.29] Dilution “Dilution” is a cause of action available to trademark owners to prevent another’s use of an identical or substantially similar mark. Unlike trademark infringement, however, dilution can be found even when there is no likelihood of confusion between the parties’ marks or products. The concept of dilution does not arise out of the common law and is not motivated by an interest in protecting consumers. Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 155 L.Ed.2d 1, 123 S.Ct. 1115, 1122 (2003). Instead, dilution is based on the notion of preserving the distinctiveness of a mark. Id. Thus, under dilution theory, a distinctive mark may be protected against the use of an identical or substantially similar mark on totally unrelated products or services. 1. [8.30] Types of Dilution Dilution of a mark generally takes one of two forms: blurring or tarnishment. “Blurring” is the term used to mean dilution of the distinctive quality of a mark. Blurring occurs when a defendant uses a mark identical or substantially similar to the plaintiff’s distinctive mark. Under dilution theory, blurring reduces the selling power and magnetism of the plaintiff’s mark by lessening the public’s perception of the mark as signifying something unique and particular. Oftrepeated examples of blurring uses that dilution law was designed to prevent include “DUPONT shoes, BUICK aspirin, and KODAK pianos.” Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 155 L.Ed.2d 1, 123 S.Ct. 1115, 1123 (2003). “Tarnishment” is the term used to describe injury to a trademark owner’s business reputation when a defendant uses an identical or substantially similar mark in connection with a shoddy or unsavory product or service. Here, the trademark’s commercial value is diminished by the public’s negative associations with the mark itself. For example, in Coca-Cola Co. v. Alma-Leo U.S.A., Inc., 719 F.Supp. 725 (N.D.Ill. 1989), the court held that Coca-Cola’s business reputation was likely to be injured by the defendant’s marketing of white powder bubble gum resembling cocaine, sold in a plastic container that simulated Coca-Cola’s bottle. A third type of dilution has been found when a defendant spoofs or alters the plaintiff’s trademark in a satirical manner to promote the defendant’s own products. See, e.g., Deere & Co. v. MTD Products, Inc., 41 F.3d 39, 44 – 45 (2d Cir. 1994) (defendant’s depiction in its advertising of plaintiff’s static, graceful deer trademark as tiny deer running away from small dog and defendant’s lawn tractor diluted plaintiff’s mark). 2. [8.31] Governing Law As noted in §8.29 above, dilution is not a common-law tort and thus arises primarily out of statutory law. Well over half of the states have enacted dilution laws (sometimes called
8 — 20
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.32
“antidilution” laws). See, e.g., 765 ILCS 1036/65. Dilution was strictly a creature of state law until the Federal Trademark Dilution Act of 1995, Pub.L. No. 104-98, 109 Stat. 985, amended the Lanham Act to adopt dilution as a federal cause of action. See 15 U.S.C. §1125(c). This provision was subsequently amended by the Trademark Dilution Revision Act of 2006 (TDRA), Pub.L. No. 109-312, 120 Stat. 1730. 3. Test a. [8.32] State Law Many state dilution laws protect against both the likelihood of injury to business reputation (tarnishment) and the likelihood of dilution of the distinctive quality of a mark (blurring). See, e.g., 765 ILCS 1036/65. To be entitled to protection, most state laws require that the trademark be well-known or highly distinctive. See, e.g., Deere & Co. v. MTD Products, Inc., 41 F.3d 39, 42 (2d Cir. 1994); Hyatt Corp. v. Hyatt Legal Services, 736 F.2d 1153, 1157 – 1158 (7th Cir. 1984). Factors that courts consider in determining whether dilution by blurring is likely include the similarity of the parties’ respective marks, the strength of the plaintiff’s mark, and the defendant’s marketing efforts. See, e.g., Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 468 – 469 (7th Cir. 2000); American Express Co. v. Vibra Approved Laboratories Corp., 10 U.S.P.Q.2d (BNA) 2006, 1989 WL 39679 (S.D.N.Y. 1989) (defendant’s “condom card,” a replica credit card with condom attached, bearing name “AMERICA EXPRESS” and slogan “NEVER LEAVE HOME WITHOUT IT,” held likely to dilute plaintiff’s “American Express” mark and its slogan “DON’T LEAVE HOME WITHOUT IT”). In a well-known case, Mead Data Central, Inc. v. Toyota Motor Sales, U.S.A., Inc., 702 F.Supp. 1031 (S.D.N.Y. 1988), the plaintiff Mead claimed that Toyota’s proposed use of “LEXUS” for a new car infringed its rights in the mark “LEXIS” for computerized legal research services. The district court found no likelihood of confusion but granted the plaintiff relief on dilution grounds. On appeal, the Second Circuit reversed and vacated the order. Mead Data Central, Inc. v. Toyota Motor Sales, U.S.A., Inc., 875 F.2d 1026 (2d Cir. 1989). Although the state antidilution statute did not require that confusion be likely, the Second Circuit held that the marks at issue must be “very” or “substantially” similar for a viable dilution claim. 875 F.2d at 1029. The Second Circuit also observed that the similarity analysis should be based on the use of the marks in commercial advertising. Noting that commercials generally contain precise diction and a visual reference to the mark and product, the Second Circuit held that there was no substantial similarity between Mead’s “LEXIS” mark and Toyota’s “LEXUS” mark. The Second Circuit further noted that a mark that circulates only in a limited market is unlikely to be associated generally with a mark for a dissimilar product circulating elsewhere. In the immediate case, the distinctiveness of the “LEXIS” mark was limited to a market of sophisticated consumers comprising attorneys and accountants. The Second Circuit thus concluded that it was unlikely that there would be any significant amount of blurring between the “LEXIS” and “LEXUS” marks.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 21
§8.33
INTELLECTUAL PROPERTY LAW
With respect to tarnishment, courts often look to the similarity of the parties’ marks and the nature of the defendant’s use. See, e.g., Toys “R” Us, Inc. v. Akkaoui, 40 U.S.P.Q.2d (BNA) 1836, 1996 WL 772709 (N.D.Cal. 1996) (defendant’s use of “Adults R Us” for sexual products tarnished plaintiff’s family of “R Us” marks); Pillsbury Co. v. Milky Way Productions, Inc., 215 U.S.P.Q. (BNA) 124, 1981 WL 1402 (N.D.Ga. 1981) (defendant likely to injure plaintiff’s commercial reputation when defendant’s magazine contained picture of plaintiff’s trade characters “Poppin’ Fresh” and “Poppie Fresh” engaging in sexual intercourse and picture implied that plaintiff may have placed or sponsored it as advertisement). In considering the viability of a state dilution claim, it is also important to note that a defendant’s ownership of a federal registration for its allegedly diluting mark acts as a complete bar to a claim under state dilution law. 15 U.S.C. §1125(c)(3). Significantly, state dilution laws generally protect against the likelihood of blurring or tarnishment, not simply actual blurring or tarnishment. Thus, these statutes outlaw even prospective harm to the trademark owner’s interest. In this sense, state dilution statutes are consistent with the likelihood of confusion concept in trademark infringement jurisprudence. b. [8.33] Federal Law To establish dilution under 15 U.S.C. §1125(c), a plaintiff must show that 1. its trademark is famous; 2. its trademark is distinctive; 3. the defendant is using the challenged trademark or tradename in commerce; 4. the allegedly diluting use began after the plaintiff’s mark became famous; and 5. the challenged use is likely to cause dilution by blurring or tarnishment. The Lanham Act provides a non-exhaustive list of factors that courts may consider in determining whether a mark is famous. These factors include the duration and extent of the plaintiff’s advertising of its mark, the amount and extent of the plaintiff’s sales under the mark, and whether the plaintiff’s mark has been registered. 15 U.S.C. §1125(c)(2). Under the Trademark Dilution Revision Act, a plaintiff is entitled to relief when it shows that the defendant’s challenged use is “likely to cause dilution.” 15 U.S.C. §1125(c)(1). The TDRA was passed in response to the United States Supreme Court’s holding in Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 155 L.Ed.2d 1, 123 S.Ct. 1115, 1124 (2003). Before the Supreme Court’s decision in Moseley, there was a split among the appellate circuits as to whether federal dilution law permitted a showing that dilution was likely or required the more rigorous showing of actual dilution. In Moseley, the Supreme Court resolved this dispute by concluding that relief under the federal dilution law, as it then read, required proof of actual dilution of the plaintiff’s trademark. 123 S.Ct. at 1124.
8 — 22
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.35
The TDRA also resolved two uncertainties in federal dilution jurisprudence. First, it previously had been unclear if federal dilution law protected only inherently distinctive marks or if marks that had acquired distinctiveness were also protected. See, e.g., TCPIP Holding Co. v. Haar Communications Inc., 244 F.3d 88 (2d Cir. 2001) (marks that lacked inherent distinctiveness not entitled to protection under federal dilution law). The TDRA expressly states that it covers both inherently distinctive marks and marks that have acquired distinctiveness. Second, there had been decisions finding marks entitled to protection under federal dilution law when they had only “niche fame,” meaning they were famous only within a discrete market. The TDRA, however, appears to deny protection to marks with only “niche fame,” as it defines a “famous” mark as one that is “widely recognized by the general consuming public of the United States as a designation of source of the goods or services of the mark’s owner.” 15 U.S.C. §1125(c)(2)(A). 4. [8.34] First Amendment and Non-Trademark Uses The line between diluting a trademark and engaging in protected free speech or parody may be difficult to establish. Compare, e.g., L.L. Bean, Inc. v. Drake Publishers, Inc., 811 F.2d 26, 27 (1st Cir. 1987) (First Amendment defense trumped Maine’s antidilution statute when defendant’s adult entertainment magazine contained article entitled “L.L. Beam’s Back-To-School-SexCatalog” displaying plaintiff’s L.L. Bean mark and sexually explicit pictures), with AnheuserBusch, Inc. v. Balducci Publications, 28 F.3d 769, 778 (8th Cir. 1994) (rejecting First Amendment defense and finding tarnishment under Missouri law when magazine’s parody ad appeared on back cover and in way that “casual viewer might fail to appreciate its editorial purpose”). When the First Amendment is raised as a defense to a dilution claim, courts tend to weigh the nature of the communicative message against the likelihood that the allegedly diluting use would be considered source identifying. See, e.g., Yankee Publishing Inc. v. News America Publishing Inc., 809 F.Supp. 267, 275 – 282 (S.D.N.Y. 1992). Congress was aware of these First Amendment concerns in enacting and amending the federal dilution statute. Accordingly, under federal dilution law, the following uses of a trademark are explicitly not actionable: (a) nominative and descriptive fair use, including use of a mark in comparative advertising, and parodying or commenting on the famous mark owner or its products or services; (b) news reporting and news commentary; and (c) noncommercial uses of a mark. 15 U.S.C. §1125(c)(3). Under the statute, parodying a famous mark is protected by the fair use defense only if the parody is not “a designation of source for the person’s own goods or services.” Id. When a defendant is using a parody of a famous mark as a mark itself, even though the “fair use” defense is not available, a court may take the parody into account in determining whether the defendant’s parody mark is likely to impair the distinctiveness of the plaintiff’s famous mark. See Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 507 F.3d 252 (4th Cir. 2007). G. [8.35] Cybersquatting Generally, a “cybersquatter” is a person who registers, traffics in, or uses an Internet domain name that is identical or confusingly similar to, or dilutive of, another party’s trademark and who has a bad-faith intent to trade on or profit from the other’s trademark.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 23
§8.36
INTELLECTUAL PROPERTY LAW
From the early days of the Internet, courts have relied on infringement or dilution law to curb cybersquatting. See, e.g., Panavision International, L.P. v. Toeppen, 141 F.3d 1316 (9th Cir. 1998) (dilution); PACCAR Inc. v. TeleScan Technologies, L.L.C., 319 F.3d 243 (6th Cir. 2003) (preliminarily enjoining defendant’s use of infringing domain names that contained plaintiff’s marks). Today, however, trademark owners wanting to challenge cybersquatters have at least two additional options: (1) a federal cause of action under the Anticybersquatting Consumer Protection Act (see §§8.36 – 8.39 below); or (2) a proceeding under either the Uniform DomainName Dispute-Resolution Policy (UDNDRP) created by the Internet Corporation for Assigned Names and Numbers (ICANN) or the dispute resolution policy, if any, of the domain name registrar of the challenged domain name (see §8.40 below). To determine enforcement options against the registrant of an offending domain name, a trademark owner must first learn (1) the identity of the registrant and (2) the identity of the registrar through which the offending domain name is registered. The registrant and registration information for most domain names may be found online in databases maintained by domain name registrars and third parties, often called “who is” databases. 1. [8.36] Anticybersquatting Consumer Protection Act In 1999, Congress enacted the Anticybersquatting Consumer Protection Act, Pub.L. No. 106113, Div. B, §1000(a)(9), 113 Stat. 1536 (1999), enacting Title III of the Intellectual Property and Communications Omnibus Reform Act of 1999, S. 1948, 106th Cong, 1st Sess. (1999), which created a new cause of action to combat cybersquatting under the Lanham Act. See 15 U.S.C. §1125(d). a. [8.37] Test To prove cybersquatting, a plaintiff must establish that (1) it is the owner of a protectable mark, (2) the defendant intended to profit in bad faith from this mark, (3) the mark was distinctive or famous at the time the domain name was registered, and (4) the domain name is identical or confusingly similar to, or dilutive of, this mark. 15 U.S.C. §1125(d)(1)(A). The Lanham Act, as amended by the Anticybersquatting Consumer Protection Act, also provides a list of nine factors that courts may consider in determining whether a defendant has the requisite bad-faith intent: (I) the trademark or other intellectual property rights of the person, if any, in the domain name; (II) the extent to which the domain name consists of the legal name of the person or a name that is otherwise commonly used to identify that person; (III) the person’s prior use, if any, of the domain name in connection with the bona fide offering of any goods or services; (IV) the person’s bona fide noncommercial or fair use of the mark in a site accessible under the domain name;
8 — 24
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.39
(V) the person’s intent to divert consumers from the mark owner’s online location to a site accessible under the domain name that could harm the goodwill represented by the mark, either for commercial gain or with the intent to tarnish or disparage the mark, by creating a likelihood of confusion as to the source, sponsorship, affiliation, or endorsement of the site; (VI) the person’s offer to transfer, sell, or otherwise assign the domain name to the mark owner or any third party for financial gain without having used, or having an intent to use, the domain name in the bona fide offering of any goods or services, or the person’s prior conduct indicating a pattern of such conduct; (VII) the person’s provision of material and misleading false contact information when applying for the registration of the domain name, the person’s intentional failure to maintain accurate contact information, or the person’s prior conduct indicating a pattern of such conduct; (VIII) the person’s registration or acquisition of multiple domain names which the person knows are identical or confusingly similar to marks of others that are distinctive at the time of registration of such domain names, or dilutive of famous marks of others that are famous at the time of registration of such domain names, without regard to the goods or services of the parties; and (IX) the extent to which the mark incorporated in the person’s domain name registration is or is not distinctive and famous within the meaning of [15 U.S.C. §1125(c)]. 15 U.S.C. §1125(d)(1)(B)(i). Bad-faith intent will not be found when the defendant believed and had reasonable grounds to believe that its use of the domain name was fair or lawful use. 15 U.S.C. §1125(d)(1)(B)(ii); Mayflower Transit, LLC v. Prince, 314 F.Supp.2d 362, 369 (D.N.J. 2004). b. [8.38] In Rem Actions When a plaintiff cannot find or obtain personal jurisdiction over a cybersquatting defendant, the plaintiff may be able to attack the cybersquatting by filing an in rem action against the offending domain name registrations themselves. 15 U.S.C. §1125(d)(2)(A). These in rem actions may be filed in the court in which the relevant domain name registry resides. Harrods Ltd. v. Sixty Internet Domain Names, 302 F.3d 214, 225 (4th Cir. 2002). At least one court has held that these in rem actions may be based not only on a cause of action for cybersquatting but also on claims of infringement and dilution. 302 F.3d at 228 – 232. c. [8.39] Relief In a standard cybersquatting case, a successful plaintiff may seek both injunctive and monetary relief. A court may enjoin the defendant from future infringing or cybersquatting activities and order cancellation of the offending domain name registration or the transfer of the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 25
§8.40
INTELLECTUAL PROPERTY LAW
domain name to the plaintiff. 15 U.S.C. §§1116, 1125(d)(1)(C). A plaintiff may also be awarded monetary relief under principles similar to other Lanham Act cases (see §§8.57 – 8.62 below) or elect statutory damages of between $1,000 and $100,000 per offending domain name. 15 U.S.C. §§1117(a), 1117(d). In an in rem action brought only under the Anticybersquatting Consumer Protection Act, relief is limited to obtaining cancellation or transfer of the offending domain name registration. 15 U.S.C. §1125(d)(2)(D)(i). 2. [8.40] Dispute Resolution Policies As an alternative to a federal lawsuit, a trademark owner may be able to file an administrative complaint against the registrant of an offending domain name. Trademark owners interested in filing an administrative complaint should review the dispute resolution policy of the domain name registrar for the offending domain name to determine what dispute resolution method, if any, the registrar uses. For any offending domain name ending in .com, .org, or .net, every domain name registrar requires that the domain name registrant submit to the Uniform Domain-Name DisputeResolution Policy set up by the Internet Corporation for Assigned Names and Numbers. Procedures for filing a UDNDRP complaint can be found online at www.icann.org. A UDNDRP complaint is often less expensive and more quickly resolved than a federal lawsuit, although there is no discovery and remedy is limited to turnover of the challenged domain name. If the offending domain name ends in a non-United States country code designation (e.g., .ca, .cn, or .eu), the trademark owner will need to determine whether the domain name registrar subscribes to the UDNDRP, has its own dispute policy, or provides no administrative dispute resolution procedure. H. [8.41] Proceedings Before the United States Patent and Trademark Office A trademark owner can challenge the registration of a confusingly similar or dilutive mark by filing an opposition or cancellation action before the Trademark Trial and Appeal Board (TTAB) of the United States Patent and Trademark Office. In such proceedings, as in a civil action, the issue is whether the challenged mark is likely to cause confusion with, or is dilutive of, the senior user’s mark. For more information on these proceedings, see §§6.39 – 6.43 of this handbook. An opposition proceeding is initiated by the filing of a notice of opposition, and a cancellation proceeding is initiated by a petition to cancel. A sample form of a notice of opposition is found in §8.87 below. The TTAB analyzes the likelihood of confusion under a multifactor test similar to the one discussed in §8.6 above for civil actions. See In re Application of E.I. DuPont DeNemours & Co., 476 F.2d 1357, 1361 (C.C.P.A. 1973). For a claim of dilution, the TTAB uses a likelihood of dilution standard. NASDAQ Stock Market, Inc. v. Antartica, S.r.l., 69 U.S.P.Q.2d (BNA) 1718, 1734 – 1735, 2003 WL 22021943 (T.T.A.B. 2003).
8 — 26
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.44
I. [8.42] Surveys and Consumer Reaction Tests Parties have increasingly relied on survey evidence in trademark litigation to prove issues such as likelihood of confusion, genericness, secondary meaning, dilution, and false advertising. When properly conducted and presented, a survey can provide valid, persuasive evidence of potential or actual consumer reactions. Trademark surveys are almost always designed and administered by experts, who then testify as to their methodology, results, and findings. Opposing counsel normally has no opportunity to interview or cross-examine the survey respondents, and the judge or jury cannot assess the respondents’ demeanor. Accordingly, courts scrutinize the survey process itself for reliability. A well-crafted survey with statistically significant results will likely influence the outcome of the case. By contrast, a poorly designed or improperly administered survey may be rejected or accorded little weight. 1. [8.43] Elements for Proper Survey A proper survey will include the following characteristics: a. It is designed and conducted by a recognized expert. b. It uses a correct and relevant universe of respondents. c. It contains a representative and statistically significant sample of this universe. d. It contains unbiased questions. e. It uses as stimuli proper specimens of the trademarks or advertising at issue. f. The surveyors maintain proper security so that the interviewers do not know the litigation purpose of the survey. g. The data is accurately reported. h. The data is tabulated, verified, and interpreted by an expert. See, e.g., Brooks Shoe Manufacturing Co. v. Suave Shoe Corp., 533 F.Supp. 75 (S.D.Fla. 1981), aff’d, 716 F.2d 854 (11th Cir. 1983). 2. [8.44] Precedents Cases containing examples of successful surveys include Union Carbide Corp. v. Ever-Ready Inc., 531 F.2d 366, 385 – 388 (7th Cir. 1976) (likelihood of confusion and secondary meaning), President & Trustees of Colby College v. Colby College-New Hampshire, 508 F.2d 804, 809 – 810 (1st Cir. 1975) (secondary meaning), E.I. DuPont de Nemours & Co. v. Yoshida International, Inc., 393 F.Supp. 502, 518 – 520 (E.D.N.Y. 1975) (resisting claim of genericness), and Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharmaceuticals Co., 290 F.3d 578, 590 – 594 (3d Cir. 2002) (misleading advertising).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 27
§8.45
INTELLECTUAL PROPERTY LAW
Poorly constructed surveys waste the litigants’ and courts’ time and resources. Given the importance of consumer perception in trademark cases, courts do not hesitate to dismiss or reject the probative value of defective surveys. See, e.g., Starter Corp. v. Converse, Inc., 170 F.3d 286, 296 – 297 (2d Cir. 1999) (survey was improper “memory test”); Brooks Shoe Manufacturing Co. v. Suave Shoe Corp., 533 F.Supp. 75, 79 – 80 (S.D.Fla. 1981) (biased and inappropriately worded questions; failure to instruct interviewers and properly gather and verify data; wrong universe), aff’d, 716 F.2d 854 (11th Cir. 1983); Amstar Corp. v. Domino’s Pizza, Inc., 615 F.2d 252, 263 – 264 (5th Cir. 1980) (improper universe and question format). For confusion surveys, a respondent confusion rate of 12 – 15 percent or higher generally will be considered probative of the likelihood of confusion. See, e.g., James Burrough Ltd. v. Sign of Beefeater, Inc., 540 F.2d 266, 279 (7th Cir. 1976). When the confusion rate is substantially lower, however, the court may conclude that the survey favors a finding that confusion is unlikely. See, e.g., Henri’s Food Products Co. v. Kraft, Inc., 717 F.2d 352 (7th Cir. 1983) (7.6 percent confusion probative that confusion unlikely). J. [8.45] Cease-and-Desist Letters When a party is concerned over another’s confusingly similar mark or deceptive advertising, commonly this party, before filing suit, will send a letter demanding that the recipient stop using a certain trademark or stop making certain representations in advertising. This correspondence is known as a “cease-and-desist” or “demand” letter. The purpose of a cease-and-desist letter is to put the recipient on notice as to the sender’s objection and, often, to initiate a dialogue for possible out-of-court resolution of the dispute. There is no legal requirement, however, that such a cease-and-desist letter be sent before filing a lawsuit. 1. [8.46] Content Cease-and-desist letters commonly are sent by attorneys (either in-house or outside counsel) and may contain some or all of the following elements: a. the identity of the sender (e.g., “We are trademark counsel for ABC Corporation.”); b. a brief description of the business of the sender or the sender’s client; c. a recitation of salient facts, trademarks, and trademark applications and/or registrations owned by the sender; d. the identity of the recipient’s trademark or advertising to which the sender objects; e. the reasons why the recipient’s trademark or advertising is objectionable; f.
8 — 28
actions that the sender demands of the recipient to rectify the situation;
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.49
g. the date by which the recipient should take action or respond to the sender, or both; and h. any pertinent attachments, such as a copy of the sender’s federal trademark registration or specimens showing the recipient’s objectionable trademark use or advertising. A sample form of a cease-and-desist letter is found in §8.85 below. 2. [8.47] Precautions If the dispute winds up in court, the cease-and-desist letter may be an exhibit at a preliminary injunction hearing or trial. Also, in Internet-related cases, the letter may be posted by the recipient on a website for the public to see. Accordingly, the letter should be professional in tone and appearance and should avoid containing any statements or admissions that may compromise the client’s position. a. [8.48] Declaratory Judgment In preparing and sending a cease-and-desist letter, a practitioner should understand that the recipient may respond by filing a declaratory judgment action for noninfringement in a venue unfavorable or inconvenient to the party alleging infringement. A definitive statement in a ceaseand-desist letter that the sender will file a lawsuit is more likely to draw this type of response. Notably, however, when a declaratory judgment action is filed soon after receipt of a ceaseand-desist letter, a court may frown on the recipient’s “race to the courthouse.” See, e.g., Remington Arms Co. v. Alliant Techsystems, Inc., No. 1:03CV1051, 2004 WL 444574, *4 (M.D.N.C. Feb. 25, 2004) (and cases cited therein). Thus, if the sender of the letter files an infringement action soon after the recipient’s filing a declaratory judgment action, courts may decline to follow the “first-to-file” rule and permit the sender’s infringement lawsuit to proceed, rather than the declaratory judgment action. Id. b. [8.49] Delay As discussed in §8.69 below, laches is an equitable defense that applies when a plaintiff has unreasonably delayed in taking action against a defendant, to the defendant’s detriment. When laches is successfully raised, a court may deny the plaintiff some or all relief. When a trademark owner sends a cease-and-desist letter but does not follow up to ensure the recipient’s compliance, the trademark owner may be susceptible to a claim of laches or acquiescence if it unreasonably delays in pursuing the infringer after sending the letter. ProFitness Physical Therapy Center v. Pro-Fit Orthopedic & Sports Physical Therapy P.C., 314 F.3d 62, 69 (2d Cir. 2002). Thus, a practitioner will want to exercise reasonable diligence under the circumstances once a cease-and-desist letter has been sent, particularly when the recipient refuses or fails to respond to the letter.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 29
§8.50
INTELLECTUAL PROPERTY LAW
K. [8.50] Insurance Coverage A defendant in a Lanham Act or unfair competition case may have insurance to cover the claim. Many commercial general liability insurance policies provide protection for insureds who are sued for causing “advertising injury.” Some courts have interpreted these “advertising injury” clauses to include claims for trademark infringement. See, e.g., Charter Oak Fire Insurance Co. v. Hedeen & Cos., 280 F.3d 730, 735 – 736 (7th Cir. 2002). In other jurisdictions, however, these clauses have been interpreted as not covering trademark infringement claims. See, e.g., ShoLodge, Inc. v. Travelers Indemnity Company of Illinois, 168 F.3d 256, 258 – 260 (6th Cir. 1999). Also, it may be attorney malpractice when a law firm representing a defendant in a trademark infringement case does not advise the client that it might have insurance coverage for the claim. See Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison, 18 Cal.4th 739, 958 P.2d 1062, 1066 – 1067, 76 Cal.Rptr.2d 749 (1998).
PRACTICE POINTER
If your client has been sued for a Lanham Act violation or a state unfair competition or deceptive trade practice, have your client consult its commercial general liability insurance policy to determine whether there is coverage.
III. [8.51] REMEDIES Available remedies in Lanham Act cases include injunctions, seizures, destruction orders, accountings of profits, awards for damages, and attorneys’ fees. These remedies are specifically provided for under federal law (15 U.S.C. §§1116 – 1118) and often under parallel or analogous state statutes or common law. Sections 8.52 – 8.62 below discuss each of these remedies in turn. A. Equitable Relief 1. [8.52] Injunctions The most common form of relief obtained in trademark and unfair competition cases is an injunction. An injunction is designed to prevent future likelihood of confusion or deception in the marketplace. The terms of the injunction will be tailored to meet the specific facts of each case. Thus, for example, the injunction may be limited geographically or by product or service; require the defendant’s use of a disclaimer, house mark, or explanatory language; or constitute a blanket prohibition on continued use of a particular trademark. a. [8.53] Geographic Issues When a plaintiff’s protectable trademark rights are limited to a certain geographic area, injunctive relief normally will likewise be limited to this area of protection. Some courts extend
8 — 30
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.55
the protection to a “zone of natural expansion.” See, e.g., Emergency One, Inc. v. American Fire Eagle Engine Co., 332 F.3d 264, 268 n.2 (4th Cir. 2003); Planetary Motion, Inc. v. Techplosion, Inc., 261 F.3d 1188, 1201 (11th Cir. 2001). b. [8.54] Disclaimer In the trademark enforcement context, a “disclaimer” is a notice appearing with a product or service that denies a connection or affiliation between different parties or their respective products or services. A typical disclaimer in advertising or on product packaging might read, “This product is neither sponsored by nor affiliated with XYZ Corporation.” In theory, the purpose of a disclaimer is to eliminate or reduce confusion as to the source or sponsorship of a particular product or service when there is something about the marketing or branding of the product or service that might cause someone to be confused or deceived. There is substantial divergence of opinion among academics and courts as to the efficacy of disclaimers in dispelling confusion. David C. Hilliard et al., TRADEMARKS AND UNFAIR COMPETITION §13.02(C)(5) (9th ed. 2012). Under appropriate circumstances, however, courts have found disclaimers to be helpful in remedying any confusion or likely confusion. See, e.g., Consumers Union of United States, Inc. v. General Signal Corp., 724 F.2d 1044, 1053 (2d Cir. 1983) (adequate disclaimer in advertisement sufficient to avoid confusion). c. [8.55] Temporary Restraining Orders and Preliminary Injunctions Temporary restraining orders and preliminary injunctive relief may be sought when a trademark owner or business is looking for immediate relief from potential or actual confusion or deception in the marketplace. This relief is commonly sought in counterfeiting cases, as well as in circumstances of egregious infringement or false advertising, when the plaintiff will likely suffer irreparable harm to its business or reputation if the defendant’s actions continue pending final judgment on the merits. A court considering a preliminary injunction request under the trademark laws will follow its standard test for obtaining preliminary injunctions. This test generally involves weighing the plaintiff’s probability of success on the merits, the possibility that the plaintiff will suffer irreparable harm if the injunction is not granted, the balance of hardships to the respective parties if the injunction is granted, and the public interest. Meridian Mutual Insurance Co. v. Meridian Insurance Group, Inc., 128 F.3d 1111, 1114 (7th Cir. 1997). Traditionally, when a plaintiff showed it was likely to succeed on the merits of an infringement or false advertising claim, a court would often presume that the plaintiff would suffer irreparable harm if the preliminary injunction was not granted. See, e.g., 128 F.3d at 1120. After the United States Supreme Court’s decision in Winter v. National Resources Defense Council, Inc., 555 U.S. 7, 172 L.Ed.2d 249, 129 S.Ct. 365 (2008), however, it seems this presumption will no longer apply in trademark infringement cases. Boomerangit, Inc. v. ID Armor, Inc., No. 5:12-CV-0920 EJD, 2012 WL 2368466 (N.D.Cal. June 21, 2012). Moreover, courts generally find that the public interest favors the granting of preliminary injunctions in trademark cases to prevent consumer confusion. See, e.g., Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 469 (7th Cir. 2000).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 31
§8.56
INTELLECTUAL PROPERTY LAW
2. [8.56] Recall, Seizure, Barred Importation, and Destruction of Infringing Articles Under appropriate circumstances, a trademark infringer may be ordered to recall all products bearing the offending mark from any distributors and retailers to prevent further consumer confusion. Cybermedia, Inc. v. Symantec Corp., 19 F.Supp.2d 1070, 1079 (N.D.Cal. 1998); Nabisco, Inc. v. PF Brands, Inc., 191 F.3d 208, 228 (2d Cir. 1999). A court may also order the seizure of goods bearing a counterfeit mark. Procedures for obtaining such an order are expressly provided for under federal law. 15 U.S.C. §1116(d). A trademark owner can also enlist the aid of U.S. Customs and Border Protection to bar the import of goods bearing a counterfeit mark. For more information on seizures, see §8.23 above. Federal law also permits a court to order that all labels, signs, prints, packages, wrappers, receptacles, and advertisements bearing the offending mark or representation and all plates, molds, matrices, and other means of making them be delivered up by the defendant for destruction. 15 U.S.C. §1118. B. [8.57] Monetary Relief While an injunction will prevent future confusion, it obviously does not compensate for harm caused by past confusion. Monetary penalties may also be necessary to deter further infringement and destroy the incentive to compete unfairly. Some federal circuits have identified six nonexclusive factors in considering whether a monetary award is appropriate in an infringement case: (1) whether the defendant had the intent to confuse or deceive; (2) whether sales have been diverted; (3) the adequacy of other remedies; (4) any unreasonable delay by the plaintiff in seeking relief; (5) the public interest in making misconduct unprofitable; and (6) whether the case involved palming off. See, e.g., Synergistic International, LLC v. Korman, 470 F.3d 162, 174 (4th Cir. 2006); Quick Technologies, Inc. v. Sage Group PLC, 313 F.3d 338, 348 – 349 (5th Cir. 2002). 1. [8.58] Accounting of Profits A court may award a successful plaintiff the profits of the defendant attributable to the use of the infringing mark. 15 U.S.C. §1117(a). Courts previously tended to grant this monetary relief when there had been a showing that the defendant had been unjustly enriched, the plaintiff had sustained damage from the infringement, or the accounting was deemed necessary to deter a willful infringer from engaging in future, similar conduct. Roulo v. Russ Berrie & Co., 886 F.2d 931, 941 (7th Cir. 1989). Several courts have indicated that willfulness is not a prerequisite for awarding a plaintiff the infringer’s profits. See, e.g., Banjo Buddies, Inc. v. Renosky, 399 F.3d 168 (3d Cir. 2005); Quick Technologies, Inc. v. Sage Group PLC, 313 F.3d 338 (5th Cir. 2002); Romag Fasteners, Inc. v Fossil, Inc., 817 F.3d 782 (Fed.Cir. 2016) (discussing circuit split on this issue). When a defendant’s profits have been awarded, a plaintiff need prove only the amount of the defendant’s infringing sales; the defendant has the burden of proving any costs or deductions associated with these sales. 15 U.S.C. §1117(a).
8 — 32
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.62
2. [8.59] Damages A successful plaintiff also may be entitled to compensation for any damages that it sustained by virtue of the defendant’s unlawful acts. An award cannot be based on speculative damage or on some number unrelated to the plaintiff’s actual injury. See, e.g., Zazú Designs v. L’Oréal, S.A., 979 F.2d 499, 505 – 507 (7th Cir. 1992); Badger Meter, Inc. v. Grinnell Corp., 13 F.3d 1145, 1157 (7th Cir. 1994) (“the amount must be provable, although some uncertainty in making this calculation is allowed”). A court may require a showing of bad faith or actual confusion to justify an award of damages. George Basch Co. v. Blue Coral, Inc., 968 F.2d 1532, 1537 (2d Cir. 1992). When a plaintiff’s damages are in the form of the plaintiff’s own lost profits, the measure of damages may overlap with the amount of the defendant’s profits from its infringing sales. In these circumstances, a plaintiff is generally not entitled to a double recovery but may elect between an award of its lost profits or of a defendant’s profits. In addition to compensation for lost profits, courts have awarded damages based on a loss of goodwill and costs for corrective advertising. Mobius Management Systems, Inc. v. Fourth Dimension Software, Inc., 880 F.Supp. 1005, 1025 (S.D.N.Y. 1994) (loss of goodwill due to defendant’s false advertising); Adray v. Adry-Mart, Inc., 76 F.3d 984, 988 – 989 (9th Cir. 1995) (corrective advertising). As noted in §§8.24 and 8.39 above, statutory damages are available for counterfeiting and cybersquatting. a. [8.60] Treble Damages A court may, in its discretion and depending on the circumstances, award monetary relief up to three times the amount of actual damages. 15 U.S.C. §1117(a). A damage award thus may be enhanced, provided the award is compensatory and not punitive. ALPO Petfoods, Inc. v. Ralston Purina Co., 997 F.2d 949, 955 (D.C.Cir. 1993). Enhanced or treble damages are not common and are awarded primarily in cases of deliberate infringement or false advertising, particularly when the plaintiff’s damages are difficult to measure or the harm to the plaintiff’s goodwill is manifest. Gorenstein Enterprises, Inc. v. Quality Care-USA, Inc., 874 F.2d 431, 435 (7th Cir. 1989); Mobius Management Systems, Inc. v. Fourth Dimension Software, Inc., 880 F.Supp. 1005, 1025 – 1026 (S.D.N.Y. 1994). b. [8.61] Punitive Damages Any award of profits or damages under the Lanham Act is compensatory only and not a penalty. 15 U.S.C. §1117(a). Thus, federal trademark law does not permit an award of punitive, or exemplary, damages. Caesars World, Inc. v. Venus Lounge, Inc., 520 F.2d 269, 274 (3d Cir. 1975). Punitive damages for infringement, unfair competition, or deceptive trade practices may be available, if at all, under state law. 3. [8.62] Attorneys’ Fees Under the Lanham Act, attorneys’ fees may be awarded to the prevailing party only in “exceptional cases.” 15 U.S.C. §1117(a). Before 2014, an “exceptional case” typically arose
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 33
§8.63
INTELLECTUAL PROPERTY LAW
when the defendant acted willfully or in bad faith in its infringing or deceptive conduct. See, e.g., Gorenstein Enterprises, Inc. v. Quality Care-USA, Inc., 874 F.2d 431, 435 – 436 (7th Cir. 1989); Tamko Roofing Products, Inc. v. Ideal Roofing Co., 282 F.3d 23, 30 – 34 (1st Cir. 2002). For a prevailing defendant to be awarded its attorneys’ fees, the plaintiff’s suit must have lacked all merit or had elements of abuse of process. See, e.g., Secalt S.A. v. Wuxi Shenxi Construction Machinery Co., 668 F.3d 677, 687 – 688 (9th Cir. 2012); Bretford Manufacturing, Inc. v. Smith System Manufacturing Co., 389 F.Supp.2d 983, 986 (N.D.Ill. 2005); S Industries, Inc. v. Centra 2000, Inc., 249 F.3d 625, 627 (7th Cir. 2001); Baltimore Luggage Co. v. Samsonite Corp., 727 F.Supp. 202, 210 (D.Md. 1989). In practice, it is uncommon for courts to award prevailing plaintiffs their attorneys’ fees and extraordinarily rare for courts to award them to prevailing defendants. In 2014, the Supreme Court rejected the rigid formulation in patent cases that attorneys’ fees can be awarded only in situations of bad faith or when a defendant acted willfully. Octane Fitness, LLC v. ICON Health & Fitness, Inc., ___ U.S. ___, 188 L.Ed.2d 816, 134 S.Ct. 1749 (2014). Rather, the Supreme Court concluded, “an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” 134 S.Ct. at 1756. Though Octane Fitness was decided under the Patent Act (U.S. patent statutes, 35 U.S.C. §1, et seq.), lower courts have subsequently adopted the ruling in trademark cases. See, e.g., Baker v. DeShong, 821 F.3d 620, 625 (5th Cir. 2016) (holding bad faith is no longer required for award of attorneys’ fees in trademark cases after Octane Fitness); Georgia-Pacific Consumer Products LP v. von Drehle Corp., 781 F.3d 710, 721 (4th Cir. 2015), as amended (Apr. 15, 2015) (“To be sure, the Octane Fitness Court did not interpret the attorneys fees provision of §1117(a). But the language of §1117(a) and §285 is identical, and we conclude that there is no reason not to apply the Octane Fitness standard when considering the award of attorneys fees under §1117(a).”); Fair Wind Sailing, Inc. v. Dempster, 764 F.3d 303, 315 (3d Cir. 2014) (stating that Supreme Court sent “clear message” that its interpretation of “exceptional” applied to fee provision in Lanham Act). When the defendant is guilty of counterfeiting, however, the plaintiff is entitled to an award of its reasonable attorneys’ fees unless there are extenuating circumstances. 15 U.S.C. §1117(b).
IV. DEFENSES A. [8.63] Fair Use Under certain circumstances, the law allows a party to use another’s trademark or a term that another has claimed as a trademark. This permitted use is called “fair use.” The common-law concept of fair use has been codified in the Lanham Act. See 15 U.S.C. §1115(b)(4). Fair use can arise when (1) a party uses a term in good faith and in a descriptive manner only to describe its own products or services or (2) a party uses another’s mark to identify or to refer to this other party’s products or services in a nondeceptive manner.
8 — 34
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.64
1. [8.64] Descriptive, or Classic, Fair Use There is no infringement when a party uses a term not as a trademark, but rather in good faith merely to describe its own product or service. Packman v. Chicago Tribune Co., 267 F.3d 628, 639 (7th Cir. 2001) (defendant newspaper’s use of phrase “The joy of six” as front page headline in recognition of Chicago Bulls’ sixth championship held fair use and not infringing of plaintiff’s registered mark “the joy of six” for entertainment services). To establish this fair use defense, a defendant must show that (a) it did not use the term as a trademark (i.e., source identifier), (b) the term is descriptive of or used descriptively in connection with the defendant’s goods or services, and (c) the term was used fairly and in good faith. Id.; 15 U.S.C. §1115(b)(4). The court’s decision in Wonder Labs, Inc. v. Procter & Gamble Co., 728 F.Supp. 1058 (S.D.N.Y. 1990), is instructive. In Wonder Labs, the plaintiff owned a federal registration for the mark “DENTISTS CHOICE” for toothbrushes. The defendant subsequently used the phrase “the dentists’ choice” in advertising its Crest toothpaste, and the plaintiff sued for trademark infringement. The court granted the defendant’s motion for summary judgment on its fair use defense. In finding fair use, the court noted that the defendant used the phrase “the dentists’ choice” in its descriptive sense as an attribute of its product. 728 F.Supp. at 1064. The court observed that the phrase was not used as a source identifier, but rather appeared either in normal print in the midst of text or in connection with a dentist recommendation or endorsements, and that the prominent Crest mark was the source identifier for the defendant’s product. The court rejected the plaintiff’s only evidence of bad faith, that the defendant had refused to stop its advertising after receiving a cease-and-desist letter from the plaintiff, because the plaintiff acted at its own peril in adopting a descriptive mark and there was no other evidence that the defendant acted to exploit the plaintiff’s goodwill in its mark. Id. By comparison, use of a term descriptively may not necessarily qualify as fair use if the term is used in a trademark-like manner. In Sands, Taylor & Wood Co. v. Quaker Oats Co., 978 F.2d 947 (7th Cir. 1992), the plaintiff alleged rights in the mark “THIRST AID” and sued the maker of Gatorade over the advertising slogan “Gatorade is Thirst Aid.” The court found that the defendant’s use of the phrase “Thirst Aid” was not a fair use because the defendant used the phrase as a prominent “attention-getting symbol.” 978 F.2d at 954, quoting 1 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §11:17 (2d ed. 1984). Significantly, fair use is a valid defense to an infringement claim even if there is a likelihood of confusion between the parties’ respective marks. KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., 543 U.S. 111, 160 L.Ed.2d 440, 125 S.Ct. 542, 550 (2004) (“it follows . . . that some possibility of consumer confusion must be compatible with fair use, and so it is”); Cosmetically Sealed Industries, Inc. v. Chesebrough-Pond’s USA Co., 125 F.3d 28, 30 (2d Cir. 1997) (“If any confusion results, that is a risk the plaintiff accepted when it decided to identify its product with a mark that uses a well known descriptive phrase.”).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 35
§8.65
INTELLECTUAL PROPERTY LAW
2. [8.65] Nominative Fair Use In classic fair use, as described in §8.64 above, a defendant uses a term to describe its own products or services. Another form of fair use, which some courts call “nominative” fair use, occurs when a defendant uses the plaintiff’s mark to refer to the plaintiff’s products or services. See, e.g., New Kids on the Block v. News America Publishing, Inc., 971 F.2d 302, 308 (9th Cir. 1992) (fair use when defendant USA Today newspaper used plaintiff’s mark “New Kids on the Block” as part of poll to learn which member of plaintiff’s music group was most popular). Nominative fair use is permitted as long as the use does not create a likelihood of confusion as to any sponsorship, affiliation, or approval between the two parties. WCVB-TV v. Boston Athletic Ass’n, 926 F.2d 42, 45 – 46 (1st Cir. 1991) (defendant’s display of plaintiff’s mark “Boston Marathon” while broadcasting the Boston Marathon was fair use); Pebble Beach Co. v. Tour 18 I Ltd., 155 F.3d 526, 545 – 546 (5th Cir. 1998) (use of plaintiffs’ marks to refer to plaintiffs’ golf holes that defendant’s golf course had replicated caused likelihood of confusion and was not nominative fair use). In Playboy Enterprises, Inc. v. Welles, 279 F.3d 796 (9th Cir. 2002), the defendant, a former Playboy Playmate, used plaintiff’s marks “Playboy” and “Playmate of the Year” on her Internet website to promote the sale of personal photographs and her spokesperson services. The plaintiff sued for trademark infringement and unfair competition. The Ninth Circuit held that the defendant’s use of the plaintiff’s marks as part of her website’s banners, headlines, and metatags was fair use. In these contexts, the marks were used in a limited and descriptive manner and did not imply the plaintiff’s sponsorship of the defendant’s website. 279 F.3d at 802 – 803. The court found, however, that the defendant’s repeated use of an abbreviation of the plaintiff’s mark in the background of her website was not a fair use because the multiple depictions were an unnecessary reference to the plaintiff’s marks. 279 F.3d at 804 – 805. 3. [8.66] Comparative Advertising A competitor’s trademark may be used lawfully in comparative advertising, provided the use is fair and the advertising is not likely to confuse or deceive consumers. Tommy Hilfiger Licensing, Inc. v. Nature Labs, LLC, 221 F.Supp.2d 410, 413, 423 (S.D.N.Y. 2002) (refusing to enjoin defendant’s use of advertising slogan, “If You Like Tommy Hilfiger Your Pet Will Love Timmy Holedigger,” for its pet perfumes); Hypertherm, Inc. v. Precision Products, Inc., 832 F.2d 697, 700 – 702 (1st Cir. 1987) (vacating portion of district court’s preliminary injunction to extent it prohibited defendant from making fair, descriptive use of plaintiff’s mark in comparative advertising to indicate that defendant’s replacement parts were compatible with plaintiff’s products). Courts do not hesitate to enjoin comparative advertising that is unfair, false, or misleading. See, e.g., Deere & Co. v. MTD Products, Inc., 41 F.3d 39, 45 (2d Cir. 1994) (enjoining comparative advertising that unfairly diluted plaintiff’s mark by materially altering it). Indeed, when false comparative advertising mentions the plaintiff or its products by name, irreparable harm to the plaintiff may be presumed for preliminary injunction purposes. McNeilab, Inc. v. American Home Products Corp., 848 F.2d 34, 38 (2d Cir. 1988).
8 — 36
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.67
4. [8.67] Repackaged, Repaired, Altered, or Lawfully Copied Products It is well settled that the resale of genuine product under its original trademark generally does not constitute infringement. Davidoff & Cie, S.A. v. PLD International Corp., 263 F.3d 1297, 1301 (11th Cir. 2001). This legal concept is known as the “first-sale doctrine.” Care must be taken, however, if those goods are being resold after repackaging, repair, or alteration. When a party repackages an original manufacturer’s products for resale, the party may identify the repackaged products by using the manufacturer’s trademark, provided the repackager is not likely to deceive consumers through its use of the mark and has not made material alterations to the products. See, e.g., Prestonettes, Inc. v. Coty, 264 U.S. 359, 68 L.Ed. 731, 44 S.Ct. 350, 351 (1924) (repackaged perfume permitted with nondeceptive, truthful disclosure); Davidoff, supra, 263 F.3d at 1302 – 1303 (enjoining repackaging when reseller’s etching on perfume bottles to remove batch codes degraded appearance of bottles and thus constituted material change to product). Similarly, when a party reconditions, repairs, or alters a manufacturer’s product for the purposes of reselling it secondhand, the party may use the manufacturer’s trademark to identify the original product, provided the repairs do not materially alter the product and the party makes truthful and adequate disclosure as to the repairs or alterations. Champion Spark Plug Co. v. Sanders, 331 U.S. 125, 91 L.Ed. 1386, 67 S.Ct. 1136 (1947) (full disclosure that used but reconditioned “Champion” spark plugs were repaired made defendant’s use of plaintiff’s “Champion” trademark permissible); Nitro Leisure Products, L.L.C. v. Acushnet Co., 341 F.3d 1356, 1360 – 1365 (Fed.Cir. 2003) (refurbished golf balls). When, however, the repairs or alterations are so substantial that the product is materially different from the one originally sold by the manufacturer, use of the manufacturer’s mark may be impermissible or curtailed. Rolex Watch, U.S.A., Inc. v. Michel Co., 179 F.3d 704, 708 – 710 (9th Cir. 1999) (enjoining defendant from using plaintiff’s mark on materially altered products); Karl Storz Endoscopy-America, Inc. v. Surgical Technologies, Inc., 285 F.3d 848, 855 – 857 (9th Cir. 2002) (replacement of every “essential” part of plaintiff’s product equivalent to selling different product); Bulova Watch Co. v. Allerton Co., 328 F.2d 20, 24 (7th Cir. 1964) (defendant enjoined only from prominent and misleading use of trademark “BULOVA” on significantly altered watch that incorporated Bulova movement). For example, in Beltronics USA, Inc. v. Midwest Inventory Distribution, LLC, 562 F.3d 1067 (10th Cir. 2009), the defendant resold the plaintiff’s products, but with the manufacturer’s serial number label removed. The district court preliminarily enjoined the defendant from reselling the plaintiff’s products in this way. On appeal, the Tenth Circuit noted that the first-sale doctrine is not applicable when the alleged infringer sells trademarked goods that are materially different from those sold by the trademark owner. In those instances, the unauthorized resale of materially different goods can constitute trademark infringement. The Tenth Circuit then affirmed the district court’s decision, finding that the removal of the manufacturer’s serial number label created a material difference because, among other things, a purchaser could not take advantage of the plaintiff’s warranty. Naturally, false or deceptive relabeling is likewise unlawful. Intel Corp. v. Terabyte International, Inc., 6 F.3d 614 (9th Cir. 1993) (reselling plaintiff’s processors under plaintiff’s mark, but relabeled with incorrect speed times, constituted blatant trademark infringement).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 37
§8.68
INTELLECTUAL PROPERTY LAW
When a party has lawfully copied another’s product, such as when the design is in the public domain, the law allows use of the other’s mark to make truthful disclosure that the party’s product is a copy. Societe Comptoir de L’Industrie Cotonniere Etablissements Boussac v. Alexander’s Department Stores, Inc., 299 F.2d 33, 36 (2d Cir. 1962) (truthful labeling and advertising of garments as adaptations of original Christian Dior products permitted). B. [8.68] Estoppel In many fields of law, equitable defenses such as laches and acquiescence act as a bar to relief. In the trade identity field, however, the law seeks to protect not only the wronged party but also the public. Thus, permitting these equitable defenses may result in perpetuating the consumer confusion that trade identity law was designed to curb. Accordingly, a finding of laches or acquiescence may and usually does bar monetary relief for past infringement but, under some circumstances, may not bar injunctive relief against a continued likelihood of confusion. Sections 8.69 – 8.77 below explore the affirmative defenses of laches and acquiescence, as well as the counterbalancing theory of progressive encroachment. As explained in §8.77 below, progressive encroachment recognizes a trademark owner’s need to take a “wait and see” approach with some potential infringers rather than penalizing the trademark owner under a laches theory for not rushing into court. 1. [8.69] Laches Under Federal Rule of Civil Procedure 8(c), laches must be pleaded as an affirmative defense by the alleged infringer. Laches occurs when a trademark owner has unreasonably delayed in enforcing its rights against an alleged infringer and, by virtue of this delay, has caused the alleged infringer undue prejudice. RESTATEMENT (THIRD) OF UNFAIR COMPETITION §31 (1995). The basic elements of laches are that (a) the plaintiff had knowledge of the defendant’s use of an allegedly infringing mark or false advertising, (b) the plaintiff inexcusably delayed in taking action against the defendant, and (c) the defendant detrimentally relied on the plaintiff’s inaction or otherwise would be prejudiced were the plaintiff permitted to assert its rights at this time. Chattanoga Manufacturing, Inc. v. Nike, Inc., 301 F.3d 789, 792 – 793 (7th Cir. 2002). See also Grupo Gigante S.A. de C.V. v. Dallo & Co., 119 F.Supp.2d 1083, 1104 (C.D.Cal. 2000) (using six-factor test), vacated and remanded on other grounds, 391 F.3d 1088 (9th Cir. 2004). a. [8.70] Knowledge The plaintiff’s knowledge of the alleged infringement is a critical element to a defense of laches. Plasticolor Molded Products v. Ford Motor Co., 698 F.Supp. 199, 202 – 203 (C.D.Cal. 1988) (no laches despite ten years of infringement by licensee when there was no evidence of licensor’s knowledge). At least some courts may extend the knowledge requirement to instances in which the plaintiffs knew or should have known of the unlawful conduct. Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829, 838 (9th Cir. 2002).
8 — 38
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.73
b. [8.71] Delay There is no bright-line period of time that establishes a trademark owner’s delay for purposes of laches, and each case must be considered on its own facts. Generally, a delay of two years or less is not sufficient, but a delay of four years or more may be likely to be enough for laches. Many courts consider it relevant, or presume delay, when the period of inaction exceeds the analogous state statute of limitations that would be applicable for trademark infringement, unfair competition, or false advertising. See, e.g., Hot Wax, Inc. v. Turtle Wax, Inc., 191 F.3d 813, 821 (7th Cir. 1999). By the same token, bringing suit within the analogous limitations period may be probative of permissible delay. Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829, 835 (9th Cir. 2002). Importantly, the delay must be unreasonable. Under proper circumstances, the delay may be excused. See, e.g., Piper Aircraft Corp. v. Wag-Aero, Inc., 741 F.2d 925, 932 (7th Cir. 1984) (no laches when parties engaged in settlement attempts for three and one-half years); Nabisco Brands Inc. v. Conusa Corp., 722 F.Supp. 1287, 1292 (M.D.N.C.) (not unreasonable for plaintiff to delay in filing suit when sales of infringing products dropped substantially and to sue only when sales picked up), aff’d, 892 F.2d 74 (4th Cir. 1989); Tonka Corp. v. Rose Art Industries, Inc., 836 F.Supp. 200, 220 (D.N.J. 1993) (filing of opposition proceeding before Trademark Trial and Appeal Board may toll laches period); National Rural Electric Cooperative Ass’n v. National Agricultural Chemical Ass’n, 26 U.S.P.Q.2d (BNA) 1294, 1992 WL 477020, *5 (D.D.C. 1992) (defendant’s encroachment gradual). c. [8.72] Detrimental Reliance or Prejudice Detrimental reliance or prejudice is often shown by reference to the resources the defendant has committed to build and market its business while the plaintiff allegedly slept on its rights. See, e.g., Chattanoga Manufacturing, Inc. v. Nike, Inc., 301 F.3d 789, 795 (7th Cir. 2002) (“For over fifteen years, Nike has spent millions of dollars annually promoting its Michael Jordanendorsed products. . . . Had Chattanoga challenged Nike’s use of the term Jordan in a timely manner and prevailed, Nike could have promoted its products in a number of different ways.”); Conopco, Inc. v. Campbell Soup Co., 95 F.3d 187, 192 (2d Cir. 1996) (laches found when, during plaintiff’s five-year delay, defendant “committed massive resources” to exploit its marketing strategy). When there is delay but no detrimental reliance, the infringer is, in effect, operating with the consent of the trademark owner, and this consent can be revoked at any time. Menendez v. Holt, 128 U.S. 514, 32 L.Ed. 526, 9 S.Ct. 143, 145 (1888). d. [8.73] Effect on Relief When laches is found, the court generally denies recovery of damages for the period prior to the filing of the complaint. Some courts may permit monetary relief for any infringement that occurred after the lawsuit was filed, but other courts deny all monetary relief when laches is found. Compare James Burrough Ltd. v. Sign of Beefeater, Inc., 572 F.2d 574, 578 (7th Cir. 1978), and Houston Sports Ass’n v. Astro-Card Co., 520 F.Supp. 1178, 1180 (S.D.Tex. 1981), with Skippy, Inc. v. CPC International, Inc., 674 F.2d 209, 212 (4th Cir. 1982).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 39
§8.74
INTELLECTUAL PROPERTY LAW
Often, laches does not bar a claim for prospective injunctive relief. See, e.g., University of Pittsburgh v. Champion Products Inc., 686 F.2d 1040, 1044 (3d Cir. 1982). In cases in which the delay was egregious or the defendant’s prejudice substantial, however, courts may deny even prospective injunctive relief. See, e.g., Hot Wax, Inc. v. Turtle Wax, Inc., 191 F.3d 813, 824 (7th Cir. 1999); Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829, 840 (9th Cir. 2002). e. [8.74] Preliminary Injunction Unreasonable delay may also result in denial of preliminary injunctive relief because the trademark owner’s delay may negate a claim of irreparable harm. Compare Tough Traveler, Ltd. v. Outbound Products, 60 F.3d 964, 968 (2d Cir. 1995) (13-month delay in seeking preliminary injunction rebutted presumption of irreparable harm), with Ty, Inc. v. Jones Group, Inc., 237 F.3d 891, 902 – 903 (7th Cir. 2001) (despite plaintiff’s 8-month delay, defendant showed no negative effect from delay and defendant assumed risk of suit when it chose to market “Beanie Racers” stuffed toys in light of plaintiff’s rights in “Beanie Babies”). f.
[8.75] Inevitable Confusion
When a strong showing of likelihood of confusion is made, the public interest in avoiding confusion may trump the doctrines of laches and acquiescence and justify injunctive relief. SunAmerica Corp. v. Sun Life Assurance Company of Canada, 77 F.3d 1325, 1334 – 1335 (11th Cir. 1996); Resorts of Pinehurst, Inc. v. Pinehurst National Corp., 148 F.3d 417, 423 (4th Cir. 1998); District Brewing Co. v. CBC Restaurant, LLC, 118 U.S.P.Q.2d 1535, 2016 WL 1366230 (S.D. Ohio 2016) (acquiescence defense can be overcome when inevitable confusion arises from continued use of parties’ marks). 2. [8.76] Acquiescence Acquiescence may constitute a ground for denial of relief when the plaintiff’s conduct amounted to an express or implied assurance that the plaintiff would not assert its rights against the defendant. Sweetheart Plastics, Inc. v. Detroit Forming, Inc., 743 F.2d 1039, 1046 (4th Cir. 1984). Thus, while laches involves passive assent, acquiescence requires active consent. As with laches, estoppel by acquiescence must be pleaded as an affirmative defense by the alleged infringer. Fed.R.Civ.P. 8(c). Express acquiescence might occur, for example, when one party explicitly tells another party that it would not object to the other party’s use of a particular mark. An example of implied acquiescence arose in Conan Properties, Inc. v. Conans Pizza, Inc., 752 F.2d 145 (5th Cir. 1985), in which the plaintiff owned the “CONAN THE BARBARIAN” comic-book character and trademark and was aware of the defendant’s use of the mark “CONAN” for its barbarian-themed restaurant in Austin, Texas. One of the plaintiff’s coowners even visited the defendant’s restaurant, had his picture taken with the defendant’s owner, and sent the defendant a signed copy of the photograph. Four years later, the plaintiff sent the defendant a cease-and-desist letter. The defendant ignored the letter and subsequently expanded its operations by opening a restaurant in San Antonio. Shortly thereafter, the plaintiff sued for trademark infringement.
8 — 40
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.78
The jury found the plaintiff guilty of laches and acquiescence. On appeal, the Fifth Circuit held that such a finding precluded injunctive relief in Austin, but that the plaintiff might be entitled to an injunction outside Austin because the defendant was on notice of the plaintiff’s objection before it expanded geographically. 3. [8.77] Progressive Encroachment The doctrine of “progressive encroachment” recognizes that some defendants start out with a different mark, different packaging, or different products and services and, over time, develop their branding or business offerings in a way that creates a greater likelihood of confusion with the plaintiff’s brand or business offerings. In these cases, a plaintiff may be justified in waiting to file suit until after the defendant has come into closer competition with the plaintiff or created a greater likelihood of confusion through modification of its mark. When this occurs, the plaintiff should not be the victim of a laches defense merely because it did not file suit when the defendant was still using its previous mark or offering its original products or services. When a defendant has expanded its products or services or entered into new marketing areas that threaten the plaintiff’s rights, progressive encroachment may be raised by a trademark owner in response to the defendant’s claim of laches. American Rice, Inc. v. Arkansas Rice Growers Cooperative Ass’n, 532 F.Supp. 1376, 1390 (S.D.Tex. 1982) (“laches is inapposite where the evidence demonstrates a history of slow encroachment followed by increased direct competition”); SCI Systems, Inc. v. Solidstate Controls, Inc., 748 F.Supp. 1257, 1262 – 1263 (S.D. Ohio 1990). If changes to the defendant’s mark or marketing have been only slight or if the defendant has not moved into more direct competition with the plaintiff, progressive encroachment may not excuse laches. See, e.g., Chattanoga Manufacturing, Inc. v. Nike, Inc., 301 F.3d 789, 794 (7th Cir. 2002); Prudential Insurance Company of America v. Gibraltar Financial Corporation of California, 694 F.2d 1150, 1154 (9th Cir. 1982). C. [8.78] Concurrent Use Conflicts sometimes arise between parties who previously had been using confusingly similar marks in good faith in geographically remote areas but who, through business expansion, find themselves operating in the same or overlapping markets. In these circumstances, difficult questions may arise in determining the scope and nature of any relief. A plaintiff relying on common-law trademark rights is entitled to injunctive relief only in those localities where it has established use or reputation of its mark. Emergency One, Inc. v. American Fire Eagle Engine Co., 332 F.3d 264, 269 (4th Cir. 2003); Money Store v. Harriscorp Finance, Inc., 689 F.2d 666, 675 (7th Cir. 1982). As the Supreme Court has stated, “[W]here two parties independently are employing the same mark upon goods of the same class, but in separate markets wholly remote the one from the other, the question of prior appropriation is legally insignificant.” United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90, 63 L.Ed. 141, 39 S.Ct. 48, 52 (1918), quoting Hanover Star Milling Co. v. Metcalf, 240 U.S. 403, 60 L.Ed. 713, 36 S.Ct. 357, 361 (1916). The United Drug Court continued, stating that the “petitioner, being the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 41
§8.79
INTELLECTUAL PROPERTY LAW
newcomer in that market, must enter it subject to whatever rights had previously been acquired there in good faith by the [respondent].” 39 S.Ct. at 52. Of course, modern communication and travel may carry reputation and goodwill to otherwise remote areas, where likelihood of confusion and trademark rights must be considered. Tisch Hotels, Inc. v. Americana Inn, Inc., 350 F.2d 609, 613 – 614 (7th Cir. 1965) (hotels in Miami, New York City, Puerto Rico, and Chicago). See §6.18 of this handbook for a discussion on developing common-law rights. When an owner of a federal registration has not used its registered mark in a specific locality, it is not entitled to injunctive relief against a junior user in this locality until it has entered, or evidences an intent to enter, the locality. Lone Star Steakhouse & Saloon, Inc. v. Alpha of Virginia, Inc., 43 F.3d 922, 931 – 932 (4th Cir. 1995) (“court will enjoin the junior user only if the registrant is likely to enter, or has entered, the junior user’s trade territory”). When the senior user of a mark has used its mark only in a limited geographic area and a junior user acquires a federal trademark registration for a confusingly similar mark, the junior user cannot enjoin the senior user from continuing to use its mark. The senior user’s trademark rights and scope of protection will be limited, however, to the area in which its use and reputation extended as of the date of the junior user’s federal trademark application. Weiner King, Inc. v. Wiener King Corp., 615 F.2d 512 (C.C.P.A. 1980). D. Importation of Goods Originally Intended for Sale Outside the United States (Gray Market Goods) 1. [8.79] In General “Gray market goods” are products (a) manufactured abroad by or under license from a U.S. business, (b) for intended sale in a foreign country, (c) bearing a trademark identical to one owned and used in the United States by the U.S. business, and (d) imported for sale into the United States without the consent of the U.S. business. Gray market goods are also called “parallel imports.” An example of a gray market good is discussed in Lever Bros. v. United States of America, 981 F.2d 1330 (D.C.Cir. 1993), in which both Lever Brothers, an American company, and its British affiliate manufactured soap under the mark “Shield” for sale in their respective countries. The soap products were formulated differently, however, to suit local circumstances: the soaps lathered differently, smelled differently, and had different colorants and packaging, and the American product had an additional ingredient to improve the deodorant qualities. An unauthorized third party purchased the “Shield” soap in England and shipped it into the United States for resale. Lever Brothers subsequently received numerous complaints from American consumers who unknowingly bought the British version rather than the American one to which they were accustomed. Gray market goods may result when a U.S. company has a foreign branch, a foreign subsidiary, or a foreign licensee, or when it manufactures goods for export to foreign countries. The problem may also arise when a foreign company grants an exclusive license to a U.S. company to sell goods under a certain trademark in the United States, while the foreign company manufactures the same goods under the same mark in other countries.
8 — 42
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.82
2. [8.80] Issues Gray market goods pose a number of problems for consumers and trademark owners. First, there are often price disparities between the gray market goods and the legitimate domestic goods, at least in part because of currency fluctuations and varying labor costs. Because gray market goods compete with the legitimate domestic products that may be more expensive, sales of gray market goods may cause financial loss to the trademark owner. Second, gray market goods may have different packaging or ingredients than the products manufactured for sale in the United States. This is particularly true for drugs, food, and beverages, which may have their packaging or contents altered to accommodate foreign tastes. Other examples are soap and cosmetics, which may be manufactured for specific solubility in the water of a foreign country. As water quality may differ from country to country, these products may not be suitable for use in the United States. Third, gray market goods may have different labels than those required in the United States. See, e.g., Bayer Corp. v. Custom School Frames, LLC, 259 F.Supp.2d 503, 508 (E.D.La. 2003) (gray market flea control preparations lacked required EPA registration number on label). If a food or beverage labeled for sale in Mexico is sold in the United States, many of the FDA labeling requirements likely will not be met, potentially harming consumers and subjecting the trademark owner to potential liability. See, e.g., PepsiCo, Inc. v. Torres, 27 U.S.P.Q.2d (BNA) 1948, 1993 WL 455222 (C.D.Cal. 1993). Fourth, countries often have different standards and regulations governing the sale of goods. In addition, companies may have different quality standards in different markets. If an inferior gray market good is sold in the United States, consumers will be confused and disappointed, and the trademark owner’s reputation could suffer greatly. Finally, a trademark owner that offers rebates or repair services for its domestic goods may unknowingly be forced to provide these services for gray market goods. 3. [8.81] Avenues for Relief Gray market goods are not counterfeits because they were authorized by the trademark owner. Under certain circumstances, however, the sale or importation of gray market goods may be enjoined or prevented. A trademark owner has several avenues to address a gray market goods problem: a civil action under the Lanham Act; the assistance of U.S. Customs and Border Protection; and proceedings before the International Trade Commission. a. [8.82] Civil Action One option for the U.S. trademark owner faced with a gray market problem is to bring a civil action against the importer under the Lanham Act and the Tariff Act of 1930, ch. 497, 46 Stat. 590. See, e.g., PepsiCo, Inc. v. Nostalgia Products Corp., 18 U.S.P.Q.2d (BNA) 1404, 1991 WL 113161 (N.D.Ill. 1991). To prevail in such an action, the trademark owner must prove that (1) it
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 43
§8.83
INTELLECTUAL PROPERTY LAW
owns the trademark in the United States, (2) the allegedly gray market goods are not authorized for sale in the United States, and (3) the gray market goods are materially different than all or substantially all of those sold domestically by the trademark owner so that their sale in the United States will create a likelihood of confusion. PepsiCo, supra; Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 638 – 640 (1st Cir. 1992); Bourdeau Bros. v. International Trade Commission, 444 F.3d 1317 (Fed.Cir. 2006). Not every difference will be considered material. Generally, if the difference will impact consumers’ purchase decisions, the difference is likely material. Given that consumers have varying purchase criteria, the threshold for materiality is often low. Differences that have been found to be material include price, language, labeling, composition, and performance. See, e.g., Grupo Gamesa S.A. De C.V. v. Dulceria El Molino, Inc., 39 U.S.P.Q.2d (BNA) 1531, 1996 WL 443659 (C.D.Cal. 1996) (noncompliance with FDA labeling requirements and California law requiring enriched flour in cookies); Societe Des Produits Nestle, supra, 982 F.2d at 640 – 644 (differences in composition, presentation, and shape of chocolates); Original Appalachian Artworks, Inc. v. Granada Electronics, Inc., 816 F.2d 68, 73 (2d Cir. 1987) (dolls with Spanish language adoption papers and birth certificates considered materially different from English versions). Cf. Davidoff & Cie, S.A. v. PLD International Corp., 263 F.3d 1297 (11th Cir. 2001) (removal of batch codes from perfume bottles degraded appearance of bottles and thus constituted material difference). b. [8.83] U.S. Customs and Border Protection Importation of gray market goods may also be prevented through §42 of the Lanham Act, 15 U.S.C. §1124, and §526 of the Tariff Act of 1930, ch. 497, 46 Stat. 590. If a party owns a federal trademark registration, the party can record the registration with U.S. Customs and Border Protection and enlist its assistance in seizing gray market goods to prevent their importation. See 15 U.S.C. §1124; 19 C.F.R. pt. 133. Once the registration is recorded, CBP will act to bar the importation of gray market goods. Two exceptions exist. CBP will not bar the importation of gray market goods when (1) the foreign and domestic trademark owners are the same person or business entity or (2) the foreign and domestic trademark owners are parent and subsidiary companies or subject to common ownership or control. 19 C.F.R. §133.23(a). See K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 100 L.Ed.2d 313, 108 S.Ct. 1811 (1988). Wholly owned subsidiaries likely will be considered under common control of the trademark owner. NEC Electronics v. CAL Circuit Abco, 810 F.2d 1506 (9th Cir. 1987). Licensees, however, may not be sufficiently related to the trademark owner to be under common control. United States of America v. Eighty-Nine (89) Bottles of “Eau de Joy,” 797 F.2d 767, 771 – 772 (9th Cir. 1986). There is, however, an exception to these exceptions. When the foreign and domestic products at issue are “materially different,” CBP will bar their importation, even if they come from affiliated companies, unless the imported goods bear a label reading: “This product is not a product authorized by the United States trademark owner for importation and is physically and materially different from the authorized product.” 19 C.F.R. §133.23(b). See Lever Bros. v.
8 — 44
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.85
United States of America, 981 F.2d 1330, 1338 – 1339 (D.C.Cir. 1993). An importer’s compliance with this label requirement would satisfy CBP but would not necessarily insulate the importer from liability under the Lanham Act. In a civil action, a court would consider whether consumers were likely to be confused, given the surrounding circumstances and disclaimer. For more information about barring the importation of gray market goods through CBP, see its website at www.cbp.gov. c. [8.84] International Trade Commission Trademark owners can also seek relief through the United States International Trade Commission (ITC), which helps administer the Tariff Act of 1930. The ITC is an administrative arm of the U.S. government authorized to take action against “[u]nfair methods of competition and unfair acts in the importation of articles” into the United States. 19 U.S.C. §1337(a)(1). Proceedings before the ITC can be more expeditious than federal civil actions. Also, jurisdiction may be easier to obtain over foreign defendants or over their goods through an in rem action. Another value of an ITC action is that a plaintiff can obtain a general exclusion order against all infringing products. The ITC is also authorized to issue cease-and-desist orders against specific parties and temporary relief pending the outcome of an ITC proceeding. See 19 U.S.C. §§1337(b) – 1337(f). However, the ITC cannot award damages. The ITC has its own set of procedures and standards, although these generally parallel ones found in federal district court. See David C. Hilliard et al., TRADEMARKS AND UNFAIR COMPETITION §3.06(B) (9th ed. 2012). Discovery matters, prehearing conferences, and hearings are presided over by administrative law judges. A decision on the merits and a remedial order are issued by a panel of the ITC after receiving the recommendations of the ALJ. For more information about ITC proceedings, see its website at www.usitc.gov.
V. APPENDIX — SAMPLE FORMS A. [8.85] Cease-and-Desist Letter Dear ____________: We represent [corporation name] in intellectual property matters. As you undoubtedly know, [corporation] has manufactured and sold widgets for over _____ years in connection with its famous trademark [trademark name]. [Corporation] has registered its [trademark name] trademark in the United States Patent and Trademark Office for [product], Reg. No. ____________. We recently learned that your company is marketing and selling [product] bearing the mark [product’s mark]. Your company’s use of the mark [product’s mark] is likely to confuse consumers into believing that your company’s products are legitimately connected with, or
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 45
§8.85
INTELLECTUAL PROPERTY LAW
sponsored or approved by, [corporation]. As your company does not have approval or authorization from [corporation] to market or sell products bearing the mark [trademark name], your company’s actions constitute trademark infringement and unfair competition under federal, state, and the common law. Accordingly, we demand that your company: a) immediately cease and desist from all distribution and sale of [product] bearing the mark [product’s mark]; b) turn over to us for destruction all [product] in your company’s possession or control that bear the [product’s mark] mark; c) reimburse [corporation] for its lost profits incurred due to your company’s infringing sales; d) reimburse [corporation] for its attorneys’ fees incurred in connection with this matter; and e) sign an agreement that recites the terms on which this matter is resolved. We hope this matter can be settled amicably. To do so, however, we must receive your written assurance by [date], that your company will comply with the above demands. We shall await your response. Sincerely, _______________________________________
8 — 46
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.86
B. [8.86] Complaint for Trademark Infringement, False Designation of Origin, Unfair Competition, and Deceptive Trade Practices UNITED STATES DISTRICT COURT ____________ DISTRICT OF ____________ _____________________
) ) ) ) ) ) ) ) )
Plaintiff, v. ____________________, Defendant.
Civil Action No. __________
COMPLAINT FOR TRADEMARK INFRINGEMENT, FALSE DESIGNATION OF ORIGIN, UNFAIR COMPETITION, AND DECEPTIVE TRADE PRACTICES JURISDICTION AND PARTIES 1. Plaintiff, [plaintiff’s name], is a Delaware corporation with its principal place of business in [plaintiff’s location], USA. 2. On information and belief, Defendant, [defendant’s name], is a [state] company with its principal place of business in [defendant’s location], USA, and is doing business in the State of [state name] and in this judicial district. 3. This Court’s jurisdiction arises (a) from the fact this is an action brought under the Trademark Laws of the United States, 15 U.S.C. §§1051 – 1129, jurisdiction conferred by 15 U.S.C. §1121 and 28 U.S.C. §§1331 and 1338; (b) from the fact that this is a civil action in which plaintiff and defendant are citizens of different states, and the value of the matters in controversy exceeds $75,000 exclusive of interest and costs, jurisdiction being conferred under 28 U.S.C. §1332(a); and (c) by virtue of the fact that certain claims are joined with substantial and related claims under the Trademark Laws of the United States, 15 U.S.C. §§1051 – 1129, jurisdiction conferred by 28 U.S.C. §§1338(b) and 1367. Venue is proper in this judicial district pursuant to 28 U.S.C. §1391(b). FACTS ____________ Corporation 4. Since at least as early as 1950, Plaintiff, [plaintiff’s name], has manufactured, distributed, advertised, and sold [product] throughout the United States under its name and
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 47
§8.86
INTELLECTUAL PROPERTY LAW
mark [mark name], and is one of the world’s leading providers of [product] and related products and services. See Exhibit A (specimens of [plaintiff’s name]’s [product] bearing the [mark name] mark). 5. Plaintiff has registered the mark [plaintiff’s mark] for [plaintiff’s product] in the United States Patent and Trademark Office, Reg. No. ____________. That registration has become incontestable in accordance with 15 U.S.C. §§1065 and 1115(b). A copy of this federal trademark registration is attached hereto as Exhibit B. 6. Plaintiff has sold $[amount sold] worth of [product] under the name and mark [mark name] throughout the United States and has spent [amount spent] dollars annually in advertising and promoting the name and mark throughout the United States. 7. By virtue of Plaintiff’s continued use, advertising, and promotion, its [product] name and mark became and still are distinctive, well-recognized, and famous, possess a strong secondary meaning, and represent an extremely valuable goodwill. Defendant’s Unlawful Activities 8. On information and belief, Defendant, [defendant’s name], manufactures and sells [defendant’s product]. 9. On information and belief, Defendant recently began manufacturing, advertising, and selling [defendant’s product] bearing the trademark [defendant’s mark]. A printout from Defendant’s website, showing its [defendant’s product] bearing the mark [defendant’s mark], is attached hereto as Exhibit C. 10. Defendant [defendant’s name]’s [defendant’s product] compete directly with Plaintiff [plaintiff’s name]’s [plaintiff’s product] and indeed are sold side by side on retailers’ shelves and on the Internet. 11. On information and belief, Defendant began to manufacture, market, and sell [defendant’s product] bearing the trademark [defendant’s mark] with knowledge of [plaintiff’s name]’s rights in the name and mark [plaintiff’s product] for these same products. 12. Defendant’s use of the trademark [defendant’s mark] for [defendant’s product] is without the consent or authorization of [plaintiff’s name]. COUNT I TRADEMARK INFRINGEMENT AND FALSE DESIGNATION OF ORIGIN 13. Plaintiff repeats and realleges each and every allegation of paragraphs 1 through 12 as though fully set forth herein.
8 — 48
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.86
14. As a result of its unauthorized use of the mark [defendant’s mark] in connection with its manufacture, advertising, and sale of [defendant’s product], Defendant is likely to cause confusion or mistake or to deceive the public, in violation of the Trademark Laws of the United States, 15 U.S.C. §1114. 15. As a result of its unauthorized use of the mark [defendant’s mark] in connection with its manufacture, advertising, and sale of [defendant’s product], Defendant is likely to mislead prospective purchasers as to the affiliation, connection, or association of Defendant or Defendant’s products with Plaintiff or Plaintiff’s [plaintiff’s products], or as to the origin, sponsorship or approval of Defendant’s [defendant’s products] by [plaintiff], causing purchasers to rely thereon, in violation of the Lanham Act, 15 U.S.C. §1125(a). 16. Defendant’s acts were undertaken in bad faith and in a deliberate attempt to capitalize on the goodwill and reputation of Plaintiff and Plaintiff’s [plaintiff’s mark] trademark for [plaintiff’s product], and to mislead the public into believing that there is a connection, affiliation, or association between Defendant or its [defendant’s products]branded [defendant’s mark] and Plaintiff and its [plaintiff’s product]-branded [plaintiff’s mark]. 17. By reason of Defendant’s acts, Plaintiff has suffered and will continue to suffer damage and injury to its business, reputation, and goodwill, and will sustain loss of revenues and profits. 18. Unless enjoined by this Court, Defendant will continue to perform the acts complained of herein and cause said damages and injury, all to the immediate and irreparable harm of Plaintiff, for which Plaintiff has no adequate remedy at law. COUNT II STATE AND COMMON LAW UNFAIR COMPETITION AND DECEPTIVE TRADE PRACTICES 19. Plaintiff repeats and realleges each and every allegation of paragraphs 1 through 12 as though fully set forth herein. 20. As a result of its unauthorized use of the mark [defendant’s mark] in connection with the manufacture, advertising, and sale of [defendant’s product], Defendant is likely to cause confusion or to cause mistake or to deceive the public, in violation of the statutory and common law of various States, including the State of [state] and [state statute]. 21. Defendant is likely to mislead prospective purchasers and retailers as to an affiliation, connection, or association of Defendant or its [defendant’s mark]-branded [defendant’s product] with Plaintiff or its [plaintiff’s mark] -branded [plaintiff’s product], or as to the origin, sponsorship, or approval by Plaintiff of Defendant’s [defendant’s mark]branded [defendant’s product], causing purchasers to rely thereon, in violation of the statutory and common law of various states, including the State of [state] and [state statute].
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 49
§8.86
INTELLECTUAL PROPERTY LAW
22. Defendant’s acts were undertaken in bad faith and in a deliberate attempt to capitalize on the goodwill and reputation of Plaintiff and Plaintiff’s [plaintiff’s mark] trademark for [plaintiff’s product], and to mislead the public into believing that there is a connection, affiliation, or association between Defendant or its [defendant’s mark]-branded [defendant’s product] and Plaintiff and its [plaintiff’s mark]-branded [plaintiff’s product]. 23. By reason of Defendant’s acts, Plaintiff has suffered and will continue to suffer damage and injury to its business, reputation, and goodwill, and will sustain loss of revenues and profits. 24. Unless enjoined by this Court, Defendant will continue to perform the acts complained of herein and cause said damages and injury, all to the immediate and irreparable harm of Plaintiff, for which Plaintiff has no adequate remedy at law. WHEREFORE, Plaintiff prays for a judgment: 1. Permanently enjoining and restraining Defendant, its officers, agents, employees, representatives, and all others acting in concert or participation with any of them from: (a)
using the trademark [plaintiff’s mark], or any other colorable imitation of the [plaintiff’s mark] mark, or any mark that is confusingly similar to the mark [plaintiff’s mark], on [defendant’s product]; and
(b) doing any other act or thing likely to induce the belief that Defendant’s business or products are in any way connected with Plaintiff’s business or products, or are sponsored or approved by Plaintiff. 2. Directing Defendant to: (a)
account for and pay over to Plaintiff all profits derived by Defendant from its acts complained of herein, together with prejudgment interest;
(b) pay to Plaintiff all the damages it has suffered as a result of the acts of Defendant complained of herein, including an assessment of trebled actual damages, together with prejudgment interest; (c)
pay to Plaintiff its attorneys’ fees and costs in this action; and
(d) file with this Court and serve on Plaintiff’s counsel, within _____ days after entry of an injunction issued by this Court, a sworn written statement as provided in 15 U.S.C. §1116. 3. Awarding Plaintiff such further relief as this Court deems just and equitable. By ____________________________________ Attorneys for ____________
8 — 50
WWW.IICLE.COM
ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW
§8.87
C. [8.87] Notice of Opposition IN THE UNITED STATES PATENT AND TRADEMARK OFFICE BEFORE TRADEMARK TRIAL AND APPEAL BOARD In the Matter of Application Serial No. ____________ Published in the Official Gazette of [publication date], Page ____, in International Class 9 ______________________,
) ) ) ) ) ) ) ) )
Opposer, v. _____________________, Applicant.
Oppn. No. _____________
NOTICE OF OPPOSITION Opposer, [opposer’s name], a Delaware corporation located and doing business at [opposer’s location], USA, believes it will be damaged by registration of the mark shown in Application Serial No. ____________, and opposes such registration. The grounds for the opposition are as follows: 1. Since at least as early as [date], and long before the Applicant’s activities complained of herein, Opposer has manufactured, distributed, advertised, and sold [opposer’s product], under the tradename and trademark [opposer’s mark]. 2. Opposer has registered the mark [opposer’s name] for [opposer’s product] in the United States Patent and Trademark Office, Reg. No. ____________. That registration has become incontestable in accordance with 15 U.S.C. §§1065 and 1115(b). 3. Opposer has sold $[amount sold] worth of [opposer’s product] under the name and mark [opposer’s mark] throughout the United States, and has spent $[amount spent] annually in advertising and promoting the name and mark throughout the United States. 4. By virtue of these extensive sales, advertising, and promotions, Opposer now owns a valuable goodwill symbolized by its [opposer’s product] name and mark. 5. By virtue of Opposer’s long use, extensive sales, advertising, and promotional efforts, the [opposer’s product] name and mark has become distinctive and famous. The [opposer’s product] name and mark achieved that fame and distinction long prior to Applicant’s activities complained of herein.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
8 — 51
§8.87
INTELLECTUAL PROPERTY LAW
6. On [filing date], Applicant filed an application to register the mark [applicant’s mark] for [applicant’s product] in Class 9. 7. Upon information and belief, neither Applicant nor any predecessor or related company of Applicant has any basis for claiming rights in [opposer’s product] prior to [filing date], the filing date of the opposed application. 8. Applicant’s proposed use of and application to register the mark [applicant’s mark] is without Opposer’s consent. Count I: Likelihood of Confusion 9. Opposer incorporates herein the allegations of paragraphs 1 through 8. 10. Applicant’s use of [applicant’s mark] is likely to result in confusion, mistake, or deception with Opposer’s [opposer’s product] name and mark, or in the belief that Applicant or its [applicant’s product] products and services are in some way legitimately connected with, licensed by, or approved by opposer. Count II: Dilution 11. Opposer incorporates herein the allegations of paragraphs 1 through 8. 12. Applicant’s use of [applicant’s mark] for such products and services will dilute the distinctiveness of Opposer’s famous [opposer’s mark] mark. WHEREFORE, registration by Applicant of [applicant’s mark] for the goods stated in Application Serial No. ____________ would be damaging to Opposer. Opposer submits the requisite filing fee of $[filing amount]. Please debit any deficiency or credit any overpayment to Deposit Account No. ____________. By ____________________________________ Attorneys for ____________
8 — 52
WWW.IICLE.COM
Part III: Copyrights
9
Copyright Subject Matter and Exclusive Rights
WILLIAM T. MCGRATH Davis McGrath LLC Chicago
®
©COPYRIGHT 2017 BY IICLE .
9—1
INTELLECTUAL PROPERTY LAW
I. The Concept of Copyright A. [9.1] Constitutional Basis B. [9.2] Copyright Act of 1976 C. [9.3] Historical Development II. Copyright Subject Matter A. [9.4] In General B. [9.5] Originality C. [9.6] Works of Authorship 1. [9.7] Literary Works 2. [9.8] Musical Works 3. [9.9] Dramatic Works 4. [9.10] Pantomimes and Choreographic Works 5. [9.11] Pictorial, Graphic, and Sculptural Works 6. [9.12] Motion Pictures and Other Audiovisual Works 7. [9.13] Sound Recordings 8. [9.14] Architectural Works D. [9.15] Fixation in Tangible Form E. [9.16] Compilations F. [9.17] Derivative Works G. [9.18] Distinction Between Copyright and Material Objects III. [9.19] Limitations on Copyright A. B. C. D. E. F.
[9.20] Ideas [9.21] Merger Doctrine [9.22] Factual and Historical Material [9.23] Scènes à Faire Doctrine [9.24] Works Lacking in Originality [9.25] Utilitarian Works 1. [9.26] Applied Art 2. [9.27] Computer Programs G. [9.28] Government Works
9—2
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
IV. Exclusive Rights Under Copyright A. [9.29] In General B. [9.30] Right To Reproduce Works in Copies and Phonorecords 1. [9.31] Reproduction in Copies 2. [9.32] Reproduction in Phonorecords C. [9.33] Preparation of Derivative Works D. [9.34] Public Distribution E. [9.35] Public Performance F. [9.36] Public Display G. [9.37] Digital Performance of Sound Recordings V. [9.38] Formalities A. [9.39] Publication B. [9.40] Copyright Notice C. [9.41] Registration VI. Duration, Renewal, and Termination of Transfers A. [9.42] Duration and Renewal 1. [9.43] Works Created on or After January 1, 1978 2. [9.44] Works Created but Not Published Before January 1, 1978 3. [9.45] Copyrights Subsisting on January 1, 1978 B. [9.46] Restoration of Copyright in Foreign Works C. [9.47] Termination of Transfers
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9—3
§9.1
INTELLECTUAL PROPERTY LAW
I. THE CONCEPT OF COPYRIGHT A. [9.1] Constitutional Basis “Copyright” is the statutory right of an author to control the reproduction, adaptation, distribution, performance, and display of a work of authorship. Interpreting and applying the copyright statute presents interesting and often difficult challenges. As Justice Story stated in an early copyright case involving alleged infringement of copyrighted letters of George Washington, “Patents and copyrights approach, nearer than any other class of cases . . . to what may be called the metaphysics of the law, where the distinctions are, or at least may be, very subtile and refined, and, sometimes, almost evanescent.” Folsom v. Marsh, 9 F.Cas. 342, 344 (Mass.Cir. 1841). Copyright is exclusively a federal statutory right, and all the rights, limitations, formalities, and remedies are contained in the Copyright Act of 1976, Pub.L. No. 94-553, §101, 90 Stat. 2541. The constitutional basis for the copyright law is found in Article I, §8, cl. 8, of the United States Constitution, which does not establish copyrights but rather provides that Congress shall have the power to grant these rights as it may see fit. The Copyright Clause gives Congress the power [t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries. Id. As reflected in this clause, the primary purpose of the copyright law is to foster the creation and dissemination of intellectual works. As the Supreme Court explained in Fogerty v. Fantasy, Inc., 510 U.S. 517, 127 L.Ed.2d 455, 114 S.Ct. 1023, 1030 (1994), “copyright law ultimately serves the purpose of enriching the general public through access to creative works.” There is also an important secondary purpose, i.e., to provide remuneration to authors. This creates an incentive for the creation of new works that in turn benefit the public. As the Court has noted: The economic philosophy behind the clause empowering Congress to grant patents and copyrights is the conviction that encouragement of individual effort by personal gain is the best way to advance public welfare through the talents of authors and inventors in “Science and useful Arts.” Sacrificial days devoted to such creative activities deserve rewards commensurate with the services rendered. Mazer v. Stein, 347 U.S. 201, 98 L.Ed. 630, 74 S.Ct. 460, 471 (1954), quoting U.S.CONST. art. 1, §8, cl. 8. B. [9.2] Copyright Act of 1976 The current U.S. copyright law is contained in the Copyright Act of 1976. Since its enactment, the Copyright Act of 1976 has been frequently amended, usually in an effort to respond to issues raised by new technology or to harmonize U.S. copyright laws with the Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886 (Berne Convention), www.wipo.int/treaties/en/text.jsp?file_id=283698, the most important multilateral international copyright treaty. The effective date of the Copyright Act of 1976 was January 1, 1978. The Act was the result of a major overhaul of the previous statute, the 1909 Copyright Act. The 1976 Act
9—4
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.3
made substantial changes to the prior law. The most important of these was the creation of a single federal system of protection for all original works of authorship, whether published or unpublished, from the moment they are fixed in a tangible medium of expression. Previously, federal statutory copyright extended to published works bearing a copyright notice. Unpublished works were protected by state law or common-law copyright. The 1976 Act essentially eliminated common-law copyright protection. State laws affecting copyright are expressly preempted in the 1976 Act. 17 U.S.C. §301. Another important change brought about by the 1976 Act affected the duration of copyright. The old law provided protection for 28 years from the year of first publication. The copyright could, upon compliance with certain formalities, be renewed for a second term of 28 years. The 1976 Act instituted for new works a single term of protection, generally based on the life of the author plus 50 years after the author’s death. With the enactment of the Sonny Bono Copyright Term Extension Act, Pub.L. No. 105-298, Title I, 112 Stat. 2827 (1998), Congress extended the duration to life of the author plus 70 years. 17 U.S.C. §302(a). The core of the Copyright Act consists of the first five chapters of Title 17 of the U.S. Code. Chapter 1 deals with the subject matter and scope of copyright. It identifies generally what is or is not copyrightable and sets forth the exclusive rights the copyright owner possesses. It also sets forth many limitations on those exclusive rights, including the fair use doctrine. Chapter 2 deals with ownership and transfer of copyright. Chapter 3 sets forth the provisions on the duration of copyright. Chapter 4 covers formalities such as notice, deposit, and registration. Chapter 5 deals mainly with remedies for infringement. A crucial part of the Copyright Act of 1976 is 17 U.S.C. §101, which contains the definitions. The Act is replete with defined terms, and it is imperative to consult §101 because the terms are precisely defined and the definitions often contain substantive information essential to a proper understanding and interpretation of the Act. Another important interpretive aid is the Act’s legislative history, which is thorough and illuminates difficult concepts with useful examples. The key legislative history is H.R.Rep. No. 1476, 94th Cong., 2d Sess. (1976), reprinted in 1976 U.S.C.C.A.N. 5659. C. [9.3] Historical Development U.S. law relating to protection of literary and artistic works is based on concepts originally developed in England. The first copyright law is often said to be the Statute of Anne, 8 Anne, ch. 19 (1710), which for the first time recognized the right of authors. It provided an exclusive right to an author to print a book for a period of 14 years, with a renewal period of 14 years. The first U.S. copyright law was enacted by Congress in 1790. It contained provisions similar to the Statute of Anne, granting protection to the author of any map, chart, or book for 14 years, with a renewal term of an additional 14 years. In the ensuing years, the law was amended to cover more subject matter and to grant more extensive rights to the author. Musical compositions were added in 1831, photographs in 1865, and paintings, drawings, and sculpture in 1870. Motion
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9—5
§9.4
INTELLECTUAL PROPERTY LAW
pictures were added in 1912 and sound recordings in 1972. Computer programs were first expressly recognized in the statute in 1980. Changes have continued to the present, most of which have expanded the scope of protection for a copyright owner.
II. COPYRIGHT SUBJECT MATTER A. [9.4] In General The Copyright Act of 1976 protects “original works of authorship” that are “fixed in any tangible medium of expression.” 17 U.S.C. §102(a). The elements of originality, works of authorship, and fixation are discussed separately in §§9.5 – 9.15 below. B. [9.5] Originality The notion of originality in the copyright context means only that the work was independently created by the author as opposed to copied from other works. A work need not be novel or unique to be original. It is original even if it is similar to other works, as long as the similarity is fortuitous and not the result of copying from another source. To be original, a work must also possess at least a minimal degree of creativity. In Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 113 L.Ed.2d 358, 111 S.Ct. 1282, 1287 (1991), the court discussed at length the copyright concept of originality and, quoting 1 Melville B. Nimmer and David Nimmer, NIMMER ON COPYRIGHT §1.08[C][1] (1990), explained that the requisite level of creativity is extremely low: “The vast majority of works make the grade quite easily, as they possess some creative spark, ‘no matter how crude, humble or obvious’ it might be.” The digital environment sometimes poses challenging issues in determining whether a work is original. See, e.g., Meshwerks, Inc. v. Toyota Motor Sales U.S.A., Inc., 528 F.3d 1258 (10th Cir. 2008), in which the court found that digitally created three-dimensional images of automobiles based on the precise measurements and dimensions of the vehicles were not original for purposes of copyright. The digital models were intended to depict the precise dimensions and shapes of actual vehicles based on raw data points rather than artistic decisions. Although time, effort, and skill went into making the digital models, the court looked to the final products, not the process, to determine if they were original. C. [9.6] Works of Authorship The Copyright Act of 1976 identifies eight broad categories of “works of authorship.” 17 U.S.C. §102(a). The legislative history of the Copyright Act of 1976 suggests that these categories are “illustrative and not limitative,” although one is hard pressed to think of a work of authorship that does not fit within one of the categories. H.R.Rep. No. 1476, 94th Cong., 2d Sess. 53 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5666. The categories are meant to be read broadly. For example, “literary works” include such works as computer programs, catalogs, and factual compilations. Of the eight categories, five are defined in 17 U.S.C. §101. The other three
9—6
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.10
categories, musical works, dramatic works, and pantomimes and choreographic works, are clear enough in themselves that no definition is necessary. Works sometimes fit into more than one category. A dramatic work will often be a literary work, or a work might be an audiovisual work as well as a dramatic work. Apart from illustrating the types of works protected by copyright, these categories serve another function in the Act. The expansion or contraction of the scope of copyright protection is sometimes affected by the category of the work. An exemption under the Act may apply to one type of work but not another. For example, under 17 U.S.C. §108(a), a library or archive has a right to reproduce a “literary work” under certain circumstances, but this right does not extend to a “musical work [or] a pictorial, graphic or sculptural work.” 17 U.S.C. §108(i). Similarly, the exclusive right of public performance applies to “musical works” (17 U.S.C. §106(4)) but not to “sound recordings” unless the public performance is “by means of a digital audio transmission” (17 U.S.C. §106(6)). 1. [9.7] Literary Works The term “literary work” is broadly defined to include “works . . . expressed in words, numbers, or other verbal or numerical symbols or indicia.” 17 U.S.C. §101. The term “literary work” does not connote or require any notion of literary merit. It encompasses not only serious works of literature but also such works as a high school diary, an Internet “blog,” an instruction manual for a Blu-ray player, or a catalog of automobile valuations. It also includes computer programs and databases. 2. [9.8] Musical Works The Copyright Act of 1976 provides that copyright protection is available for musical works that are fixed in a tangible medium, including any accompanying words. 17 U.S.C. §102(a)(2). A musical work need not be visibly perceptible, such as musical notes in a score, but can be in a tape, disk, or other type of recording. 3. [9.9] Dramatic Works Dramatic works are also copyrightable subject matter. 17 U.S.C. §102(a)(3). There is no statutory definition of “dramatic works,” but over the years, caselaw has provided a gloss on the term. A “dramatic work” is one that is not narrated or described, but rather presented by dialogue or action. Stage plays, motion pictures, operas, and many television programs would be considered dramatic works. A screenplay is a dramatic work. Most dramatic works would also constitute literary works, but not all literary works are dramatic works. For example, a poem that contains no dialogue or plot would be a literary work but not a dramatic work. 4. [9.10] Pantomimes and Choreographic Works The Copyright Act of 1976 identifies “pantomimes and choreographic works” as works of authorship. 17 U.S.C. §102(a)(4). These categories were first recognized as copyright subject matter in the 1976 Act. The terms are not defined and probably need no definition. Pantomime
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9—7
§9.11
INTELLECTUAL PROPERTY LAW
has yet to become a common subject of copyright litigation. Choreography is encountered somewhat more frequently and has occasionally been the subject of copyright cases. See, e.g., Horgan v. MacMillan, Inc., 789 F.2d 157 (2d Cir. 1986) (involving alleged infringement of Balanchine’s ballet The Nutcracker); Martha Graham School & Dance Foundation, Inc. v. Martha Graham Center of Contemporary Dance, Inc., 380 F.3d 624 (2d Cir. 2004) (involving ownership of copyright in entire collection of Martha Graham’s choreographic works). It is important to remember that for any pantomime or choreography to be protected by copyright, it must be fixed in a tangible medium. For these types of works, fixation would most commonly occur by capturing the work on film, videotape, or DVD. 5. [9.11] Pictorial, Graphic, and Sculptural Works The category of pictorial, graphic, and sculptural works is an important one as it encompasses most forms of the fine and visual arts. Difficult questions arise when artistic concepts are incorporated into utilitarian works or works of applied art. For example, when will a lamp, chair, or belt buckle be treated as a copyrightable sculptural work rather than as a lamp, chair, or belt buckle? The issue of copyright protection for the design of useful articles is discussed in more detail in §§9.25 – 9.27 below. At this point, it is sufficient to note that the definition of “[p]ictorial, graphic, and sculptural works” in the Copyright Act of 1976 states that, with respect to works or artistic craftsmanship, copyright protects “their form but not their mechanical or utilitarian aspects.” 17 U.S.C. §101. The definition further explains that the design of a “useful article” (also a defined term in §101) will be considered a pictorial, graphic, or sculptural work “only if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article.” Id. The term “pictorial, graphic, and sculptural works” is broadly defined to include all types of fine, graphic, and applied art, such as photographs, prints and drawings, paintings, and sculpture. It even includes maps and globes, although interesting issues arise as to the scope of protection for maps since they are usually factual representations. Compare Kern River Gas Transmission Co. v. Coastal Corp., 899 F.2d 1458 (5th Cir. 1990) (map of proposed gas pipeline was unprotectable because expression merged with unprotectable idea), with Mason v. Montgomery Data, Inc., 967 F.2d 135 (5th Cir. 1992) (map was copyrightable based on original selection, coordination, and arrangement of material and did not merge with idea). The definition also covers technical drawings and architectural plans. There is no implied criterion of artistic quality or taste, but the work must contain some minimal degree of creativity. Thus, even bad art is protected by copyright. 6. [9.12] Motion Pictures and Other Audiovisual Works It should be noted that “motion pictures” and “audiovisual works” are not the same thing in the Copyright Act of 1976. The term “audiovisual works” is broader, as it includes motion pictures and other types of works as well. “Audiovisual works” are defined in 17 U.S.C. §101 as “works that consist of a series of related images which are intrinsically intended to be shown by the use of machines or devices such as projectors, viewers, or electronic equipment, together with accompanying sounds, if any.” A “motion picture” is an audiovisual work that imparts “an
9—8
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.15
impression of motion.” Id. It does not matter how the motion picture is embodied — it could be embodied in film, on videotape or DVD, or even in a computer program. 7. [9.13] Sound Recordings A “sound recording” is distinguished from a “musical work” because it is a different type of work of authorship. See 17 U.S.C. §§102(a)(2), 102(a)(7). “Sound recordings,” as defined in the Copyright Act of 1976, are “works that result from the fixation of series of musical, spoken, or other sounds.” 17 U.S.C. §101. This definition specifically excludes, however, sounds accompanying a motion picture or other audiovisual work and makes clear that a sound recording is not limited to the fixation of musical sounds. Id. A book on tape or a recording of the sounds of nature would come within the definition of “sound recording.” It is also important to distinguish sound recordings from phonorecords. A sound recording is a type of work of authorship, but “phonorecords,” as defined in 17 U.S.C. §101, are not works of authorship at all. They are the tangible material objects on which sounds are fixed. Sound recordings (works of authorship) are embodied in phonorecords (material objects). There are different types of phonorecords, such as vinyl records, audiotapes, or CDs. 8. [9.14] Architectural Works Architectural works were not made part of the Copyright Act until 1990. Prior to that time, copyright protection was available for architectural drawings but generally not for the design of a building itself. In 1990, Congress enacted the Architectural Works Copyright Protection Act, Pub.L. No. 101-650, Title VII, 104 Stat. 5133 (1990), which added “architectural works” as a category of works of authorship. 17 U.S.C. §102(a)(8). An “architectural work” is defined in 17 U.S.C. §101 as “the design of a building as embodied in any tangible medium of expression, including a building, architectural plans, or drawings.” This definition further explains that the work includes the overall form of the building, as well as the arrangement and composition of spaces in the design. It does not include individual standard features (e.g., a Doric column or a standard window treatment). The legislative history makes clear that to be protected the work must be a habitable structure. H.R.Rep. No. 735, 101st Cong., 2d Sess. 18 – 21 (1990), reprinted in 1990 U.S.C.C.A.N. 6935, 6949 – 6952. Thus, a house, church, or gazebo might be an architectural work, but a bridge or cloverleaf on a highway would not. Copyright protection is available only for works constructed on or after December 1, 1990. Copyright in an architectural work does not include the right to prevent the making of pictures or photographs of the work if the building is located in or visible from a public place. 17 U.S.C. §120(a). D. [9.15] Fixation in Tangible Form Copyright protects an original work of authorship only if it is “fixed in [a] tangible medium of expression.” 17 U.S.C. §102(a). Thus, fixation is a prerequisite to copyright protection. An extemporaneous speech, an improvisational comedy performance, a live performance of music, or a live news broadcast would not be protected by copyright if not simultaneously recorded.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9—9
§9.16
INTELLECTUAL PROPERTY LAW
It does not matter what form or medium a work of authorship is fixed on; it can be on paper, magnetic tape, a computer chip, a compact disc, film, videotape, or any other medium. All that is necessary is that it can be “perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” Id. If an author records a literary work on audiotape, it is fixed because, though it cannot be directly perceived (as a printed book can be perceived), it can be perceived or communicated with the aid of a machine or device (i.e., a tape player). For a work to be fixed, there must be at least some degree of permanence. As defined in 17 U.S.C. §101, a work is “fixed” if it is “sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.” Digital copies or phonorecords stored on a computer are generally considered to be fixed. London-Sire Records, Inc. v. Doe 1, 542 F.Supp.2d 153 (D.Mass. 2008); MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). However, when data is only fleetingly captured, it does not meet the requirement of being fixed for “more than transitory duration.” Cartoon Network LP v. CSC Holdings, Inc., 536 F.3d 121, 127 – 130 (2d Cir. 2008) (no fixation when no bit of data remained in computer buffer for more than 1.2 seconds). A work may be fixed only “by or under the authority of the author.” 17 U.S.C. §101. Thus, a bootleg tape of a live musical performance that is recorded without the permission of the author would not constitute a fixation of the musical performance. E. [9.16] Compilations A work of authorship can be in the form of a compilation. A “compilation” is defined as “a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship.” 17 U.S.C. §101. To be copyrightable, it is essential that the selection, coordination, or arrangement of the materials or data result in an original work. While facts or raw data are not copyrightable, an original selection or arrangement of facts, i.e., one that has at least a minimal degree of creativity and is not simply copied from another source, would be copyrightable. The leading case dealing with compilations is Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 113 L.Ed.2d 358, 111 S.Ct. 1282 (1991), in which the Supreme Court addressed the question of when a compilation of facts has sufficient originality in its selection and arrangement to be copyrightable. Feist involved a claim of copyright in a white pages telephone directory consisting only of names, addresses, and phone numbers listed in alphabetical order. The Court recognized that even a directory that contains only facts can be protected by copyright if it features an original selection or arrangement of these facts, but the selection and arrangement cannot be so mechanical or routine as to require no creativity whatsoever. The Feist Court noted: “The standard of originality is low, but it does exist.” 111 S.Ct. at 1296.
9 — 10
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.17
The Court held that the selection, coordination, and arrangement of the white pages telephone directory did not satisfy the minimum standards for originality. There was no creativity in simply arranging names alphabetically, and neither was there originality in the selection of name, address, and phone number, which lacked even a modicum of creativity: “The end product is a garden-variety white pages directory, devoid of even the slightest trace of creativity.” Id. Another case illustrating insufficient originality to qualify as a copyrightable compilation is Matthew Bender & Co. v. West Publishing Co., 158 F.3d 674, 692 (2d Cir. 1998), in which West claimed copyright in certain “editorial enhancements” it made to otherwise uncopyrightable court opinions. The Matthew Bender court found that adding various editorial features, such as the name of the court, attorney information, and parallel citations, did not constitute sufficient originality to make the cases copyrightable compilations of fact: “In light of accepted legal conventions and other external constraining factors, West’s choices on selection and arrangement can reasonably be viewed as obvious, typical, and lacking even minimal creativity.” 158 F.3d at 677. See also Bikram’s Yoga College of India, L.P. v. Evolation Yoga, LLC, 803 F.3d 1032 (9th Cir. 2015), in which the court held that a sequence of 26 yoga poses was not copyrightable as a compilation because it was merely a process or system amounting to an unprotectable idea. In contrast, the court in CCC Information Services, Inc. v. Maclean Hunter Market Reports, Inc., 44 F.3d 61 (2d Cir. 1994), found that a compendium of used car valuations had sufficient originality to be copyrightable. Other cases meeting the low threshold of originality are Kregos v. Associated Press, 937 F.2d 700 (2d Cir. 1991) (baseball pitching form containing nine categories of statistics about competing pitchers was copyrightable), and Key Publications, Inc. v. Chinatown Today Publishing Enterprises, Inc., 945 F.2d 509 (2d Cir. 1991) (yellow pages directory for Chinese-American community in New York was copyrightable). But see BellSouth Advertising & Publishing Corp. v. Donnelly Information Publishing, Inc., 999 F.2d 1436 (11th Cir. 1993) (yellow pages directory for Miami area was not copyrightable). Compilations do not enjoy the broad scope of protection that many other types of works do. The Feist Court noted repeatedly that copyright in a factual compilation is limited or thin. Copyright is limited only to the particular selection or arrangement of the facts, not to the individual facts themselves, and “a subsequent compiler remains free to use the facts contained in another’s publication to aid in preparing a competing work, so long as the competing work does not feature the same selection and arrangement.” 111 S.Ct. at 1289. 17 U.S.C. §103(b) addresses the scope of protection for compilations, providing that copyright in a compilation extends only to “the material contributed by the author of such work, as distinguished from the preexisting material employed in the work, and does not imply any exclusive right in the preexisting material.” F. [9.17] Derivative Works The Copyright Act of 1976 also protects a “derivative work,” which is defined as “a work based upon one or more preexisting works.” 17 U.S.C. §101. Derivative works include such works as translations, musical arrangements, motion picture adaptations of literary works, abridged works, and “any other form in which a work may be recast, transformed, or adapted.”
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 11
§9.17
INTELLECTUAL PROPERTY LAW
Id. The right to make a derivative work based on a copyrighted work is one of the exclusive rights of a copyright holder. 17 U.S.C. §106(2). Only the copyright owner of a work has the right to make or authorize another to make a derivative of a work protected by copyright. Of course, anyone has the right to make a derivative of a work in the public domain. For example, if an author translated a Shakespeare play into Russian, the translator would hold a copyright in the Russian translation but not in the underlying work by Shakespeare. If Danielle Steel allowed a motion picture adaptation of her latest tempestuous novel, the moviemaker would own a copyright in the film version of the work. If Reader’s Digest, with the permission of the author, prepared a condensed version of a novel, it has created a derivative work. It is important to understand that the copyright in the derivative work extends only to those elements that are original to the derivative author. The Russian translator of Shakespeare does not obtain copyright over Shakespeare’s version, only the specific Russian translation. 17 U.S.C. §103(b) states that the copyright in a derivative work “extends only to the material contributed by the author of such work, as distinguished from the preexisting material employed in the work, and does not imply any exclusive right in the preexisting material.” Section 103(b) also explains that the copyright in the derivative work is independent of any copyright in the preexisting material. If the underlying work is copyrighted, the copyright in the derivative work will neither extend nor nullify the copyright in the underlying work. If the underlying work is in the public domain, copyright in the derivative work will not render the underlying work protectable. Similarly, the copyright owner of the underlying work does not obtain any ownership interest in the copyright for the derivative work, and neither does the creator of the derivative work obtain any copyright ownership in the underlying work. Lawful use of the underlying work is a precondition to copyright in the derivative work. 17 U.S.C. §103(a). For a derivative work to be copyrightable, the changes made to the underlying work must be original. As noted in §9.5 above, the threshold for determining if a work is sufficiently creative to be original is quite low. Courts have not been uniform in applying the concept of originality to determine copyrightability of derivative works. For example, in Alfred Bell & Co. v. Catalda Fine Arts, Inc., 191 F.2d 99, 103 (2d Cir. 1951), the court, quoting Chamberlin v. Uris Sales Corp., 150 F.2d 512, 513 (2d Cir. 1945), found that the plaintiff’s engravings of public domain paintings were sufficiently original to warrant copyright protection, stating that a copy of something in the public domain will support a copyright if the author “contributed something more than a ‘merely trivial’ variation, something recognizably ‘his own.’ ” The Alfred Bell court further added: “Originality in this context ‘means little more than a prohibition of actual copying.’ ” Alfred Bell, supra, quoting Hoague-Sprague Corp. v. Frank C. Meyer Co., 31 F.2d 583, 586 (E.D.N.Y. 1929). In contrast, in L. Batlin & Son, Inc. v. Snyder, 536 F.2d 486 (2d Cir. 1976), the court found that modest changes to a public domain Uncle Sam bank were insufficient to earn copyright. The court stated that for an art reproduction to achieve copyright status, the work must contain “some substantial, not merely trivial originality.” 536 F.2d at 490, quoting Chamberlin, supra, 150 F.2d at 513. The Batlin court, while noting that some physical skill may have been required to make the bank reproductions, held: “A considerably higher degree of skill is required, true artistic skill, to make the reproduction copyrightable.” [Emphasis in original.]. 536 F.2d at 491.
9 — 12
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.20
The Seventh Circuit has clarified these disparate views as to the necessary level of originality for a derivative work to be copyrightable, finding that derivative works do not require a higher level of originality than other works. In Schrock v. Learning Curve International, Inc., 586 F.3d 513, 521 (7th Cir. 2009), the court held that the quantum of originality required for copyright in a derivative work is no more demanding than that required for copyright in any other work: “[T]he key inquiry is whether there is sufficient nontrivial expressive variation in the derivative work to make it distinguishable from the underlying work in some meaningful way.” G. [9.18] Distinction Between Copyright and Material Objects A copyright is an intangible right to prevent others from copying a work without permission. This intangible right must be distinguished from the right one may have to possession of the tangible copy of a copyrighted work. 17 U.S.C. §202 sets forth this dichotomy, providing that “[o]wnership of a copyright . . . is distinct from ownership of any material object in which the work is embodied. Transfer of ownership of any material object . . . does not of itself convey any rights in the copyrighted work embodied in the object.” Thus, the recipient of a series of letters from a famous author owns the tangible, material object embodying these literary works, but the recipient does not own copyright in the letters. Absent an agreement to the contrary, the author would own the copyright in the literary works embodied in the letters. See Forward v. Thorogood, 985 F.2d 604 (1st Cir. 1993) (possession and ownership of master recording tapes did not give plaintiff copyright interest in music embodied on tapes).
III. [9.19]
LIMITATIONS ON COPYRIGHT
It is equally important to understand what copyright does not protect as to understand what it does protect. There are many works or parts of works that are considered by the law to be unprotectable and part of the public domain. A. [9.20] Ideas It is a fundamental principle of copyright law that its protection extends only to the particularized expression of an idea, never to the idea itself. The same can be said for other manifestations of ideas, such as systems, processes, or methods of operation. To allow protection over ideas would stultify rather than encourage the dissemination of knowledge and would undermine the central purpose of copyright. This cornerstone principle was recognized long ago by the Supreme Court in Baker v. Selden, 101 U.S. 99, 101, 25 L.Ed. 841 (1879), in which the Court refused to extend copyright protection to a “system or method of book-keeping” described in a copyrighted book on the subject. While the copyright protected the author’s description of the bookkeeping system, it did not give the author exclusive rights over the system itself. This principle is codified in the Copyright Act of 1976, which states: “In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery.” 17 U.S.C. §102(b).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 13
§9.21
INTELLECTUAL PROPERTY LAW
Distinguishing between unprotectable ideas and protectable expression is one of the most difficult issues a court faces in copyright cases. In a well-known passage, Judge Learned Hand grappled with the issue by looking at it as a kind of continuum referred to as the “abstractions test.” In Nichols v. Universal Pictures Corp., 45 F.2d 119 (2d Cir. 1930), the plaintiff claimed that the defendant’s motion picture had copied the plaintiff’s stage play. Judge Hand stated: Upon any work, and especially upon a play, a great number of patterns of increasing generality will fit equally well, as more and more of the incident is left out. The last may perhaps be no more than the most general statement of what the play is about, and at times might consist only of its title; but there is a point in this series of abstractions where they are no longer protected, since otherwise the playwright could prevent the use of his “ideas,” to which, apart from their expression, his property is never extended. . . . Nobody has ever been able to fix that boundary, and nobody ever can. [Citations omitted.] 45 F.2d at 121. Like ideas, “systems” and “methods of operation” are not protected by copyright. See Southco, Inc. v. Kanebridge Corp., 390 F.3d 276, 282 (3d Cir 2004) (Alito, J.) (parts numbers that were dictated by rigid rules of manufacturer’s numbering system could not be protected by copyright); Lotus Development Corp. v. Borland International, Inc., 49 F.3d 807, 815 (1st Cir. 1995) (menu command hierarchy for computer program was uncopyrightable “method of operation”); Bikram’s Yoga College of India, L.P. v. Evolation Yoga, LLC, 803 F.3d 1032 (9th Cir. 2015) (sequence of yoga poses was unprotectable process). It is the job of the court, however, to “ferret out apparent expressive aspects of a work” and then separate protectable expression from unprotectable ideas, processes, and method of operation. Oracle America, Inc. v. Google Inc., 750 F.3d 1339, 1357 (Fed.Cir. 2014) (finding Oracle’s computer program had sufficient expression to warrant copyright protection). “Section 102(b) does not extinguish the protection accorded a particular expression of an idea merely because that expression is embodied in a method of operation.” Mitel, Inc. v. Iqtel, Inc., 124 F.3d 1366, 1372 (10th Cir. 1997). B. [9.21] Merger Doctrine A corollary of the rule that ideas are not protectable is the merger doctrine. There are sometimes situations in which even expression will not be protected because the expression is said to “merge” with the idea. When there is only one or a few ways to express an idea, courts will withhold copyright protection from the expression because to allow protection to the expression would be tantamount to extending copyright protection to the idea itself. For example, in Herbert Rosenthal Jewelry Corp. v. Kalpakian, 446 F.2d 738 (9th Cir. 1971), the plaintiff charged the defendants with infringement of its jewelry, that is, a pin in the shape of a bee encrusted with jewels. The court noted that a jeweled bee pin was an idea that the defendants were free to copy. The plaintiff agreed but claimed that its expression had been copied. The difficulty, said the court, was that in this case “the ‘idea’ and its ‘expression’ appear to be indistinguishable.” 446 F.2d at 742. The court explained that [w]hen the ‘idea’ and its ‘expression’ are thus inseparable, copying the ‘expression’ will not be barred, since protecting the ‘expression’ in such circumstances would confer a monopoly of the ‘idea’ upon the copyright owner free of the conditions and limitations imposed by the patent law. Id.
9 — 14
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.23
See also Seng-Tiong Ho v. Taflove, 648 F.3d 489 (7th Cir. 2011) (equations, figures, and text used to express atomic model were not protectable due to merger doctrine); Morrissey v. Procter & Gamble Co., 379 F.2d 675 (1st Cir. 1967) (set of simple rules for sweepstakes promotional contest was unprotectable under merger doctrine); New York Mercantile Exchange, Inc. v. IntercontinentalExchange, Inc., 497 F.3d 109 (2d Cir. 2007) (commodity futures exchange settlement prices produced to value customers’ open positions held not protected due to merger doctrine). C. [9.22] Factual and Historical Material Like ideas, facts are not copyrightable. The reason for this is they are not original to the author. As the Supreme Court noted in Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 113 L.Ed.2d 358, 111 S.Ct. 1282, 1287 (1991), “[t]he sine qua non of copyright is originality.” Since no author can claim originality as to facts, there can be no copyright in facts. “This is because facts do not owe their origin to an act of authorship. The distinction is one between creation and discovery: The first person to find and report a particular fact has not created the fact; he or she has merely discovered its existence.” 111 S.Ct. at 1288. This is true of all types of facts, whether scientific, historical, biographical, or topical. Facts are part of the public domain and must remain available to everyone. As discussed in §9.16 above, while facts are not copyrightable, a compilation of facts is copyrightable if it is original in its selection, arrangement, or coordination of the facts. However, copyright in a compilation of facts does not protect the individual facts contained in the compilation. They remain available for use by anyone: “Notwithstanding a valid copyright, a subsequent compiler remains free to use the facts contained in another’s publication to aid in preparing a competing work.” 111 S.Ct. at 1289. Accordingly, copyright in a historical work extends only to the author’s particular expression and not to the historical facts or theories. In Nash v. CBS, Inc., 899 F.2d 1537 (7th Cir. 1990), the defendant was held not to have infringed the plaintiff’s copyright when it used as a plot for a television show the theory proposed in the plaintiff’s book that gangster John Dillinger did not die at the Biograph Theater in 1934 but rather escaped the trap and lived on the West Coast in secrecy until 1979. Whether or not it was true, the author in Nash presented the theory as fact, not fiction, so it could not be protected. As the court stated, “the first person to conclude that Dillinger survived does not get dibs on history.” 899 F.2d at 1541. See also Hoehling v. Universal City Studios, Inc., 618 F.2d 972 (2d Cir. 1980) (theory that dirigible Hindenburg was destroyed by planted bomb was not copyrightable); Miller v. Universal City Studios, Inc., 650 F.2d 1365 (5th Cir. 1981) (facts about notorious kidnapping were not protected by copyright); Effie Film, LLC v. Pomerance, 909 F.Supp.2d 273 (S.D.N.Y. 2012) (screenplay involving three historical persons from Victorian art world did not infringe other screenplays about same persons). D. [9.23] Scènes à Faire Doctrine One of the limitations on copyright is the “scènes à faire” doctrine. This doctrine refers to commonplace or stock treatments that might appear in a work. Scènes à faire are “ ‘incidents, characters or settings which are as a practical matter indispensable, or at least standard, in the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 15
§9.24
INTELLECTUAL PROPERTY LAW
treatment of a given topic.’ These devices are not protectible by copyright.” Incredible Technologies, Inc. v. Virtual Technologies, Inc., 400 F.3d 1007, 1012 (7th Cir. 2005), quoting Atari, Inc. v. North American Philips Consumer Electronics Corp., 672 F.2d 607, 616 (7th Cir. 1982). In Incredible Technologies, a case involving alleged infringement of a video arcade golf game, the court found that certain common elements of the plaintiff’s and the defendant’s video games were unprotectable as scènes à faire. Features such as club selection, wind meters, measurement of distance, sand traps, and water hazards are an inherent part of golf and were protected only from “virtually identical copying.” 400 F.3d at 1015. In Gaiman v. McFarlane, 360 F.3d 644, 659 (7th Cir. 2004), quoting Bucklew v. Hawkins, Ash, Baptie & Co., 329 F.3d 923, 929 (7th Cir. 2003), the court explained that the scènes à faire doctrine teaches that “a copyright owner can’t prove infringement by pointing to features of his work that are found in the defendant’s work as well but that are so rudimentary, commonplace, standard, or unavoidable that they do not serve to distinguish one work within a class of works from another.” The Gaiman court noted that “[a] stock character is a stock example of the operation of the doctrine,” but found the characters at issue in the case to be sufficiently delineated and distinctive to avoid application of the doctrine. 360 F.3d at 659. See also Incredible Technologies, supra (certain golf-related images were indispensable to accurate representation of game of golf in competitor’s video arcade golf game and thus were unprotectable scènes à faire). E. [9.24] Works Lacking in Originality As the Supreme Court noted in Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 113 L.Ed.2d 358, 111 S.Ct. 1282 (1991), the level of originality required for a work to be copyrightable is not high, and the vast majority of works make the grade quite easily. However, there are some types of works that do not meet even this low threshold. Magic Marketing, Inc. v. Mailing Services of Pittsburgh, Inc., 634 F.Supp. 769, 771 (W.D.Pa. 1986) (“There is a narrow class of cases where even admittedly independent efforts may be deemed too trivial or insignificant to support copyright protection.”). The U.S. Copyright Office regulations provide examples of works not subject to copyright: (a) Words and short phrases such as names, titles, and slogans; familiar symbols or designs; mere variations of typographic ornamentation, lettering or coloring; mere listing of ingredients or contents; *** (c) Blank forms, such as time cards, graph paper, account books, diaries, bank checks, scorecards, address books, report forms, order forms and the like, which are designed for recording information and do not in themselves convey information;
9 — 16
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.26
(d) Works consisting entirely of information that is common property containing no original authorship, such as, for example: Standard calendars, height and weight charts, tape measures and rulers, schedules of sporting events, and lists or tables taken from public documents or other common sources. 37 C.F.R. §202.1. See Meshwerks, Inc. v. Toyota Motor Sales U.S.A., Inc., 528 F.3d 1258 (10th Cir. 2008) (digital wire frame depictions of automobiles without any individualizing features lacked originality; digital models were intended to precisely depict dimensions and shape of actual vehicles based on raw data points and did not reflect artistic decisions); Murray Hill Publications, Inc. v. ABC Communications, Inc., 264 F.3d 622, 632 (6th Cir. 2001) (plaintiff’s radio show tagline phrase was not protectable by copyright); Southco, Inc. v. Kanebridge Corp., 390 F.3d 276, 282 (3d Cir 2004) (Alito, J.) (parts numbers are analogous to short phrases and thus excluded from copyright protection). Similarly, typeface designs or fonts as such are not copyrightable, although the computer software that generates the typeface is copyrightable. Adobe Systems Inc. v. Southern Software, Inc., 45 U.S.P.Q.2d (BNA) 1827, 1998 WL 104303 (N.D.Cal. 1998). F. [9.25] Utilitarian Works Utility and copyright create an uneasy combination. The mere fact that a work is utilitarian does not deprive it of copyright. A dictionary or a do-it-yourself plumbing handbook is utilitarian but nevertheless copyrightable. However, as noted in the Copyright Act of 1976, processes, systems, and methods of operation are not copyrightable. 17 U.S.C. §102(b). The problems of copyright for functional works are seen most commonly in two areas: applied art (when artistic elements are incorporated into a useful article) and computer programs. 1. [9.26] Applied Art Until 1954, it was assumed that the only statutory protection for the designs of utilitarian articles was the limited protection available under design patent law. Congress for many years had declined to enact separate legislation protecting industrial designs. A major change occurred in 1954 when the Supreme Court decided Mazer v. Stein, 347 U.S. 201, 98 L.Ed. 630, 74 S.Ct. 460 (1954), in which the Court upheld the copyrightability of works of art incorporated into the designs of useful articles, finding that a lamp whose base consisted of a sculpture of a Balinese dancer was copyrightable. The Court concluded that original works of art do not cease to be copyrightable merely by being incorporated into a useful article. While Mazer itself is unexceptional, it has spawned some of the most complex caselaw in copyright history. The holding of the Court in Mazer was later incorporated into the Copyright Act of 1976. 17 U.S.C. §113(a) states that, with certain exceptions, “the exclusive right to reproduce a copyrighted pictorial, graphic, or sculptural work . . . includes the right to reproduce the work in or on any kind of article, whether useful or otherwise.”
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 17
§9.26
INTELLECTUAL PROPERTY LAW
After Mazer, copyrightability of everyday items came into issue. Could a belt buckle design be copyrighted? Could a chair, a mannequin, a bicycle rack, or a light fixture be copyrighted? Can copyright protection be afforded to the artistic aspects of these items without creating patentlike protection for their utilitarian aspects? Courts have not been uniform in answering these questions. Two definitions in the Copyright Act are central to the inquiry. First is the description of “[p]ictorial, graphic, and sculptural works,” which are defined to include two-dimensional and three-dimensional works of fine, graphic, and applied art. . . . Such works shall include works of artistic craftsmanship insofar as their form but not their mechanical or utilitarian aspects are concerned; the design of a useful article, as defined in this section, shall be considered a pictorial, graphic, or sculptural work only if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article. 17 U.S.C. §101. A “useful article” is defined as “an article having an intrinsic utilitarian function that is not merely to portray the appearance of the article or to convey information.” Id. These definitions give rise to a two-step inquiry in determining whether works of this type are copyrightable. The first question is “Is the work a useful article under the definition?” If not, then there are no limitations on its copyrightability as a pictorial, graphic, or sculptural work, as long as it is original. If it is a useful article, then the question becomes “Can the artistic features be identified separately from and exist independently of the utilitarian aspects of the article?” This is the part of the analysis that has caused courts much difficulty since they have been unable to articulate a coherent and consistently applied test. See Pivot Point International, Inc. v. Charlene Products, Inc., 372 F.3d 913 (7th Cir. 2004) (summarizing efforts of leading cases to develop meaningful approach to issue of separating artistic aspects from utilitarian aspects of work). The purpose of the statutory language was “to draw as clear a line as possible between copyrightable works of applied art and uncopyrighted works of industrial design.” H.R.Rep. No. 1476, 94th Cong., 2d Sess. 55 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5668. On the one hand, a work of art remains copyrightable even if incorporated into a useful article. On the other hand, an industrial design, no matter how aesthetically pleasing, is not protected by copyright. Most courts and commentators agree that copyright protection applies not only to works in which the artistic features are “physically” separable (e.g., the statuette lamp base in Mazer, supra) but also for works in which the artistic features are “conceptually” separable. Pivot Point, supra, 372 F.3d at 922 – 923. For examples of cases in which courts have grappled with the metaphysical exercise of determining whether artistic features were “conceptually separable” from utilitarian aspects of an item, see Home Legend, LLC v. Mannington Mills, Inc., 784 F.3d 1404 (11th Cir. 2015) (rustic natural wood look for laminate flooring was conceptually separable from utilitarian aspect of product), Kieselstein-Cord v. Accessories by Pearl, Inc., 632 F.2d 989 (2d Cir. 1980) (belt buckle design was copyrightable), Carol Barnhart Inc. v. Economy Cover
9 — 18
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.27
Corp., 773 F.2d 411 (2d Cir. 1985) (mannequins consisting of human torsos for displaying shirts were not copyrightable), Brandir International, Inc. v. Cascade Pacific Lumber Co., 834 F.2d 1142 (2d Cir. 1987) (bicycle rack was not copyrightable), and Pivot Point, supra (mannequin head sculpted to imitate hungry look of high-fashion runway models was copyrightable). The difficulty of articulating a proper test to determine whether the artistic features of a useful article are conceptually separable from the utilitarian aspects of the article is seen in Varsity Brands, Inc. v. Star Athletica, LLC, 799 F.3d 468 (6th Cir. 2015), in which the court identified nine different approaches to conceptual separability applied by different courts and the Copyright Office, and then added its own approach in deciding that various stripes, chevrons, zigzags, and color blocks in cheerleading uniforms were conceptually separable from the uniforms themselves. Perhaps intending to clarify this potpourri of approaches, the Supreme Court has granted certiorari in the case. Star Athletica, LLC v. Varsity Brands, Inc., ___ U.S. ___, 194 L.Ed.2d 829, 136 S.Ct. 1823 (2016). 2. [9.27] Computer Programs At the time it was enacted, the Copyright Act of 1976 did not specifically address the questions of copyright protection for computer programs. The legislative history suggested that programs were protected by copyright, but the statute itself was silent. H.R.Rep. No. 1476, 94th Cong., 2d Sess. 54 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5667 (“ ‘literary works’ . . . includes computer data bases, and computer programs”). The National Commission on New Technological Uses of Copyrighted Works (CONTU) had been established by Congress in 1974 to study computers and copyright, but it had not completed its work at the time the Act was ready to be enacted. In 1978, CONTU issued its final report to Congress, concluding that computer programs were and should continue to be within the subject matter of copyright. CONTU recommended only two changes to the Copyright Act of 1976 to address the issue of computer programs. One recommendation was to add to 17 U.S.C. §101 a definition of “computer program” as “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.” Final Report of the National Commission on New Technological Uses of Copyrighted Works, Ch. 3, p. 12 (July 31, 1978), http://digital-lawonline.info/CONTU. The other recommendation was to revise the Act to clarify that computer users were entitled to make copies or adaptations of programs in limited ways essential to the utilization of the program. Id. See 17 U.S.C. §§117(a), 117(b). CONTU’s recommendations were enacted by Congress in 1980. See Pub.L. No. 96-517, §10(b), 94 Stat. 3015, 3028 (1980). Despite these amendments, courts in the early 1980s were still faced with uncertainty as to the scope of copyright protection for computer-related works. Most courts recognized, however, that computer programs in any form, whether in source code or object code, whether as read-only memory (ROM) or as an operating system, were the proper subject of copyright and literal copying constituted infringement. See, e.g., Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240 (3d Cir. 1983). In later cases, courts have struggled with the problem of distinguishing unprotectable ideas or processes of a program from protectable expression. Compare Whelan Associates, Inc. v. Jaslow Dental Laboratory, Inc., 797 F.2d 1222 (3d Cir. 1986), with Computer Associates International, Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 19
§9.28
INTELLECTUAL PROPERTY LAW
The courts have also addressed the scope of protection when there has been nonliteral copying of a program. The court’s opinion in Whelan, supra, typifies a broader scope of protection, affording protection not only against literal copying of the computer code but also copying of the “structure, sequence, and organization” of the program. 797 F.2d at 1248. Computer Associates is illustrative of a narrow scope of protection for programs as the court applied the “abstractionfiltration-comparison” test in which the works are compared for similarities only after ideas and other unprotectable elements of the work are filtered out of the analysis. 982 F.2d at 706 – 712. An important case addressing issues of protectability and infringement of computer code is Oracle America, Inc. v. Google Inc., 750 F3d 1339, 1347 (Fed.Cir. 2014). Oracle claimed copyright in certain “application programming interfaces” (API packages) and alleged that Google’s Android mobile operating system infringed these copyrights. The district court found that the elements of computer code replicated by Google were not entitled to copyright protection. The court of appeals reversed, holding that the literal code and the structure, sequence, and organization of the code were protectable. The court also found that the structure, sequence, and organization of the API packages was not a “method of operation” and was entitled to protection. 750 F3d at 1359. This case reflects a move back to a recognition of broader protection for computer programs and a departure from a narrower scope of protection that had been seen in Computer Associates, supra. G. [9.28] Government Works The Copyright Act of 1976 expressly provides that copyright protection is not available for “any work of the United States Government” (17 U.S.C. §105), which is defined in §101 as “a work prepared by an officer or employee of the United States Government as part of that person’s official duties.” Thus, federal government works such as The Warren Report or The 9/11 Commission Report are in the public domain and may be freely copied by anyone. Federal statutes and court opinions likewise are not protected by copyright. Section 105 addresses only works by the U.S. government and does not speak to works generated by state governments. It has long been held that state judicial opinions are not copyrightable. Banks v. Manchester, 128 U.S. 244, 32 L.Ed. 425, 9 S.Ct. 36 (1888). More recently, the Fifth Circuit has held that even a model building code drafted by a nongovernmental entity became unprotectable once it was enacted into law. Veeck v. Southern Building Code Congress International, Inc., 293 F.3d 791, 802 (5th Cir. 2002) (“We emphasize that in continuing to write and publish model building codes, [the defendant] is creating copyrightable works of authorship. When those codes are enacted into law, however, they become to that extent ‘the law’ of the governmental entities and may be reproduced or distributed as ‘the law’ of those jurisdictions.”). However, the mere fact that a state law refers to a copyrighted work or requires citizens to consult or use a copyrighted work does not cause the work to become public domain. CCC Information Services, Inc. v. Maclean Hunter Market Reports, Inc., 44 F.3d 61 (2d Cir. 1994) (state law requiring use of Red Book auto values did not cause Red Book to enter public domain); Practice Management Information Corp. v. American Medical Ass’n, 121 F.3d 516 (9th Cir. 1997) (federal agency requirement that physicians use American Medical Association’s coding system for Medicare reimbursement forms did not put this work into public domain), amended, 133 F.3d 1140 (9th Cir. 1998).
9 — 20
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.30
IV. EXCLUSIVE RIGHTS UNDER COPYRIGHT A. [9.29] In General The heart of copyright lies in the exclusive rights held by the copyright owner under the Copyright Act of 1976. 17 U.S.C. §106. Section 106 grants to copyright owners the power to prevent others from using a copyrighted work in certain ways. These rights are not absolute, however, and are subject to many exceptions set forth in §§107 – 122 of the Act. Section 106 provides: Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following: (1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the copyrighted work; (3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; (4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly; (5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and (6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission. 17 U.S.C. §106. As seen in the statutory language, the first three exclusive rights extend to every type of copyrighted work. The remaining exclusive rights extend only to certain types of works. Infringement takes place when any one of the rights is violated. As §106 makes clear, the copyright owner has not only the exclusive right to do these acts but also the exclusive right to authorize the acts. B. [9.30] Right To Reproduce Works in Copies and Phonorecords The right to reproduce works in copies and phonorecords is the exclusive right most frequently implicated in infringement actions. The right to reproduce means “the right to produce a material object in which the work is duplicated, transcribed, imitated, or simulated in a fixed form.” H.R.Rep. No. 1476, 94th Cong., 2d Sess. 61 – 62 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5674 – 5675. A work would be infringed by reproducing it in whole or in any substantial part, whether duplicated exactly or by imitation or simulation. Id.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 21
§9.31
INTELLECTUAL PROPERTY LAW
1. [9.31] Reproduction in Copies The Copyright Act of 1976 includes the exclusive right to reproduce a work “in copies.” 17 U.S.C. §106(1). This is distinguished from reproduction of a work in phonorecords. Id. Except for the copying of music, the vast majority of reproductions are in the form of copies. The term “copies” is broadly defined in §101 to include all material objects, other than phonorecords, in which a work is fixed. The unauthorized faxing of a work has been held to constitute an unlawful reproduction of a copy. Pasha Publications, Inc. v. Enmark Gas Corp., Civ.A. No. 3-92-CV0027G, 1992 WL 70786 (N.D.Tex. Mar. 10, 1992). Reproduction in a copy also occurs when there is a fixation, even if temporary, in a computer’s memory. MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). Scanning a work into a computer would constitute reproduction in a copy. Phillips v. Kidsoft L.L.C., 52 U.S.P.Q.2d (BNA) 1102, 1999 WL 813939 (D.Md. 1999). Even reproducing a work in a different medium (e.g., making a movie from a novel) would constitute a reproduction in a copy. 2. [9.32] Reproduction in Phonorecords Some reproductions are not in copies but rather are reproductions in phonorecords. “Phonorecords” are narrowly defined in the Copyright Act of 1976 as “material objects in which sounds, other than those accompanying a motion picture or other audiovisual work, are fixed.” 17 U.S.C. §101. The unauthorized recording of musical work or the unauthorized duplication of a sound recording would constitute a reproduction in phonorecords. The exclusive right of reproduction in phonorecords is subject to an important limitation. 17 U.S.C. §115(a) provides for a compulsory license to make and distribute phonorecords of any nondramatic musical work that has been previously recorded and distributed. U.S. Copyright Office regulations set a statutory royalty rate for these compulsory licenses. 37 C.F.R. pt. 255. For any physical phonorecord made and distributed after January 1, 2006, the compulsory royalty rate is the greater of 9.1 cents or 1.75 cents per minute of playing time or fraction thereof. 37 C.F.R. §255.3(m). Different rates apply for ringtones, limited downloads, and interactive streaming. See 37 C.F.R. §§385.1 – 385.17. C. [9.33] Preparation of Derivative Works The owner of a copyright in a work has the exclusive right to prepare derivative works based on the copyrighted work. 17 U.S.C. §106(2). To constitute a violation of §106(2), the infringing work must substantially incorporate protected material from the copyrighted work in some form. In Lewis Galoob Toys, Inc. v. Nintendo of America, Inc., 964 F.2d 965 (9th Cir. 1992), a software program that allowed video game players to alter individual features of Nintendo video games, such as a character’s strength or speed, was held not to violate the copyright owner’s derivative right because the software did not incorporate the Nintendo work in any concrete or permanent form. In contrast, the court in Micro Star v. Formgen Inc., 154 F.3d 1107 (9th Cir. 1998), found that the defendant’s act of compiling and selling a CD consisting of 300 user-created levels for the “Duke Nukem 3D” video game constituted the creation of an unauthorized derivative work. The court noted that a copyright owner had the exclusive right to create sequels, and the stories told in the user-generated levels compiled in the CD were sequels. In Lee v. A.R.T. Co., 125 F.3d
9 — 22
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.34
580 (7th Cir. 1997), the court held that the defendant did not create an infringing derivative work when it mounted the plaintiff’s illustrated note cards on ceramic tiles with clear epoxy resin and resold the tiles. The defendant’s creation of the tiles did not “recast” or “transform” the plaintiff’s original artwork. 125 F.3d at 582. The fact that a party may have the right to reproduce a copyrighted work under §106(1) does not authorize the party to alter, modify, or mutilate the work. See Gilliam v. American Broadcasting Cos., 538 F.2d 14 (2d Cir. 1976). D. [9.34] Public Distribution The Copyright Act of 1976 grants to the copyright owner the exclusive right “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.” 17 U.S.C. §106(3). This provision gives the owner the right to control the first public distribution. A question arises whether transmitting a work over a computer network is a public distribution since there is no physical transfer of possession of a tangible work. Most courts addressing the issue have recognized that an electronic transmission over the Internet constitutes a distribution under §106(3). In New York Times Co. v. Tasini, 533 U.S. 483, 150 L.Ed.2d 500, 121 S.Ct. 2381, 2390 (2001), the Court determined that by selling newspaper articles through its online database, LEXIS/NEXIS distributed copies of the articles to the public. In A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1014 (9th Cir. 2001), the court found that uploading music files for others to copy violated the distribution right. See also Getaped.com, Inc. v. Cangemi, 188 F.Supp.2d 398, 402 (S.D.N.Y. 2002) (when website “goes live,” it is “distributed” within meaning of Copyright Act); Marobie-FL, Inc. v. National Association of Fire Equipment Distributors, 983 F.Supp. 1167 (N.D.Ill. 1997) (defendant’s placement of files containing infringing art on its website violated plaintiff’s exclusive right to publicly distribute art). In contrast, several cases have held that merely making a digital copy of a musical work available for download by others in a peer-to-peer network does not constitute a public distribution. Actual dissemination of the digital copy is required to violate §106(3). See, e.g., Elektra Entertainment Group, Inc. v. Barker, 551 F.Supp.2d 234 (S.D.N.Y. 2008); London-Sire Records, Inc. v. Doe 1, 542 F.Supp.2d 153 (D.Mass. 2008); Atlantic Recording Corp. v. Brennan, 534 F.Supp.2d 278 (D.Conn. 2008). Not every Internet transmission constitutes a distribution, however. An important district court case has held that an Internet service provider serving as a mere conduit of information transmitted over the Internet did not publicly distribute a work when the infringing material was originated and controlled by others. Religious Technology Center v. Netcom On-Line Communication Services, Inc., 907 F.Supp. 1361 (N.D.Cal. 1995). See also CoStar Group, Inc. v. LoopNet, Inc., 373 F.3d 544, 555 (4th Cir. 2004) (“Agreeing with the analysis in Netcom, we hold that the automatic copying, storage, and transmission of copyrighted materials, when instigated by others, does not render an [Internet service provider] strictly liable for copyright infringement.”).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 23
§9.35
INTELLECTUAL PROPERTY LAW
In Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146 (9th Cir. 2007), the court held that Google, by providing links to websites containing infringing material, did not violate the distribution right. By providing a link, Google’s search engine merely communicates HTML instructions enabling a user to find the material on another website, but Google does not itself distribute copies of the infringing material. An important limitation on the public distribution right is the “first-sale doctrine.” This doctrine is codified in 17 U.S.C. §109(a) and provides that the owner of a lawfully made copy of a work may, without the authority of the owner, sell or otherwise dispose of this copy of the work. Thus, a person who buys a book may resell the book to a used bookstore or give it to a charity for resale. The copyright owner’s rights of public distribution are exhausted after the first sale. However, the first-sale doctrine does not give the owner of the copy any right to reproduce the copy. In Kirtsaeng v. John Wiley & Sons, Inc., ___ U.S. ___, 185 L.Ed.2d 392, 133 S.Ct. 1351 (2013), the Supreme Court addressed an apparent conflict between the importation right in §602(a) of the Copyright Act and the first sale doctrine in §109(a). Section 602(a) provides that importation of a copyright-protected work from abroad without permission of the copyright owner is a violation of the distribution right of §106(3). The question in Kirtsaeng was whether the first-sale doctrine is available to importers of works first manufactured and sold abroad. Wiley contended that the requirement in §109(a) that the original work be “lawfully made under this title” meant that the goods had to be first made in the United States, and thus the first-sale doctrine did not apply to imports of goods manufactured and sold abroad. The Court rejected this interpretation, finding that the statute does not contain any geographical limitation on the application of the first-sale doctrine. E. [9.35] Public Performance Another valuable right for copyright owners is the exclusive right of public performance. The Copyright Act of 1976 provides that, in the case of literary, musical, dramatic, and audiovisual works, the copyright owner has the exclusive right “to perform the copyrighted work publicly.” 17 U.S.C. §106(4). Importantly, the general public performance right of §106(4) does not extend to sound recordings. As discussed in §9.37 below, a more limited performance right is granted to sound recordings under §106(6). In analyzing a matter implicating the public performance right, it is necessary initially to determine (1) whether the work was “performed” and, if so, (2) whether the performance was made “publicly.” To make these determinations, one must consult the definitions of these terms in 17 U.S.C. §101. Section 101 provides that to “perform” a work means to “recite, render, play, dance, or act it, either directly or by means of any device or process.” Performance covers not only the initial rendition of the work but also any further act by which this rendition is transmitted or communicated to the public. As H.R.Rep. No. 1476, 94th Cong., 2d Sess. 63 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5676 – 5677, notes by way of example, a singer is performing when he or she sings a song, a broadcasting network is performing when it transmits the singer’s
9 — 24
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.35
performance, and an individual is performing the work when he or she communicates the performance by turning on a receiving set, such as a television. For a performance to be infringing, however, it must be public. A work is performed “publicly” if any of the following apply: 1. The performance is made at a place open to the public. 2. The performance is made at any place where a substantial number of persons outside a normal circle of a family and its social acquaintances is gathered. This would be the case even if this gathering were, for example, at a private club. 3. The performance is transmitted to either of the places specified above. 17 U.S.C. §101. To “transmit” a performance means “to communicate it by any device or process whereby images or sounds are received beyond the place from which they are sent.” Id. This is a broad definition and would include all conceivable forms and combinations of wired or wireless communications media. If such a transmission reaches the public in any form, it comes within the scope of §106(4). In American Broadcasting Cos. v. Aereo, Inc., ___ U.S. ___, 189 L.Ed.2d 476, 134 S.Ct. 2498 (2014), the Court analyzed whether these provisions applied to a company that transmitted television programs to viewers over the Internet through a device that employed thousands of individual antennas assigned to individual subscribers. The Court held that, even though each transmission went to an individual viewer, the company had transmitted the performances to “the public” within the meaning of the statutory definition. 134 S.Ct. at 2509 – 2510. These transmissions, made without the copyright owner’s permission, violated the public performance right of §106(4). The public performance right is a major source of revenue for the music industry. In order to facilitate the licensing of public performance rights for music, performing rights societies such as the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Musicians, Inc. (BMI), have been created. These organizations grant blanket licenses on behalf of composers, lyricists, and music publishers for all types of nondramatic public performances of music. There are numerous exemptions to the public performance right, and these are set forth in the Copyright Act. The exemptions are somewhat narrow and contain many conditions, so it is imperative to review the statutory language carefully to determine whether a particular exemption is applicable. Among the more important exemptions are those for face-to-face teaching activities (17 U.S.C. §110(1)), distance learning (17 U.S.C. §110(2)), performance at a place of worship or religious assembly (17 U.S.C. §110(3)), performances communicated by radio or television in small business establishments (17 U.S.C. §110(5)(A)), and transmission of radio and television broadcasts for eating and drinking establishments meeting certain size restrictions (17 U.S.C. §110(5)(B)).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 25
§9.36
INTELLECTUAL PROPERTY LAW
F. [9.36] Public Display The right of public display is set forth in 17 U.S.C. §106(5). This right has taken on increased importance in recent years because dissemination of a work on the Internet usually implicates the right of public display. To “display” a work means to “show a copy of it, either directly or by means of a film, slide, television image, or any other device or process.” 17 U.S.C. §101. Like the performance right, this exclusive right applies only to works displayed “publicly,” and thus the definition of the term “publicly” in §101 applies. In Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1160 (9th Cir. 2007), the court held that a person “displays” a copy of a photographic image by using a computer to fill a computer screen with a copy of the image fixed in the computer’s memory. However, merely providing a link to another website where the image is stored does not constitute a display under the Copyright Act of 1976. 17 U.S.C. §109(c) provides an important limitation on the right of public display, stating that the lawful owner of a copy of a work can put this copy of the work on display without the consent of the copyright owner. Thus, the owner of a painting may display it to the public in a gallery. This exemption does not apply to broadcasts or other situations in which the display is transmitted to the public at a place other than where the copy is located. G. [9.37] Digital Performance of Sound Recordings As mentioned in §9.35 above, the basic public performance right of the Copyright Act of 1976 does not extend to sound recordings. 17 U.S.C. §106(4). Thus, a radio station playing a popular sound recording would be required to pay royalties to the copyright owner of the musical composition but not to the owner of the copyright of the particular sound recording of the composition. With the enactment of the Digital Performance Right in Sound Recordings Act of 1995, Pub.L. No. 104-39, 109 Stat. 336, however, Congress granted a limited digital public performance right to owners of copyright in sound recordings. Section 106(6) grants to producers and performers of sound recordings public performance rights for performances “by means of a digital audio transmission.” The scope and limitations of this exclusive right are extremely detailed and are set forth in 17 U.S.C. §114.
V. [9.38] FORMALITIES Since the first copyright statute was enacted in 1790, U.S. copyright law has contained various formalities, some of which were conditions to protection. Until the Copyright Act of 1976, federal statutory copyright was typically available only if a work was published. The inclusion of copyright notice was also a prerequisite to federal protection. Formal requirements such as these prevented the United States from joining the Berne Convention for the Protection of Literary and Artistic Works, the most significant international copyright convention, for over 100
9 — 26
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.40
years. The Berne Convention requires that, in a member state, “the enjoyment and the exercise of [copyright] shall not be subject to any formality.” Berne Convention art. 5(2). Congress began eliminating some of the formalities in the 1976 Act, and with further amendments, the United States was finally in a position to join the Berne Convention in 1989. See the Berne Convention Implementation Act of 1988, Pub.L. No. 100-568, 102 Stat. 2853. Nevertheless, formalities such as publication, notice, and registration continue to be part of U.S. copyright law but are no longer prerequisites to protection. These concepts may still affect protectability of older works and may affect remedies or the scope of protection even after the Berne Convention adherence. A. [9.39] Publication Prior to the Copyright Act of 1976, statutory copyright for a work was secured by publication of the work with a proper copyright notice. Publication was the dividing line between commonlaw protection and federal statutory protection. Publication of a work without notice resulted in the loss of copyright in the work. Consequently, the continued validity of a copyright often hinged on the issue of whether a work was published. The concept of “limited publication” developed to mitigate drastic consequences of publication without notice. Only a general publication divested a work of copyright protection. Distribution of a work to a limited class of persons for a limited purpose was held not to be a general publication, but rather a limited publication that did not divest the work of its common-law protection. See Academy of Motion Picture Arts & Sciences v. Creative House Promotions, Inc., 944 F.2d 1446 (9th Cir. 1991). Another important limitation on the concept of publication is that a performance, no matter how large the audience, is not a publication. See Estate of Martin Luther King, Jr., Inc. v. CBS, Inc., 194 F.3d 1211 (11th Cir. 1999). In the Copyright Act of 1976, “publication” is defined as the distribution of copies or phonorecords of a work to the public by sale or other transfer of ownership, or by rental, lease, or lending. The offering to distribute copies or phonorecords to a group of persons for purposes of further distribution, public performance, or public display, constitutes publication. A public performance or display of a work does not of itself constitute publication. 17 U.S.C. §101. Though no longer a prerequisite to protection, publication still affects such things as duration of a work (e.g., duration of works made for hire is measured from date of publication), the proper deposit for a registration (two copies of a work are required for published works), and eligibility for statutory damages (17 U.S.C. §412 treats published and unpublished works differently). B. [9.40] Copyright Notice Under the 1909 Copyright Act, failure to include notice on a published work resulted in the loss of copyright protection. Some errors in the copyright notice (e.g., postdating the year of publication) had the same effect. The Copyright Act of 1976 kept the requirement of notice but added provisions allowing errors or omissions to be cured within five years of publication.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 27
§9.41
INTELLECTUAL PROPERTY LAW
This notice requirement was eliminated altogether for new works as of March 1, 1989, the effective date of the Berne Convention Implementation Act. For works first published on or after March 1, 1989, use of a copyright notice on a published work is optional, not mandatory. 17 U.S.C. §401(a). The omission of notice on such works no longer results in loss of copyright protection. 17 U.S.C. §405(a). A proper copyright notice consists of three elements: 1. the symbol ©, the word “Copyright,” or the abbreviation “Copr.”; 2. the year of first publication of the work; and 3. the name of the copyright owner. 17 U.S.C. §401(b). An example of a proper copyright notice is “© 2008 John Doe.” The notice should be affixed to copies in such a way as to give reasonable notice of the claim of copyright. The proper notice for phonorecords embodying sound recording is the symbol instead of ©. C. [9.41] Registration Registration of a copyright claim is permissive, not mandatory. It is not a condition of copyright protection. A copyright exists from the moment the work is fixed in a tangible medium of expression, regardless of whether the owner registers the claim. Provisions concerning registration are set forth in 17 U.S.C. §408. Registration may be made at any time during the subsistence of the copyright. Registration is made by submitting a completed application, the appropriate fee, and two complete copies of the best edition of the published work (only one deposit copy is necessary for unpublished works). 17 U.S.C. §408(b); 37 C.F.R. §202.3(c). Although it is still possible to file a copyright application using paper forms, the U.S. Copyright Office has moved toward a primarily online system. Electronic applications are processed substantially faster than paper filings. Instructions and forms for electronic filing can be viewed at the Copyright Office’s website at www.copyright.gov/eco. Although registration is permissive and not a condition of protection, it is required before an action can be filed for infringement of a U.S. work. 17 U.S.C. §411(a). Registration is not, however, a prerequisite to an infringement action for works of foreign origin. Timely registration is also a prerequisite to eligibility for statutory damages and attorneys’ fees. 17 U.S.C. §412.
VI. DURATION, RENEWAL, AND TERMINATION OF TRANSFERS A. [9.42] Duration and Renewal The Copyright Act of 1976 brought about a major change in the duration of copyrights. Since 1790, duration of copyright in the United States had been measured by a definite number of years
9 — 28
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.45
(e.g., 28 years under the 1909 Act), with the opportunity to renew the copyright for an additional term. Thus, under the 1909 Act, the maximum life of a copyright was 56 years. The 1976 Act changed duration of copyright to a single term based on the life of the author plus 50 years. With the enactment of the Sonny Bono Copyright Term Extension Act in 1998, this term was increased to life of the author plus 70 years. See 17 U.S.C. §302(a). The 1976 Act eliminated the concept of renewal for works created on or after January 1, 1978, preferring to grant a single longer term rather than consecutive shorter terms. However, with respect to preexisting works, Congress felt it necessary to leave in place the system of duration for a fixed term with the possibility of a renewal period. See 17 U.S.C. §304. Congress did, however, extend the length of the renewal period. Thus, any determination of the length of a copyright will depend on whether the work was created before or after January 1, 1978. The constitutionality of the Sonny Bono Copyright Term Extension Act was upheld in Eldred v. Ashcroft, 537 U.S. 186, 154 L.Ed.2d 683, 123 S.Ct. 769 (2003). 1. [9.43] Works Created on or After January 1, 1978 Under 17 U.S.C. §302(a), copyright in a work created on or after January 1, 1978, subsists from its creation and endures for a term consisting of the life of the author plus 70 years after the author’s death. In the case of a joint work, it endures for 70 years after the death of the last surviving author. 17 U.S.C. §302(b). For some types of works, there is no “life of the author” to measure against. For these works, such as works made for hire or pseudonymous works, the duration of copyright is for 95 years from the date of first publication or 120 years from creation, whichever expires first. 17 U.S.C. §302(c). 2. [9.44] Works Created but Not Published Before January 1, 1978 Prior to the Copyright Act of 1976, an unpublished work enjoyed common-law protection for as long as the work remained unpublished. The 1976 Act changed that by bringing both published and unpublished works under the purview of federal statutory copyright. Unpublished works no longer have perpetual protection. Rather, the copyright in an unpublished work created before January 1, 1978, endures for the life of the author plus 70 years. 17 U.S.C. §303(a). In no case, however, did the copyright in such a work expire before December 31, 2002. If the work was published on or before December 31, 2002, the term of copyright shall not expire before December 31, 2047. Id. 3. [9.45] Copyrights Subsisting on January 1, 1978 Though Congress changed to a duration based on the life of the author for new works, it retained the system of a fixed term plus renewal option for subsisting works. Thus, copyright in a preexisting work remained at 28 years. 17 U.S.C. §304(a). If not renewed, copyright would expire at the end of 28 years after first publication. Congress did, however, increase the renewal term from 28 years to 47 years. This increase applied to works already in their renewal term on
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 29
§9.46
INTELLECTUAL PROPERTY LAW
January 1, 1978, and to works renewed after that date. With the enactment of the Sonny Bono Copyright Term Extension Act in 1998, Congress added another 20 years to the renewal term. Thus, a properly renewed work published before January 1, 1978, will be protected for a total of 95 years. With the Copyright Amendments Act of 1992, Pub.L. No. 102-307, 106 Stat. 264, Congress made renewal automatic. Under the automatic renewal amendment, any work copyrighted between January 1, 1964, and December 31, 1977, received an automatic renewal term. This renewal term is 67 years. 17 U.S.C. §304(a). Applying these principles, one can be certain in knowing that any work published in the United States before 1923 is in the public domain. Such a work, even if properly renewed, would have expired before Congress added 20 years to the renewal term in 1998. B. [9.46] Restoration of Copyright in Foreign Works In 1994, as a result of pressure exerted on the United States from its international trade partners, Congress enacted the Uruguay Round Agreements Act (URAA), Pub.L. No. 103-465, 108 Stat. 4809 (1994), which restored copyright to foreign works that had previously lost copyright protection in the United States due to (1) failure to adhere to the formalities of U.S. law, (2) lack of copyright protection in the United States for sound recordings made prior to 1972, or (3) lack of national eligibility (e.g., for many years the United States had no copyright relations with Russia). See 17 U.S.C. §104A. Many foreign works over the years have lost protection in the United States for noncompliance with the notice requirements or the renewal requirements of U.S. law. Copyright was restored to all such works automatically as of January 1, 1996, as long as the work was not in the public domain in its source country. 17 U.S.C. §§104A(a), 104A(h)(6). In the event of restoration, the restored copyright continues for the remainder of the term of copyright that the work would otherwise have had in the United States if the work had never entered the public domain. 17 U.S.C. §104A(a)(1)(B). The URAA contains a limited exception to liability for certain parties, called “reliance parties,” who exploited the public domain work prior to the restoration of the copyright. 17 U.S.C. §104A. Troll Co. v. Uneeda Doll Co., 483 F.3d 150 (2d Cir. 2007), contains a thorough discussion of the URAA’s restoration provisions and the rights of reliance parties. The constitutionality of the URAA was upheld in Golan v. Holder, ___ U.S. ___, 181 L.Ed.2d 835, 132 S.Ct. 873 (2012). The restoration provisions do not exceed Congress’ authority under the Copyright Clause of the U.S. Constitution (see §9.1 above), nor do they violate the First Amendment. C. [9.47] Termination of Transfers The Copyright Act of 1976 allows an author to terminate after 35 years any transfer or license made on or after January 1, 1978. 17 U.S.C. §203. The author must comply with a host of requirements set forth in §203, such as the requirement of advance written notice and recordation. 17 U.S.C. §203(a)(4). The purpose of this provision is to give an author a chance to recapture the rights in a work that may have become more valuable over time. The author’s right to terminate a transfer cannot be forfeited or signed away. If the author does not take steps to terminate a
9 — 30
WWW.IICLE.COM
COPYRIGHT SUBJECT MATTER AND EXCLUSIVE RIGHTS
§9.47
transfer, it continues in effect according to its terms. 17 U.S.C. §203(b)(6). A similar provision in 17 U.S.C. §304(c) allows an author to recapture copyright for the extended duration of the renewal term added by the 1976 Act and by the Sonny Bono Copyright Term Extension Act in 1998. The right to terminate transfer of copyright after 35 years is a valuable right when a work has been commercially successful over the years. There has been much litigation involving efforts of well-known composers, music groups, and other creators to reclaim copyrights they transferred long ago. See, e.g., Baldwin v. EMI Feist Catalog, Inc., 805 F.3d 18 (2d Cir. 2015) (terminating rights to song “Santa Claus is Comin’ to Town”); Classic Media, Inc. v. Mewborn, 532 F.3d 978 (9th Cir. 2008) (terminating rights to novel LASSIE COME HOME); Siegel v. Warner Bros. Entertainment Inc., 658 F.Supp.2d 1036 (C.D.Cal. 2009) (terminating rights in “Superman” comics); Milne ex rel. Coyne v. Stephen Schlesinger, Inc., 430 F.3d 1036 (9th Cir. 2005) (refusing to terminate rights to “Winnie-the-Pooh” books when heir had previously renegotiated pre-1978 transfer agreement).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
9 — 31
10
Ownership and Transfer of Copyrights
RICHARD C. BALOUGH Balough Law Offices, LLC Chicago
®
©COPYRIGHT 2017 BY IICLE .
10 — 1
INTELLECTUAL PROPERTY LAW
I. [10.1] Ownership Rights II. Authorship and Ownership A. [10.2] Joint Authorship B. [10.3] Ownership of Compilations and Collective Works C. [10.4] Ownership of Works for Hire III. Transfer A. [10.5] In General B. Validity of Transfers 1. [10.6] Categories of Ownership 2. [10.7] Voluntary Transfers 3. [10.8] Documentation 4. [10.9] Challenges 5. [10.10] Assigning Causes of Action 6. [10.11] Involuntary Transfers 7. [10.12] Implied Licenses C. [10.13] Recording Transfers D. [10.14] Termination of Transfers IV. [10.15] Sample License Agreement Between Photographer and Studio
10 — 2
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.1
I. [10.1] OWNERSHIP RIGHTS Copyright law is based on Article I, §8, Clause 8, of the United States Constitution. This Article grants Congress the power “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors . . . the exclusive Right to their respective Writings.” In other words, the Constitution gives Congress the power to determine the ownership rights of authors and the power to determine how these rights may be transferred. Not surprisingly, since the power has been given to Congress, the scope of the rights and how they may be owned and transferred have changed over time as the Copyright Act of 1976, Pub.L. No. 94-553, §101, 90 Stat. 2541, has been amended. In addition, courts have interpreted the Act to further define these terms. This chapter addresses ownership and the ability to transfer the rights bestowed to authors by Article I, §8, Clause 8, of the U.S. Constitution as embodied in the Copyright Act. This chapter also discusses practical copyright licensing issues. As discussed in Chapter 9 of this handbook, an author is the creator of a work. An author can be an individual, a group of individuals who have agreed to be joint authors, or a corporation, partnership, or other entity when the work is done by an employee or is a commissioned work in one of nine specific categories. See §10.4 below. An author must be a “person” or “human being.” The Compendium of the U.S. Copyright Office Practices §306 (3d ed. 2014) states that it “will register an original work of authorship, provided that the work is created by a human being.” This phrase was challenged in Naruto v. Slater, Case No. 15-cv-04324-WHO, 2016 WL 362231 (N.D.Cal. Jan. 28, 2016), when a complaint was filed by the People for the Ethical Treatment of Animals claiming that a crested macaque monkey was the legitimate author of a “selfie” taken by Slater’s camera. The photo was sold by Slater. In rejecting the claim, the court found the Copyright Act does not “plainly” extend the concept of authorship or statutory standing to animals. To the contrary, there is no mention of animals anywhere in the Act. The Supreme Court and Ninth Circuit have repeatedly referred to “persons” or “human beings” when analyzing authorship under the Act. . . Despite Next Friends’ assertion that declining to grant a monkey copyright to a photograph “would depart from well-established norms,” Next Friends have not cited, and I have not found, a single case that expands the definition of authors to include animals. 2016 WL 362231 at *4. As a result of Naruto, the Copyright Office added to §313.2 of the Compendium a provision that states [t]o qualify as a work of “authorship” a work must be created by a human being. . . . Works that do not satisfy this requirement are not copyrightable. [Citation omitted] The author of a work obtains rights in the work the instant that it is created and reduced to a tangible fixed form. 17 U.S.C. §102(a). A work can be many things, but it cannot be a mere compilation of facts. See 17 U.S.C. §102(b). There must be some creative element to a work,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 3
§10.1
INTELLECTUAL PROPERTY LAW
although the concept of creativity as used in the Copyright Act has a very low threshold. The rights that the author has in the work are set out in 17 U.S.C. §106: (1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the copyrighted work; (3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; (4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly; (5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and (6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission. These rights are considered as a bundle of rights that the owner can own or transfer individually, in part, or in whole. Therefore, there can be one owner of the right to reproduce the work, another owner of the right to prepare derivative works, another to distribute copies of the work, and another to perform the work publicly. This was not always true. Prior to amendments in the Copyright Act in 1976 (see Pub.L. No. 94-553, 90 Stat. 2541), the law provided that there could be only one owner of a copyright who owned all of the enumerated exclusive rights. As a result, any transfer of less than all the rights had to be done via a license agreement. After 1976, the definition of “copyright owner” in the Act was changed to state: “ ‘Copyright owner’, with respect to any one of the exclusive rights comprised in a copyright, refers to the owner of that particular right.” 17 U.S.C. §101. This definition recognizes that there can be separate owners of each of the exclusive rights, doing away with the pre-1976 requirement that separate ownership could be established only through a license with the owner of the entire copyright. In 1976, the Copyright Act was amended to provide that “[a]ny of the exclusive rights comprised in a copyright, including any subdivision of any of the rights specified by section 106, may be transferred . . . and owned separately.” 17 U.S.C. §201(d)(2). Under the Copyright Act, the rights of the author vest immediately upon the work being reduced to a tangible form regardless of whether the author registers the work with the U.S. Copyright Office. Registration of copyrights is required for works of origin in the United States for the filing of a lawsuit in federal court, but foreign works need not be registered prior to initiation of a federal lawsuit. In the United States, claims for copyright infringement must be brought in federal court, although some copyright counterclaims may be raised in state court proceedings.
10 — 4
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.2
Because the “exclusive Right to their respective Writings,” as provided by Article I, §8, Clause 8, of the U.S. Constitution, is one owned by authors, only an author or, if the rights were transferred, the person owning the transferred rights may claim the copyright and seek enforcement of the respective rights owned. In other words, the mere possession of a work does not automatically make the owner of the work the person who may claim the copyright. 17 U.S.C. §202. For example, a person may own a copy of a book, but this ownership of the book does not automatically give the person the right to print additional copies of the book, the right to authorize another person to make a derivative of the work, or the right to perform the work publicly. Because it is the creator of the work who is the author and default copyright owner, the owner may be a citizen of another country, a minor, or, in the case of a work for hire, a corporation or other entity. Of course, in the case of a minor, state law may affect the minor’s rights in other respects. While normally the possessor of the article copyrighted may dispose of it or alter it as the possessor pleases, the owner is restricted, as noted above, from making copies and distributing these copies. For the possessor of a copyrighted work of visual art, there are additional restrictions as to what the possessor can do with the work. A “work of visual art” is — (1) a painting, drawing, print, or sculpture, existing in a single copy, in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author, or, in the case of a sculpture, in multiple cast, carved, or fabricated sculptures of 200 or fewer that are consecutively numbered by the author and bear the signature or other identifying mark of the author; or (2) a still photographic image produced for exhibition purposes only, existing in a single copy that is signed by the author, or in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author. 17 U.S.C. §101. For these visual arts, the author retains certain rights, regardless of any ownership transfer, including the right to claim authorship of the work and to prevent the use of his or her name as the author of any work of visual art that he or she did not create and to prevent the use of his or her name as the author of the work “in the event of a distortion, mutilation, or other modification of the work which would be prejudicial to his or her honor or reputation.” 17 U.S.C. §106A(a)(2). The author additionally has the right “to prevent . . . any intentional distortion, mutilation, or modification of that work is a violation of that right.” 17 U.S.C. §106A(a)(3)(A). This right to protect attribution and integrity is limited to the author and may be exercised “whether or not the author is the copyright owner.” 17 U.S.C. §106A(b).
II. AUTHORSHIP AND OWNERSHIP A. [10.2] Joint Authorship A work may be created by a single author or may be a joint work or a work for hire. These authorship categories govern ownership rights and how these rights may be transferred.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 5
§10.2
INTELLECTUAL PROPERTY LAW
A single author is the owner of the copyright and, absent any transfer, owns all of the rights to the work. As a single author, the author may transfer any or all of the rights to the work in any manner that the author determines. The author also is free to license any or all of the exclusive rights as the author sees fit. A “joint work” is defined as “a work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole.” 17 U.S.C. §101. For a joint work, any of the authors may grant a nonexclusive license to any of the rights in whole or in part, subject only to an accounting of profits to the other coowners. The party seeking to demonstrate joint authorship must establish that each author intends that its respective contributions be merged into a unified work. Kaplan v. Vincent, 937 F.Supp. 307, 316 (S.D.N.Y. 1996). For there to be a joint work, the parties must intend that their contributions be merged into one work. In Kaplan, the parties engaged in extensive negotiations for a collaboration agreement. While negotiations were pending, Kaplan conducted interviews with Vincent and others and wrote some of the book. Vincent then decided he no longer wanted to cowrite the book. Kaplan wanted to use the information he had gathered from Vincent to write a book on his own, arguing he was the coauthor and, therefore, had the right. The issue was whether the parties intended to be coauthors absent a signed agreement. Once intent is found, then there are two approaches to determine whether the individual contributions meet the definition of a joint work — the “de minimis” and copyrightable approaches. The de minimis approach was championed by the late Professor Melville B. Nimmer, an authority on copyright law. He argued that all that should be required for someone to be a joint author is that a person contributed more than a de minimis amount to the work (i.e., more than just a word or a line). 1 Melville B. Nimmer and David Nimmer, NIMMER ON COPYRIGHT: A TREATISE ON THE LAW OF LITERARY, MUSICAL AND ARTISTIC PROPERTY, AND THE PROTECTION OF IDEAS §6.07 (2012). Under the de minimis approach, it is not necessary that the authors’ contributions be quantitatively or qualitatively equal. Greene v. Albon, 794 F.3d 133 (1st Cir. 2015). Under Greene, all that is necessary is that the authors “intended, ‘at the time the writing is done,’ that their contributions be merged into ‘an integrated unit.’ ” 794 F.3d at 151, quoting H.R.Rep. No. 1476, 94th Cong., 2d Sess., p. 120 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5736. The copyrightable approach looks at whether the authors contributed more than a de minimis amount of work and whether the authors each contributed work that is copyrightable in its own right. The Seventh Circuit, for example, uses the copyrightable standard: According to Professor Goldstein, “[a] collaborative contribution will not produce a joint work, and a contributor will not obtain a co-ownership interest, unless the contribution represents original expression that could stand on its own as the subject matter of copyright.” Erickson v. Trinity Theatre, Inc., 13 F.3d 1061, 1070 (7th Cir. 1994), quoting Paul Goldstein, COPYRIGHT: PRINCIPLES, LAWS, AND PRACTICE, §4.2.1.2, p. 379 (1989).
10 — 6
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.2
That is, “the joint authors hold undivided interests in [the] work, despite any differences in each author’s contribution.” 13 F.3d at 1068. “The copyrightability test advances creativity in science and art by allowing for the unhindered exchange of ideas, and protects authorship rights in a consistent and predictable manner.” 13 F.3d at 1071. This conclusion is based on the fact that an author is “the party who actually creates the work, that is, the person who translates an idea into a fixed, tangible expression entitled to copyright protection.” Community for Creative NonViolence v. Reid, 490 U.S. 730, 104 L.Ed.2d 811, 109 S.Ct. 2166, 2171 (1989). In Erickson, supra, the issue involved the copyrights of three plays. Erickson contended that she owned the copyrights, while Trinity Theatre said that the plays were joint works and that several of the other contributors had authorized the theater to produce the plays. However, none of the other contributors had a final say in what was in the script, and nothing was included in the script without Erickson’s approval. The court said the collaboration of the other parties was not sufficient to meet the test that their contributions could stand on their own as copyrightable material. The Ninth Circuit adopted this view in Aalmuhammed v. Lee, 202 F.3d 1227 (9th Cir. 2000), in which the plaintiff, Aalmuhammed, was a consultant to a movie, Malcolm X, and claimed that he was the author of a joint work. The court found that Aalmuhammed lacked control over the work and that there was no intent that he be a joint author. The court noted that the defendant, Spike Lee, had to sign a work for hire agreement; therefore, it was unlikely that Warner Brothers would intend for a person working for Spike Lee to be a coauthor. Citing the Copyright Clause of the U.S. Constitution, the court stated: Progress would be retarded rather than promoted, if an author could not consult with others and adopt their useful suggestions without sacrificing sole ownership of the work. Too open a definition of author would compel authors to insulate themselves and maintain ignorance of the contributions others might make. 202 F.3d at 1235. In Aalmuhammed, the court listed the following factors for determining whether a contributor should be considered a joint author when there is no contract: 1. whether the purported author controls the work and is the inventive or mastermind who creates or gives effect to the idea; 2. whether the putative coauthors make objective manifestations of a shared intent to be coauthors; and 3. whether the audience appeal of the work turns on both contributions and the share of each in its success cannot be appraised. 202 F.3d at 1234. In Gaylord v. United States, 595 F.3d 1364 (Fed.Cir. 2010), the appellate court rejected a claim by the United States that it was a joint author for copyright purposes of the Korean War Veterans Memorial in Washington, DC. Gaylord (the sculptor of the statues of the soldiers in the squad) registered a copyright on the sculptures with himself as the sole author. In 2002, the U.S. Postal Service issued a stamp commemorating the Korean War veterans, using a photograph of the sculptures in the snow. Gaylord sued the U.S. Postal Service for copyright infringement. The
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 7
§10.3
INTELLECTUAL PROPERTY LAW
government argued that the contributions of the various governmental entities in preparing the memorial made it a joint author and thus not subject to a copyright infringement suit by Gaylord, but the court disagreed. “While the government entities provided some direction and ideas, this effort did not rise to the level necessary for a joint work.” 595 F.3d at 1379. Janky v. Lake County Convention & Visitors Bureau, 576 F.3d 356 (7th Cir. 2009), also analyzed when a work prepared by two or more authors falls under the definition of a “joint work” in the Copyright Act. Janky was a member of an Indiana-based doo-wop group. She composed a song — for which she registered the copyright as the sole author — in response to the Lake County Convention Bureau’s commission. Another member of the group, Henry Farag, reviewed the song and recommended revising the lyrics to better meet the needs of the convention bureau. Janky then filed a new copyright listing Farag as “coauthor.” Still later, she filed another copyright and this time listed herself as the sole author. The magistrate found that there was no intent for any joint work and that Farag did not contribute independently copyrightable material. The appellate court reversed, finding that both parties intended to be joint authors at the time the work was created as evidenced by Janky’s listing Farag as a joint author in the second copyright registration. The appellate court found that Farag’s contributions were more than ideas, refinements, or suggestions: They were concrete expressions and thus pass the test of copyrightability where mere ideas fail. . . . In addition, while Farag’s changes may have accounted for only 10 percent of the lyrics, they were significant. They were important not only to the final sound, but also to its commercial viability. Before Farag became involved, the song celebrated the charm of Indiana as a state; Farag shifted the focus to Lake County. Without Farag’s input, it is unlikely that the Bureau would have embraced the song the way it did. [Citation omitted.] 576 F.3d at 363. While joint authorship cases typically arise because one party believes it has been unfairly cut out as a joint author, in Reinsdorf v. Skechers U.S.A., 922 F.Supp.2d 866 (C.D.Cal. 2013), the photographer instead sought to disavow any authorship in the final product. Reinsdorf took pictures that were used in advertisements for a shoe company. Skechers argued the photographs used in the advertisements were part of a joint work and thus as a coauthor, the photographer could not sue for copyright infringement. The court found the parties behaved in ways uncharacteristic of joint authors. Perhaps most importantly, Reinsdorf charged Skechers thousands of dollars for his work. Not only did Reinsdorf charge for his time and effort, but also for “usage” of the photographs. . . A party intending to jointly produce a finished work generally would not require payment from a co-author and, conversely, would not likely agree to pay for a purported co-author’s contribution. More importantly, a co-author would not attempt to constrain an intended co-author’s use of a collaborative work. 922 F.Supp.2d at 874. B. [10.3] Ownership of Compilations and Collective Works A joint work is different than a compilation. A “compilation” is “a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or
10 — 8
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.3
arranged in such a way that the resulting work as a whole constitutes an original work of authorship.” 17 U.S.C. §101. A compilation consists of the selection and arrangement of preexisting materials without any internal changes in the materials. For example, when an author licensed his book to a publisher, the use of portions of that book in a standardized achievement test — using a verbatim reproduction of several pages of the book — was a compilation, not a derivative work. Harris v. Simon & Schuster, Inc., 646 F.Supp.2d 622 (S.D.N.Y. 2009). A subset of a compilation is a collective work, which is a work “in which a number of contributions, constituting separate and independent works in themselves, are assembled into a collective whole.” 17 U.S.C. §101. However, when the individual work is transformed into a new work, the work is not a collective work but rather a derivative work. Jarvis v. K2 Inc., 486 F.3d 526 (9th Cir. 2007). Registration of a collective work with the U.S. Copyright Office can include each part of the work as well as the work as a collection. The Compendium of Copyright Office Practices §509.1 (3d ed. 2014) provides: A collective work is . . . “a work, such as a periodical issue, anthology, or encyclopedia, in which a number of contributions, constituting separate and independent works in themselves, are assembled into a collective whole.” See 17 U.S.C. §101. When a collective work is being registered, the application should name the author of the collective work. The names of the individual authors of separate contributions being registered as part of the claim need not be given on the application. The registration may cover (1) the collective work authorship, (2) any contribution created by the employee or other party commissioned by the author of a work made for hire, and (3) any other contributions that the claimant of the collective work obtained by transfer. There is disagreement as to whether this provision means that individual authors of separate contributions can seek redress if they are not individually listed in the application for the collective work. For example, when several photographers attempted to save costs by combining their images in a database and registering only the database as a whole, the photographers could not sue individually for copyright infringement because the registration of the collective work did not include the individual names of each photographer. In Muench Photography, Inc. v. Houghton Mifflin Harcourt Publishing Co., 712 F.Supp.2d 84, 87 (S.D.N.Y. 2010), the photographers licensed their images to a third party “solely for the purposes of copyright registration.” After the images were registered with the U.S. Copyright Office, they were assigned back to the photographers. Unfortunately for the photographers, Corbis (an agent of Muench Photography, Inc.) did not list the plaintiffs as “authors” for purposes of the copyright registration. The court found that only the database — not the individual works — was registered. 712 F.Supp.2d at 95. But in Panoramic Stock Images, Ltd. v McGraw-Hill Cos., 961 F.Supp.2d 918 (N.D.Ill. 2013), the court found that if the party seeking to enforce the copyright is the entity that holds the copyright in the compilation and not the individuals, then the statute does not require the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 9
§10.4
INTELLECTUAL PROPERTY LAW
copyright registrant to identify each individual author and title. See also Bean v. McDougal Littell, division of Houghton Mifflin Co., 669 F.Supp.2d 1031 (D.Ariz. 2008), in which the court allowed a photographer to proceed with his lawsuit when the images had been registered in the same way as in Muench, supra. C. [10.4] Ownership of Works for Hire In a situation involving a work for hire, the author of the work is the employer or the person who commissioned the work. Therefore, the employer or the person who commissioned the work owns all rights in the work. For purposes of copyright, “employee” means an employee under the general laws of agency, not strictly an employee-employer relationship. “Where work is deemed ‘work made for hire’, under the Copyright Act such work automatically vests with the employer unless an express, written agreement between the employer and employee exists.” Rouse v. Walter & Associates, L.L.C., 513 F.Supp.2d 1041, 1061 (S.D. Iowa 2007). In Community for Creative Non-Violence v. Reid, 490 U.S. 730, 104 L.Ed.2d 811, 109 S.Ct. 2166 (1989), the Supreme Court described the test for determining whether a person is an employee under the Copyright Act. In this case, the defendant, Reid, was a sculptor who agreed to produce a work for the Community for Creative Non-Violence. After an initial showing of the sculpture, Reid retook possession, claiming it was his work. The Community for Creative NonViolence claimed that it, not Reid, was the owner of the copyright because Reid was an “employee” under the Copyright Act. The Supreme Court rejected this argument and found that the terms “employee” and “scope of employment” should “be understood in light of the general common law of agency.” 109 S.Ct. at 2173. This question is resolved by looking at “the hiring party’s right to control the manner and means by which the product is accomplished.” 109 S.Ct. at 2178. The Court set out the factors to use: 1. the skill required; 2. the source of the instrumentalities and tools; 3. the location of the work; 4. the duration of the relationship between the parties; 5. whether the hiring party has the right to assign additional projects to the hired party; 6. the extent of the hired party’s discretion over when and how long to work; 7. the method of payment; 8. the hired party’s role in hiring and paying assistants; 9. whether the work is part of the regular business of the hiring party; 10. whether the hiring party is in business;
10 — 10
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.4
11. the provision of employee benefits; and 12. the tax treatment of the hired party. 109 S.Ct. at 2178 – 2179. Courts have found that no one factor is decisive, and the question of whether an author is an employee must be judged in light of the way a company does business. For example, when a start-up company did not exercise much control over the manner and means by which the employee created source code, the court stated that control is not as important to a technology start-up as it might be to an established company. Byce was an inventive computer programmer expected to work independently. The business model and Byce’s duties do not require that the project be completed in a particular manner or that Just continuously oversee Byce’s work, so long as JustMed eventually found itself with a marketable product. JustMed, Inc. v. Byce, 600 F.3d 1118, 1127 (9th Cir. 2010). The court also determined that [a]s a small start-up company, JustMed conducted its business more informally than an established enterprise might. This fact can make it more difficult to decide whether a hired party is an employee or an independent contractor, but it should not make the company more susceptible to losing control over software integral to its product. 600 F.3d at 1128. The court found that Byce (1) received a W-4 form, (2) received a monthly salary, and (3) performed other duties in addition to writing code. These facts were sufficient to find that Byce was an employee and the computer code belonged to the company under the work-for-hire doctrine. Because company owners are not always employees, in creating a partnership or a limited liability company, the partnership agreement or the operating agreement should include a transfer of intellectual property to the entity. In Woods v. Resnick, 725 F.Supp. 2d 809 (W.D.Wis. 2010), the court found that a computer program written by one of two limited liability company members before the company was formed was not a “work for hire” under the Copyright Act and did not belong to the company. The court found JustMed was not directly on point. Although that case recognized that some of the Reid factors tending to show that a party is an independent contractor — such as the hiring party’s lack of day-to-day oversight over the other party and failure to pay employment benefits — have less weight given how technology start-ups operate, the company in that case was a corporation, not a limited liability company with two equal members. Further, as in Reid, there was no dispute that the author of the source code was hired by the corporation. [JustMed, supra, 600 F.3d at 1126]. There is another reason why defendants’ work-for-hire theory fails: F & I Source, LLC did not exist at the time Woods prepared the source code. The company was not
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 11
§10.5
INTELLECTUAL PROPERTY LAW
formed until early 2004, after Woods had written the source code and assembled a product that was ready for distribution to the public. . . The company now claiming to own the copyright simply did not exist at the time Woods created the code. Under these circumstances, Woods could not have prepared the source code as a work for hire. 725 F.Supp.2d at 824 – 825. A commissioned work also may be a work for hire if the work falls within nine categories specified in the Copyright Act and the parties expressly agree in a written instrument signed by them that the work is a work for hire. Commissioned works outside these categories are not works for hire, and the copyright remains with the author, who may transfer — by contract or license — all or a portion of the copyright to a third party. The categories of a work specially commissioned that can be a work for hire are limited to the following: 1. contribution to a collective work; 2. part of a motion picture or other audiovisual work; 3. a sound recording; 4. a translation; 5. a supplementary work; 6. a compilation; 7. an instructional text; 8. a test or answer material for a test; or 9. an atlas. 17 U.S.C. §101. While computer programs are not specifically listed as one of the nine categories under a work for hire, computer programs may be considered compilations “insofar as the concepts of selection, arrangement and organization, central to the compilation doctrine, are included in the analysis of a computer program’s structure.” Logicom Inclusive, Inc. v. W.P. Stewart & Co., No. 04 Civ. 0604(CSH), 2004 WL 1781009, *9 (S.D.N.Y. Aug. 10, 2004).
III. TRANSFER A. [10.5] In General Because a copyright is considered a bundle of rights, the copyright owner can fully transfer any or all of his or her rights. Copyright interests may be transferred either voluntarily or by operation of law. A transfer also can occur when the owner of the copyright interest dies, in
10 — 12
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.6
which case the successor in interest for the copyright may be determined by the state’s probate law. If the copyright owner is a corporation, a transfer may occur when the corporation changes ownership or by order of a bankruptcy court. One of the most common methods to transfer an interest in a copyright is through a license agreement. B. Validity of Transfers 1. [10.6] Categories of Ownership For a transfer of a copyright interest to be valid, the question of who is the owner of the copyright must be resolved. As noted in §10.1 above, there are several categories of copyright owners and, depending on how the work was created, the right to transfer may be different. For a single author working on his or her own, the ownership of the copyright rests with that person. 17 U.S.C. §201(a). If the work is a work for hire, then the employer or other person for whom the work was prepared is considered the author “and, unless the parties have expressly agreed otherwise in a written instrument signed by them, owns all of the rights comprised in the copyright.” 17 U.S.C. §201(b). As a result, the employee has no beneficial ownership in the copyright and cannot maintain a suit for infringement even when the employee would have received a payment. For example, in Moran v. London Records, Ltd., 827 F.2d 180 (7th Cir. 1987), the plaintiff, Moran, was a commercial announcer who had a contract with the Quaker Oats Company whereby he relinquished all rights in a commercial that he recorded. The contract provided that if Moran’s recordings were to be used for any purpose other than a television commercial, (a) Quaker would have to bargain with Moran for additional payment and (b) Moran had to agree to the proposed use. London Records obtained a copy of the commercial with Moran’s voice and incorporated it in a song. 827 F.2d at 181. Quaker took no action on the infringement; Moran did not receive any additional payment for the infringing use from either the infringers or Quaker. Moran sued the infringers, claiming he was a beneficial owner in the copyright based on his agreement with Quaker. The court found that, because his original work for Quaker was a work made for hire, Quaker “is considered the author of a work made for hire, and owns all of the rights comprised in the copyright unless the parties expressly agree otherwise in writing.” [Emphasis in original.] 827 F.2d at 183. As a result, Moran had no standing to bring a lawsuit for infringement of recording by third parties. A similar result was reached in Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136 (9th Cir. 2003), in which the composer of music for a television series sued the licensees of the work, claiming that MTM Productions, the party for whom the composer wrote the music, breached its contract with him by not paying him royalties due and, as a result, the copyright reverted to him and any license granted was not valid. The court first found that the failure to pay royalties was not a breach warranting rescission of the work-for-hire agreement with MTM. Because the work was still owned by MTM, the plaintiff was not a beneficial owner of the copyright and could not maintain any action against third parties for infringement.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 13
§10.7
INTELLECTUAL PROPERTY LAW
The Copyright Act, however, considers each separate contribution to a collective work as a distinct copyrightable work, and the copyright vests in the author. As to the collective work itself, [i]n the absence of an express transfer of the copyright or of any rights under it, the owner of copyright in the collective work is presumed to have acquired only the privilege of reproducing and distributing the contribution as part of that particular collective work, any revision of that collective work, and any later collective work in the same series. 17 U.S.C. §201(c). Therefore, the author retains ownership of the copyright in the work standing alone. Revision of a collective work does not include putting the collective work into a database through which each work can be accessed separately, even when the work “bears marks of its origin in a particular periodical.” New York Times Co. v. Tasini, 533 U.S. 483, 150 L.Ed.2d 500, 121 S.Ct. 2381, 2391 (2001). In Tasini, freelance writers for the New York Times and two other publications sued to block the publication of their works in the NEXIS database. The publishers argued that the database was a mere revision of the collective work. The Supreme Court rejected this argument, stating that [t]he publishers are not sheltered by §201(c), we conclude, because the databases reproduce and distribute articles standing alone and not in context, not “as part of that particular collective work” to which the author contributed, “as part of . . . any revision” thereof, or “as part of . . . any later collective work in the same series.” Both the print publishers and the electronic publishers, we rule, have infringed the copyrights of the freelance authors. [Omissions in original.] 121 S.Ct. at 2384 – 2385. 2. [10.7] Voluntary Transfers Generally, the ownership interest in a copyright may be transferred voluntarily as with any other right in tangible property. The Copyright Act provides the following guidance concerning voluntary transfers of ownership: (1) The ownership of a copyright may be transferred in whole or in part by any means of conveyance or by operation of law, and may be bequeathed by will or pass as personal property by the applicable laws of intestate succession. (2) Any of the exclusive rights comprised in a copyright, including any subdivision of any of the rights specified by section 106, may be transferred as provided by clause (1) and owned separately. The owner of any particular exclusive right is entitled, to the extent of that right, to all of the protection and remedies accorded to the copyright owner by this title. 17 U.S.C. §201(d). 3. [10.8] Documentation A transfer of copyright ownership must be conveyed by a writing signed by the transferring owner:
10 — 14
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.8
A transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner’s duly authorized agent. 17 U.S.C. §204(a). This provision has been interpreted to mean the transfer of an exclusive right. If the right being transferred is less than exclusive, the transfer need not be in writing, although it is good practice to have these nonexclusive transfers in writing and signed by both parties. For a transfer to be valid, the documentation does not have to be executed at the time of the transfer as long as the intent to transfer can be proven. At least where there is no dispute between transferor and transferee regarding the ownership of a copyright, there is little reason to demand that a validating written instrument be drafted and signed contemporaneously with the transferring event. Barefoot Architect, Inc. v. Bunge, 632 F.3d 822, 830 (3d Cir. 2011). The reason for this is simple. The infringer knows or should know that it is infringing on someone’s copyright even if it does not know precisely who owns the copyright. As a result, when the validating documentation was signed is not relevant. However, for the documentation “to ‘validate’ a past transfer, the past transfer must have actually occurred.” Id. In Barefoot, an architect claimed that he transferred his copyright in an architectural drawing to a successor company but waited nine years to sign any documentation. The court noted that the memorandum does not itself constitute the transfer; rather, the writing renders valid and enforceable in court a change in ownership that has already taken place. . . . Under the statute’s plain terms it is clear that an oral transfer can be given legal effect by a subsequent signed writing. [Citation omitted.] 632 F.3d at 827. In many instances, the owner of a work does not wish to transfer all of the rights under the copyright law to a third party. Rather, the owner seeks to transfer one or more of the rights, such as the right to reproduce the work, to distribute the work, or to perform the work. This is frequently accomplished through a nonexclusive license agreement. The question is what consent is necessary for a valid license agreement? Software is now distributed via the Internet or via software as a service. “While new commerce on the Internet has exposed courts to many new situations, it has not fundamentally changed the principles of contract.” Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir.2004). One such principle is the requirement that “[m]utual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract.” Specht v. Netscape Commc’ns Corp., 306 F.3d 17, 29 (2d Cir.2002) (applying California law). Nguyen v. Barnes & Noble Inc., 763 F.3d 1171, 1175 (9th Cir. 2014). In the past, assent to the software license was in the form of a “shrinkwrap” or “clickwrap” agreement. These agreements get their names from the way that software was
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 15
§10.8
INTELLECTUAL PROPERTY LAW
originally packaged in a box with a plastic shrinkwrap sealing the contents. Clickwrap and shrinkwrap agreements have been mostly replaced by browsewrap agreements that may be included in a website’s terms and conditions. One court described the differences: Although there is no per se rule of validity or invalidity on either end, our Circuit has recognized that the closer digital agreements are to the clickwrap end of the spectrum, the more often they have been upheld as valid and enforceable. See Nguyen, 763 F.3d at 1176 (“[c]ourts have . . . been more willing to find the requisite notice for constructive assent where the browsewrap agreement resembles a clickwrap agreement”); see also Savetsky v. Pre–Paid Legal Servs., Inc., No. 14-03514 SC, 2015 WL 604767, at *3 (N.D.Cal. Feb. 12, 2015) (“courts generally find that clickwrap agreements are enforceable”). Browsewrap agreements, on the other hand, have been viewed with skepticism. See Nguyen, 763 F.3d at 1178 – 79 (observing the “courts’ traditional reluctance to enforce browsewrap agreements against individual consumers,” and declining to find contract had formed where “a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent”). In re Facebook Biometric Information Privacy Litigation, No. 15-cv-03747-JD, 2016 WL 2593853, *7 (N.D.Cal. May 5, 2016). However, while today software, generally, is downloaded via a direct connection on the Internet with just a click, the designation “shrinkwrap” or “clickwrap” still applies. These agreements were found valid in ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). In ProCD, the plaintiff compiled more than 3,000 telephone directories into a database and sold the database via a compact disc encased in shrinkwrap. A license agreement restricting the use of the copyrighted database was on the CD. The defendant, Ziedenberg, ignored the license agreement, and ProCD sued him when he made the database available on the Internet. The court found that the shrinkwrap agreement was enforceable. In Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1148 (7th Cir. 1997), the court further elaborated that licenses in software boxes bind the consumers who use the software after they have the opportunity to read the terms and to reject them by returning the software. In 2002, the shrinkwrap concept was extended to clickwrap agreements. In i.Lan Systems, Inc. v. NetScout Service Level Corp., 183 F.Supp.2d 328 (D.Mass. 2002), the court found clickwrap agreements to be enforceable. Regardless of the form, copyright license agreements are similar in many ways to other types of license agreements. At a minimum, a license should contain a. a description of precisely what is being licensed (It is good practice to include the description either in the license or attached to the license a copy of the material, if it is not voluminous, or at least the U.S. Copyright Office registration number.); b. information about whether the work can be sublicensed; c. a statement as to whether the rights granted include rights to create other works or derivative works (If these rights are granted, then the license should address which party would own the copyright for the new or derivative work.);
10 — 16
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.8
d. a statement relating to whether there should be attribution to the author for the work and limitations as to how the work may be used or displayed so as not to destroy the integrity of the work or the reputation of the author; e. representations and warranties as to (1) the ownership of the work being licensed and (2) that it does not infringe on any other copyright or other intellectual property rights of third parties; f.
a description of the procedure to follow if there is an infringement by a third party (The license should state who has the right (or obligation) to file suit and who is to pay the cost of the litigation. The agreement should distinguish between infringements before the license and after the license. Under 17 U.S.C. §501(b), suit may be brought by a person or entity that has a beneficial interest in at least one of the exclusive rights under 17 U.S.C. §106. Therefore, a party may not assign the right to sue without there also being a license of one of the exclusive rights. Silvers v. Sony Pictures Entertainment, Inc., 402 F.3d 881 (9th Cir. 2005).);
g. a statement as to whether it is an exclusive or nonexclusive license (This statement should describe with particularity the use or uses being granted (i.e., that it is a one-time use for a particular project or a continuing use).); h. a statement as to the media or form in which the material may be used; NOTE: The copyright law landscape is littered with cases in which the license granted was unclear as to the media covered, resulting in an inability to use the work in other media. This is especially critical today when there are constant changes in technology. For example, in New York Times Co. v. Tasini, 533 U.S. 483, 150 L.Ed.2d 500, 121 S.Ct. 2381 (2001), the issue was whether freelance writers gave permission for their works to be included in an electronic database. The Supreme Court found that the New York Times could not include the freelancers’ work in the database without further compensation to the writers because the database presentation was not a revision of the original work but rather constituted a new work. On the other hand, in Faulkner v. National Geographic Enterprises Inc., 409 F.3d 26 (2d Cir. 2005), the court found that a CD containing a scanned copy of past issues of National Geographic Magazine that were not otherwise altered was a revision of the original work so that the holding in Tasini, supra, was not applicable and, therefore, the writers and photographers were not entitled to additional compensation. i.
a term and termination provision (Any termination provision is subject to 17 U.S.C. §203, which allows a copyright owner to terminate any license after 35 years from the date of a grant entered into on or after January, 1978.);
j.
standard contract provisions (e.g., what constitutes a default, jurisdiction, and venue); and
k. provisions relating to payment. Concerning item k in the list above, payment under copyright licenses can be either in a lump sum for a one-time use or in the form of a royalty in which multiple uses or sales are expected.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 17
§10.8
INTELLECTUAL PROPERTY LAW
When fees are based on a per-use arrangement or sales, licenses frequently have an audit provision to verify the amount of the payment. Sometimes there are cost-shifting provisions associated with the audit; that is, if the audit discloses an underpayment, the cost for the audit shifts. These cost-shifting provisions should be reviewed carefully because it is possible that a relatively small error in calculating royalty payments could result in liability for an expensive audit. In other words, if the provision allows for cost shifting if an error of five percent occurs and the amount due is small, then the error could result in liability for the entire cost of the audit. Sample Accounting Provision Accounting. Publisher shall render to Author a statement of Net Copies Sold and Net Revenues from sale of Publisher’s editions and other exploitation and disposition of rights to the Work, and other credits and debits relating to the Work and the rights granted in this Agreement, and pay Author any amount(s) then owing for each month not later than the 20th of the following month. a. Publisher shall have the right to debit the account of Author for any overpayment of royalties, and any and all costs, charges, or expenses that Author is required to pay or reimburse Publisher under this Agreement, and any amounts owing Publisher under any other agreement between Publisher and Author. Publisher shall provide reasonable documentation of such debits upon request. b. Author shall have the right, but not the obligation, to inspect and to audit the books and records of Publisher to the extent necessary to determine and to verify that Author has been paid all appropriate royalties and to verify the costs, charges, or expenses that Author has been required to pay or to reimburse Publisher. Author’s audit shall be made no more frequently than every 12 months and shall be conducted during the regular business hours of Publisher. If, as a result of the audit, it is determined that payments to Author and/or payments made by Author have been under or overpaid by more than 15 percent, then Publisher shall pay to Author all costs associated with the audit. Open source software programs are offered under various licenses that may require that all derivative works be offered free of charge. Open source can be offered under the GNU General Public License (GNU GPL). Authors who distribute their works under this license, devised by the Free Software Foundation, Inc., authorize not only copying but also the creation of derivative works — and the license prohibits charging for the derivative work. People may make and distribute derivative works if and only if they come under the same license terms as the original work. Thus the GPL propagates from user to user and revision to revision: neither the original author, nor any creator of a revised or improved version, may charge for the software or allow any successor to charge. Copyright law, usually the basis of limiting reproduction in order to collect a fee, ensures that open-source software remains free: any attempt to sell a derivative
10 — 18
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.8
work will violate copyright laws, even if the improver has not accepted the GPL. The Free Software Foundation calls the result “copyleft.” Wallace v. International Business Machines Corp., 467 F.3d 1104, 1105 (7th Cir. 2006). Under a GNU GPL, all modifications of the software remain free software for all users to use and modify. Section 3 of the GNU GPL license, Version 3 (June 29, 2007), www.gnu.org/licenses/gpl-3.0.en.html, provides that anyone using a GNU GPL “covered work” cannot forbid someone from accessing the source code when the program is conveyed. A “covered work” is either an unmodified GNU GPL program or a work based on a GNU GPL program. “Convey” means “any kind of propagation that enables other parties to make or receive copies. Mere interaction with a user through a computer network, with no transfer of a copy, is not conveying.” Id. If GNU GPL software is incorporated into other software that does not enable “other parties to make or receive copies,” then the software is not “conveyed” under the GNU GPL license; therefore, the user would not be required to disclose or provide access to the software. Section 2 of the GNU GPL amplifies on what is permitted: You may make, run and propagate covered works that you do not convey, without conditions so long as your license otherwise remains in force. You may convey covered works to others for the sole purpose of having them make modifications exclusively for you, or provide you with facilities for running those works, provided that you comply with the terms of this License in conveying all material for which you do not control copyright. Those thus making or running the covered works for you must do so exclusively on your behalf, under your direction and control, on terms that prohibit them from making any copies of your copyrighted material outside their relationship with you. Even if the software at issue meets the “convey” definition, then GNU GPL §3 would apply. Another open source license is the GNU LGPL, which is a less restrictive license than the GNU GPL. Rather than being required to make public all the source code for the modified software, the GNU LGPL requires disclosure of only the source code for that the portion of the existing GNU LGPL software linked to the creator’s proprietary software. If the software is unmodified as a library or a stand-alone program, then the software must retain the GNU copyright notice and the unmodified source code must be made available to the public, which in turn can use that source code. If the GNU LGPL software both links and makes modifications to other software, then not only would the GNU LGPL copyright notice be required but also the party would be required to make available to the public the modified source code along with a detailed change-log. Therefore, in order to avoid any claims by others (e.g., customers, third parties) for access to proprietary software, the user should maintain a clear separation between its proprietary and GNU LGPL components, using the latter only unmodified as a library or as a stand-alone software. In this case, the user would need to retain the GNU LGPL copyright notice along with the unmodified GNU LGPL source code and make only that unmodified (or standalone) portion of the code accessible to the public.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 19
§10.9
INTELLECTUAL PROPERTY LAW
Even though open source software is free for use and revisions, a violation of the terms of the open source license may be copyright infringement for which irreparable harm may be presumed for purposes of an injunction. Jacobsen v. Katzer, 535 F.3d 1373, 1378 (Fed.Cir. 2008). Jacobsen, who held a copyright for an open source program, sued Katzer for copyright infringement for using the code outside the scope of the license. Jacobsen’s code was made available under the “Artistic License,” a form of public or open source license. That license required any user not to charge for the program or incorporate it into a program for which there was a charge. The court found that “[c]opyright holders who engage in open source licensing have the right to control the modification and distribution of copyrighted material.” 535 F.3d at 1381. “It is outside the scope of the Artistic License to modify and distribute the copyrighted materials without copyright notices and a tracking of modifications from the original computer files.” 535 F.3d at 1382. The trial court found Katzer’s action was a breach of contract, not infringement. The appellate court reversed, finding that the district court erred by treating the license provisions as contractual covenants rather than conditions to the copyright license. Because the license created conditions under which the license was granted and because Katzer did not abide by those conditions, the proper cause of action was copyright infringement, not breach of contract. However, even though the “GPL imposes an affirmative obligation on any license holder to make the code of any derivative work freely available and open source,” this obligation is separate and distinct from copyright. Versata Software, Inc. v. Ameriprise Fin., Inc., No. A-14-CA-12-SS, 2014 WL 950065, *4 (W.D.Tex. Mar. 11, 2014). “Copyright law imposes no open source obligations.” 2014 WL 950065 at *5. When transferring a copyright using a written document, one can record the transfer at the U.S. Copyright Office by filing a certificate of acknowledgment. A certificate of acknowledgement is not required for the validity of a transfer, but is prima facie evidence of the execution of the transfer if — (1) in the case of a transfer executed in the United States, the certificate is issued by a person authorized to administer oaths within the United States; or (2) in the case of a transfer executed in a foreign country, the certificate is issued by a diplomatic or consular officer of the United States, or by a person authorized to administer oaths whose authority is proved by a certificate of such an officer. 17 U.S.C. §204(b). 4. [10.9] Challenges A transfer of copyright may be challenged only by copyright owners and transferees to protect these parties from persons mistakenly or fraudulently claiming oral licenses or copyright ownership. [W]here there is no dispute between the copyright owner and the transferee about the status of the copyright, it would be unusual and unwarranted to permit a thirdparty infringer to invoke section 204(a) to avoid suit for copyright infringement. Imperial Residential Design, Inc. v. Palms Development Group, Inc., 70 F.3d 96, 99 (11th Cir. 1995).
10 — 20
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.12
In Billy-Bob Teeth, Inc. v. Novelty, Inc., 329 F.3d 586 (7th Cir. 2003), an infringer challenged the copyright to novelty teeth. The plaintiff, Billy-Bob Teeth, sued the infringer, who was making lower-quality novelty teeth. The infringer claimed that Billy-Bob Teeth could not own the copyright as a work for hire since Billy Bob Teeth was not even in existence when the novelty teeth were designed and, further, the teeth did not fall within any of the nine categories for commissioned works. To solve this problem, Billy-Bob Teeth and the designer executed a nunc pro tunc document assigning the copyright to Billy-Bob Teeth. The district court rejected the assignment, but the appellate court reversed, citing Imperial Residential Design, supra. The court found that there was no dispute between Billy-Bob Teeth and the designer of the novelty teeth as to who should own the copyright and the infringer could not challenge the assignment. 5. [10.10] Assigning Causes of Action Not only may the copyright be transferred to third parties, but also the owner may assign the copyright work and any accrued causes of action to a third party, but only if the right to sue is coupled with one of the six “exclusive rights” under 17 U.S.C. §106. The Copyright Act allows the “legal or beneficial owner of an exclusive right under a copyright . . . to institute an action for any infringement of that particular right committed while he or she is the owner of it.” 17 U.S.C. §501(b). However, “[t]he bare assignment of an accrued cause of action is impermissible under 17 U.S.C. §501(b).” Silvers v. Sony Pictures Entertainment, Inc., 402 F.3d 881, 890 (9th Cir. 2005). A party seeking to sue for infringement need not show that it has obtained all of the exclusive rights; even one will suffice. Hyperquest, Inc. v. N’Site Solutions, Inc., 632 F.3d 377, 382 (7th Cir. 2011). 6. [10.11] Involuntary Transfers As to involuntary transfers, the Copyright Act states that no action by any governmental body or other official or organization purporting to seize, expropriate, transfer, or exercise rights of ownership with respect to the copyright, or any of the exclusive rights under a copyright, shall be given effect under this title, except as provided under title 11 [pertaining to bankruptcy]. 17 U.S.C. §201(e). 7. [10.12] Implied Licenses An exception to the requirement that a transfer of copyright must be in writing occurs when an owner takes or does not take action that results in an implied nonexclusive license. In such cases, the courts will not find infringement by the user. An implied nonexclusive license to reproduce copyrighted material may be granted orally or implied from conduct. . . . Such an implied license, a species of contract implied in fact, does not transfer ownership of the copyright; rather, it simply permits the use of the copyrighted work in a particular manner. . . . While federal copyright law recognizes an implied license from the parties’ course of dealing, state contract law determines its existence and scope. [Citations omitted.] Lowry’s Reports, Inc. v. Legg Mason, Inc., 271 F.Supp.2d 737, 749 – 750 (D.Md. 2003).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 21
§10.12
INTELLECTUAL PROPERTY LAW
For example, if an author posts copyrighted materials on the Internet but takes no action to prevent the content from being downloaded, there may be an implied license. In Field v. Google, Inc., 412 F.Supp.2d 1106 (D.Nev. 2006), Field sued Google for uploading his copyrighted website pages into a cache maintained by the search engine. Field knew that search engines archive materials on pages unless there is a “no archive” metatag on the page but, Field did not include the “no archive” metatag on the pages that included his copyrighted materials. Thus, with knowledge of how Google would use the copyrighted works he placed on those pages, and with knowledge that he could prevent such use, Field instead made a conscious decision to permit it. His conduct is reasonably interpreted as the grant of a license to Google for that use. 412 F.Supp. 2d at 1116. In a similar case, another court found an implied license for cached copies of several registered works on another website. In Parker v. Yahoo!, Inc., No. 07-2757, 2008 WL 4410095 (E.D.Pa. Sept. 25, 2008), the owner acknowledged in his complaint that he could have prevented the use of his copyrighted materials by Yahoo! if he had used an electronic “robots.txt” in the metatags for the pages on which the copyrighted material was located. Parker also did not send any take-down notices to Yahoo! to remove the content from Yahoo! search results. In finding that Yahoo!’s affirmative defense for an implied license defeated the copyright infringement claim, the court noted: The Court is persuaded that Parker’s complaint conclusively establishes the affirmative defense of implied license. At the very least, paragraph 24 of his complaint suggests that Parker knew that as a result of his failure to abide by the search engines’ procedures, the search engines would display a copy of his works. From Parker’s silence and lack of earlier objection, the defendants could properly infer that Parker knew of and encouraged the search engines’ activity, and, as did the defendants in Field, they could reasonably interpret Parker’s conduct to be a grant of a license for that use. 2008 WL 4410095 at *4. Implied licenses may be created by a course of conduct as well. In Psihoyos v. Pearson Education, Inc., 855 F.Supp.2d 103 (S.D.N.Y. 2012), the plaintiffs licensed their registered photographs through a photography service. The contract with the service expired. Pearson used four photographs and, consistent with its previous course of dealing with the service, sent back the license agreement and payment after the photographs were used and after the photographers’ contract with the service expired. The court found that if the course of conduct between two parties demonstrates that there was a “meeting of the minds” that the practice of occasionally backdating licenses was permissible — in other words, if the plaintiff demonstrated “knowledge of, and acquiescence” to the practice of backdating licenses — then it is reasonable not to impose copyright infringement liability when a defendant engages in this practice. 855 F.Supp.2d at 125. However, the court found that the record was “inconclusive and contradictory” as to whether the backdating was in the ordinary course of conduct between the parties, so it could not rule as a matter of law that there was an implied license. 855 F.Supp.2d at 128.
10 — 22
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.13
The test for determining whether an implied license exists has three elements. The defendant must show that (1) the licensee requested the creation of a work; (2) the licensor made that particular work and delivered it to the licensee who requested it; and (3) the licensor intended that the licensee copy and distribute his work. Associated Press v. Meltwater U.S. Holdings, Inc., 931 F.Supp.2d 537, 562 (S.D.N.Y. 2013) In Meltwater, the court found there was no evidence that the Associated Press intended to give Meltwater an implied license to use its news stories. In addition, the Digital Millennium Copyright Act (DMCA), Pub.L. No. 105-304, 112 Stat. 2860, prohibits the circumvention of a “technological measure that effectively controls access” to a copyrighted work. 17 U.S.C. §1201. Therefore, if in Field, supra, the plaintiff had used technological measures to block rather than invite Google’s robots to the site, Field would have been able to argue that Google violated the DMCA’s anti-circumvention provision. C. [10.13] Recording Transfers The U.S. Copyright Office provides a mechanism for transfers to be recorded. If a copyright transfer is to be recorded, then the document must contain the actual signature of the persons who executed it. 17 U.S.C. §205(a). The Copyright Office encourages, but does not require, the submission of a Recordation Document Cover Sheet (Form DCS), available on the Copyright Office website. The form is required, however, if the filer wants a return receipt. The form also may be used to satisfy the sworn certification requirement of 71 U.S.C. §205(a). NOTE: The U.S. Copyright Office does not review the document to be recorded for legal sufficiency. United States Copyright Office, Circular 12: Recordation of Transfers and Other Documents, p. 3 (rev. October 2014), www.copyright.gov/circs, provides the following checklist to record a document: To be recorded, a document must: •
Have an original signature (or proper certification if submitted as a photocopy);
•
Be complete by its own terms;
•
Be legible; and
•
Be accompanied by the correct fee
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 23
§10.13
INTELLECTUAL PROPERTY LAW
Circular 12 also provides that the Copyright Office will return a document unrecorded if any of the following applies: •
The document does not have an original signature or proper certification;
•
The document is illegible;
•
The document is not capable of being reproduced legibly;
•
The document is incomplete by its own terms;
•
The document is marked as an “attachment” or “exhibit,” unless the person requesting recordation asserts that the document is sufficiently complete as it stands;
•
The complete recordation fee is not submitted
•
It is unclear to the Copyright Office whether the document is to be recorded; or
•
The document is submitted to [the Copyright Office] in error. Circular 12, pp. 4 – 5.
It is not necessary that transfers be recorded. In fact, failure to record an assignment of a copyright is not available as a defense by an infringer. Symantec Corp. v. CD Micro, Inc., 286 F.Supp.2d 1265, 1271 (D.Or. 2003). However, recording the transfer gives all persons constructive notice of the facts stated in the recordation and establishes prima facie evidence of the validity, but only if the following applies: (1) the document, or material attached to it, specifically identifies the work to which it pertains so that, after the document is indexed by the Register of Copyrights, it would be revealed by a reasonable search under the title or registration number of the work; and (2) registration has been made for the work. 17 U.S.C. §205(c). The recording of transfers also has the advantage of establishing priority for transfers and conflicts involving nonexclusive licenses: (d) Priority Between Conflicting Transfers. — As between two conflicting transfers, the one executed first prevails if it is recorded, in the manner required to give constructive notice under subsection (c), within one month after its execution in the United States or within two months after its execution outside the United States, or at any time before recordation in such manner of the later transfer. Otherwise the later transfer prevails if recorded first in such manner, and if taken in good faith, for valuable consideration or on the basis of a binding promise to pay royalties, and without notice of the earlier transfer.
10 — 24
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.14
(e) Priority Between Conflicting Transfer of Ownership and Nonexclusive License. — A nonexclusive license, whether recorded or not, prevails over a conflicting transfer of copyright ownership if the license is evidenced by a written instrument signed by the owner of the rights licensed or such owner’s duly authorized agent, and if — (1) the license was taken before execution of the transfer; or (2) the license was taken in good faith before recordation of the transfer and without notice of it. 17 U.S.C. §205. D. [10.14] Termination of Transfers Unlike many legal transfers, the transfer of a copyright, other than a work made for hire, is subject to termination by law, notwithstanding an agreement to the contrary. This right can be vexing not only because it is contrary to other legal principles, but also because, with the various amendments to the Copyright Act, different terms apply depending on when the copyright was originally obtained and renewed. This right of termination has its foundation under the old regime of copyright law in which there was an initial term and a renewal term. The initial term was as short as 28 years, with a renewal term for another 28 years. Under the current Copyright Act, new copyrights for an individual author are for the life of the author plus 70 years. 17 U.S.C. §302(a). For joint authors, it is for the life of the last surviving author plus 70 years. 17 U.S.C. §302(b). For works for hire, it is 95 years from the date of publication or 120 years from the date of creation, whichever is shorter. 17 U.S.C. §302(c). Copyrights secured before January 1, 1978, have different rules concerning the term for a copyright. For a full discussion of the term of copyrights, see Chapter 9 of this handbook. Under the current Copyright Act, the transfer or license of a copyright for any work (other than a work for hire) that was in its first or renewal term as of January 1, 1978, may be terminated during a 5-year window that begins at the end of the 56th year from the date the copyright was originally secured. 17 U.S.C. §304(c)(3). The termination of the grant is made by serving advance notice in writing on the grantee or the grantee’s successor. 17 U.S.C. §304(c)(4). The notice must be signed by the author or, if dead, by the widow or widower and children. Id. “Children” are defined under the Act as the author’s “immediate offspring, whether legitimate or not, and any children legally adopted by that person.” 17 U.S.C. §101. If there are no survivors, then the author’s executor or administrator must sign the notice. 17 U.S.C. §304(c)(4). The notice must state the effective date of the termination, which must be within the 5-year window. 17 U.S.C. §304(c)(4)(A). For copyrights that expired on or before the effective date of the Copyright Term Extension Act of 1998 (CTEA) (also known as the Sonny Bono Copyright Term Extension Act or the Mickey Mouse Protection Act), Pub.L. No. 105-298, Title I, 112 Stat. 2827 (i.e., October 27, 1998), and when a termination right has not been previously exercised, the termination right window is a period of 5 years beginning at the end of 75 years from the date the copyright was originally secured. 17 U.S.C. §304(d).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 25
§10.14
INTELLECTUAL PROPERTY LAW
For licenses of works, other than works for hire, that were executed after January 1, 1978, the termination right may be exercised during a 5-year period beginning at the end of 35 years from the date of the execution of the grant and ending 40 years from the exercise of the grant. The right may be exercised by the author, if deceased, by the widow or widower, or by the children. 17 U.S.C. §203(a). But section 304(c) provides that termination rights under that section do not exist with respect to “work[s] made for hire.” 17 U.S.C. §304(c). Where a work is “made for hire,” copyright law deems the employer to be the “author” for purposes of copyright ownership. Copyright Act of 1909 §62 (formerly codified at 17 U.S.C. §26) (“[T]he word ‘author’ shall include an employer in the case of works made for hire.”); see also Copyright Act of 1976 §201(b), 17 U.S.C. §201(b) (“In the case of a work made for hire, the employer or other person for whom the work was prepared is considered the author for purposes of this title. . . .”). The hired party, although “the ‘author’ in the colloquial sense,” Shapiro, Bernstein & Co. v. Bryan, 123 F.2d 697, 699 (2d Cir. 1941), therefore never owned the copyrights to assign. It stands to reason, then, that there are no rights the assignment of which his or her heirs may now terminate. Marvel Characters, Inc. v. Kirby, 726 F.3d 119, 137 (2d Cir. 2013). In Marvel, the court found the heirs to comic book artist Jack Kirby had no termination right because his drawings were works for hire. While §304 has been effective since 1978, it has “been little utilized by authors or their heirs and, consequently, little explored by the courts.” Siegel v. Warner Bros. Entertainment, Inc., 690 F.Supp.2d 1048, 1050 (C.D.Cal. 2009). The section was in large measure designed to assure that its new benefits would be for the authors and their heirs. Thus, with the termination of transfer provisions, authors or their heirs are able to negotiate additional compensation for previously granted rights. Without such a right of termination, the Extended Renewal Term would constitute a windfall to grantees. Classic Media, Inc. v. Mewborn, 532 F.3d 978, 984 (9th Cir. 2008). Mewborn, the daughter of Eric Knight, the author of LASSIE COME HOME, was sued by Classic Media, which contended that her termination notice was ineffective because, prior to the effective date of the 1976 Copyright Act, her predecessor-in-interest granted an extension of the license for the copyright. In addition, the extension was granted before the “window” for termination was open under 17 U.S.C. §304. Because Mewborn did not have the right to serve an advance notice of termination under the 1976 Act until 1994, the extension granted in 1978 was ineffective and the 1996 termination notice was effective. As with recordation, the U.S. Copyright Office does not have forms for terminations. However, 37 C.F.R. §201.10 lists the contents required for a notice. For termination notices in the 56th year, the notice should contain the following:
10 — 26
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.14
(i) Whether the termination is made under section 304(c) or under section 304(d); (ii) The name of each grantee whose rights are being terminated, or the grantee’s successor in title, and each address at which service of the notice is being made; (iii) The title and the name of at least one author of, and the date copyright was originally secured in, each work to which the notice of termination applies; and, if possible and practicable, the original copyright registration number; (iv) A brief statement reasonably identifying the grant to which the notice of termination applies; (v) The effective date of termination; (vi) If termination is made under section 304(d), a statement that termination of renewal term rights under section 304(c) has not been previously exercised; and (vii) In the case of a termination of a grant executed by a person or persons other than the author, a listing of the surviving person or persons who executed the grant. In the case of a termination of a grant executed by one or more of the authors of the work where the termination is exercised by the successors of a deceased author, a listing of the names and relationships to that deceased author of all of the following, together with specific indication of the person or persons executing the notice who constitute more than one-half of that author’s termination interest: That author’s surviving widow or widower; and all of that author’s surviving children; and, where any of that author’s children are dead, all of the surviving children of any such deceased child of that author; however, instead of the information required by this paragraph (vii), the notice may contain both of the following: (A) A statement of as much of such information as is currently available to the person or persons signing the notice, with a brief explanation of the reasons why full information is or may be lacking; together with (B) A statement that, to the best knowledge and belief of the person or persons signing the notice, the notice has been signed by all persons whose signature is necessary to terminate the grant under section 304 of title 17, U.S.C., or by their duly authorized agents. 37 C.F.R. §201.10(b)(1). Service of the termination notice may be made by personal service or by first-class mail sent to an address that, after reasonable investigation, has been found to be the last known address of the grantee or successor in title. 37 C.F.R. §201.10(d)(1). While practitioners should follow the requirements of the Copyright Act for giving termination notice, an inadvertent failure to comply precisely may not otherwise invalidate the notice. In Siegel, supra, the survivors of a cocreator of a comic book character, Superman, provided notice that included 546 pages that listed the title, registration number, and dates of
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 27
§10.15
INTELLECTUAL PROPERTY LAW
“literally tens of thousands of Superman works published from 1938 to 1997.” 690 F.Supp.2d at 1050. However, the notice failed to list the title, the name of one author, the date the copyright was originally secured, or the original copyright registration number for the first two weeks of Superman newspaper comic strips that were published beginning on January 18, 1939, and concluding on January 28, 1939. The court stated it was faced with the question of whether this noncompliance with the regulatory requirements was harmless error. The court concluded that the plaintiffs’ failure to list the title, registration number, or date of the first two weeks’ of the comic strict “was indeed inadvertent.” 690 F.Supp.2d at 1065. To require complete or perfect constructive notice (as advocated by defendants by reference to 17 U.S.C. §205(c)) would provide authors or their heirs an illusory “opportunity” to recapture the extended copyright to property such as Superman, whose very success has led to its consistent appearance in print and other media for seventy years, leading to the creation of a large library of works in which constructive notice would have to be given. It is in the context of such iconic characters that defendants’ insistence on “certainty” and strict compliance would saddle authors and their heirs with having to conform to an overly “burdensome,” “ritualistic formality” that does little, if anything, to advance the purpose of ensuring that the public (or the grantee) will receive a “reasonable opportunity” to identify the works affected “from the information given in the notice.” 690 F.Supp.2d at 1067.
IV. [10.15] SAMPLE LICENSE AGREEMENT BETWEEN PHOTOGRAPHER AND STUDIO NOTE: This license is for images that do not include images of persons who have additional right of publicity for which a separate written waiver is necessary before the images could be used for commercial purposes. The waiver requirements for a commercial use of images is found in the Right of Publicity Act, 765 ILCS 1075/1, et seq. LICENSE AGREEMENT BETWEEN [PHOTOGRAPHER] AND [STUDIO] This License Agreement (Agreement) is entered into between [photographer’s name] (Photographer), an individual, and [studio name] (Studio), an Illinois corporation. Whereas, Photographer is a commercial photographer who over the years has created a portfolio of work, including work protected by U.S. copyrights, and desires to license some of [his] [her] work on a limited, nonexclusive basis to Studio; and, Whereas, Studio maintains an outlet for commercial photography and Studio desires to obtain a limited, nonexclusive license for some of the works of Photographer;
10 — 28
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.15
Now therefore, in consideration of the mutual promises and covenants and good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following meanings: 1.1 “Studio” shall mean [studio name], an Illinois corporation, and its officers, directors, employees, agents, successors, and assigns. 1.2 “Photographer” shall mean [photographer’s name], an individual, and [his] [her] successors, heirs, and assigns. 1.3 “Work” shall mean Photographs by Photographer that are licensed under this Agreement. 1.4 “Derivative Work(s)” shall mean any Photograph or digital image that either (a) constitutes a derivative work of the Work within the meaning of that term under the United States copyright law or (b) produces a visual effect that would infringe the copyright in the visual effect contained in the Work. 1.5 “Derivative Product” shall mean any product or medium that is based on or derived from the Work or any visual effect produced by the Work. 1.6 “Photograph(s)” shall mean any still image, film, and/or visual representation generated or reproduced optically, electronically, digitally, and/or by any other means, including any negatives, transparencies, film imprints, prints, original digital files, and/or any reproductions thereof on a medium now in existence or that may be in existence in the future. 2. License of Work. Photographer does hereby grant and convey to Studio, subject to all the terms and conditions in this Agreement, a nonexclusive, worldwide license to sublicense, to sell, to edit, to publish, and to distribute to others the Work listed on Exhibit A to this Agreement, as such exhibit may be amended from time to time. This license shall include the right to create, to sublicense, to sell, to edit, to publish, and to distribute to others Derivative Works and Derivative Products of the Work. 3. Representations and Indemnity by Photographer. 3.1 Photographer represents and warrants to Studio that (a) the Work is original and does not infringe upon any copyright or other proprietary rights of others; (b) Photographer is the sole and exclusive owner of all rights in the Work; and (c) Photographer has full power to enter into this Agreement, to carry out its obligations herein, and to grant the rights herein granted to Studio.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 29
§10.15
INTELLECTUAL PROPERTY LAW
3.2 Photographer shall indemnify Studio and its customers and sublicensees for, and hold them harmless from, any loss, expense (including reasonable attorneys’ fees), damage, or liability arising out of any claim, demand, or suit resulting from a breach of any of the warranties in Section 3.1 of this Agreement. Studio shall promptly inform Photographer in writing of any such claim, demand, or suit, and Photographer shall fully cooperate in the defense thereof. 3.3 Studio shall have the right to extend Photographer’s representations and warranties and indemnities contained herein to Studio’s customers and sublicensees, and Photographer shall be liable to the same extent as if such representations and warranties were made by Photographer directly to such customers and sublicensees. 3.4 Photographer grants no rights and makes no warranties with regard to the use of names, trademarks, trade dress, or registered, unregistered, or copyrighted designs or works of art or architecture depicted in any Work, and Studio must satisfy itself that all the necessary rights or consents regarding any of the foregoing as may be required have been obtained. 4. Representations and Indemnity by Studio. 4.1 Studio represents and warrants that it shall market the Work and will make all reasonable efforts to distribute the Work through sales, distribution, publication, and/or sublicenses. 4.2 Studio represents and warrants that it shall not sell, distribute, publish, or sublicense the Work and shall restrict any sale, distribution, publication, or sublicense to any party or for any use that would damage the reputation of Photographer or hold Photographer in ill repute. Without limiting the previous sentence, Studio shall not permit any pornographic, defamatory, libelous, or otherwise unlawful use of the Work whether directly or in context or juxtaposition with the Work. 4.3 Studio shall indemnify Photographer and its customers and sublicensees for, and hold them harmless from, any loss, expense (including reasonable attorneys’ fees), damage, or liability arising out of any claim, demand, or suit resulting from a breach of any of the warranties in Sections 4.1 and 4.2 above. Photographer shall promptly inform Studio in writing of any such claim, demand, or suit, and Photographer shall fully cooperate in defense thereof. 5. Copyrights. 5.1 Except as stated herein and for the purpose of fulfilling this Agreement, no ownership of copyright in the Work shall pass to Studio by this Agreement. Copyright ownership shall remain with Photographer at all times. Studio is strictly prohibited from using, distributing, publishing, or sublicensing the Work in any manner except as permitted under this Agreement. Upon demand by Photographer, Studio shall
10 — 30
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.15
immediately assign to Photographer any copyright resulting from a Derivative Work arising under this Agreement. No copyright information shall be removed from any digital file. 5.2 A line crediting Photographer shall appear adjacent to any Work utilized in an editorial manner. The credit line shall be in a form suitable to Photographer. 6. Infringement. 6.1 Studio will notify Photographer of any actual, potential, or threatened infringement of the rights in the Work or Derivative Works that come to its attention. 6.2 In the event of any infringement of any rights granted to Studio under this Agreement, Studio shall have the first option to bring any such action for such infringement on behalf of itself and Photographer, and Photographer shall cooperate fully with Studio in such action. In such event, Studio shall bear the expenses of the action and shall recover its expenses from any sums recovered in the action. The balance of any proceeds of such action shall be divided between Studio and Photographer in a mutually agreeable allocation. 6.3 If Studio declines in writing to bring any such action, Photographer may proceed with an action for infringement and shall bear all expenses of the action and shall recover its expenses from any sums recovered in the action. The balance of such recovery, if any, shall be paid solely to Photographer. 7. Term and Termination. 7.1 This Agreement shall have an initial term of 3 years from the date of signing of this Agreement. This Agreement automatically shall extend for additional 1-year periods unless either party notifies the other no later than 30 days before the termination of the Agreement that the party intends to terminate the Agreement. 7.2 This Agreement may be terminated by either party if 7.2.1 the other party commits or allows to be committed any material breach of the Agreement and fails to remedy such breach within 30 days of written notice having been given by the other party requiring the breach to be remedied or 7.2.2 the other party shall be dissolved or in any case shall commit any act of bankruptcy, shall have a receiving order made against it, or shall make or negotiate for any composition or arrangement with or assignment for the benefit of its creditors. 7.3 Termination shall be without prejudice to any rights or remedies that either party may have under this Agreement or otherwise.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 31
§10.15
INTELLECTUAL PROPERTY LAW
7.4 Upon termination of this Agreement, Studio shall immediately return to Photographer all Works, Derivative Works, and Derivative Products in its possession and shall provide a full and complete accounting to Photographer of all licensing fees under Section 8 of this Agreement. 8. Licensing Fees. 8.1 Studio shall pay an annual licensing fee (Annual Fee) to Photographer in the amount of $[amount]. This fee shall be due and payable at the time this Agreement is signed and on the anniversary date of the signing of this Agreement. 8.2 In addition to the Annual Fee in Section 8.1 above, Studio shall pay a royalty of [percent] to Photographer based on the gross revenues received by Studio for each sale, publication, and/or sublicense. The royalty payment shall be paid on the 15th day of the month following the month in which the revenues were received by the Studio. 8.3 At the time of payment, Studio shall deliver to Photographer a report that shall provide all reasonably necessary information for computation of the payments for the period which is reflected by the payment. 8.4 Photographer or Photographer’s agent may, upon reasonable notice and during normal business hours, inspect the records of Studio on which such reports are based no more often than once per year, provided that such records shall remain confidential. 9. Additional Works. Photographer may, but is not obligated to, offer to Studio additional Works for licensing. 10. Liability. 10.1 Neither party shall be liable to the other with respect to any failure to perform its obligations under the Agreement arising from, but only to the extent of, circumstances beyond its control, including but not limited to force majeure, act of God, governmental act, fire, explosion, accident, civil commotion, terrorism, labor disputes of whatever nature and whatever cause, sabotage, breakdown of equipment, or the impossibility of obtaining materials. 10.2 Except as provided in Sections 3.2 and 4.3 of this Agreement, neither party shall be liable to the other for incidental, consequential, special, or punitive damages, including but not limited to loss of profits or goodwill. 11. Interpretation and Construction. 11.1 This Agreement may be amended only in a writing signed by both parties with a document that indicates on its face that it is amending this Agreement. E-mail correspondence shall not constitute an amendment to this Agreement.
10 — 32
WWW.IICLE.COM
OWNERSHIP AND TRANSFER OF COPYRIGHTS
§10.15
11.2 Clause headings are inserted for convenience of reference only and shall have no effect on the construction of the Agreement. 11.3 This transaction shall be governed by the laws of the State of Illinois without resort to its conflict-of-laws provisions. Both parties agree that jurisdiction and venue shall be proper in a court of competent jurisdiction in [county name] County, Illinois, and waive forum non conveniens arguments. The parties further agree that notice given pursuant to Section 12 of this Agreement shall be sufficient notice for the purpose of service of process for any lawsuit brought under this Agreement. 11.4 Nothing herein shall be deemed or construed as creating a joint venture or partnership between Studio and Photographer, and neither is authorized as an agent or other representative of the other. 11.5 No failure, delay, or indulgence on the part of either party in exercising any power or right conferred on such party by the Agreement shall operate as a waiver of such power or right. 11.6 This Agreement contains all of the agreements, understandings, representations, warranties, and conditions and constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior communications or agreements, written or oral. 12. Notices. 12.1 Any notice required to be given by one party to the other in accordance with the Agreement shall be in writing and delivered by mail, courier, personal delivery, facsimile, or e-mail to the relevant party at the addresses listed below or such other address as shall have been notified to the other party and shall be deemed to have been delivered upon the earlier of receipt or the second business day after sending. 12.2 Notice to Studio: [studio name] [address] [e-mail] [phone, fax] 12.3 Notice to Photographer: [photographer’s name] [address] [e-mail] [phone, fax] 13. Assignment. This Agreement may not be assigned in total or in part by either party unless the other party agrees to such assignment in writing prior to such assignment.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
10 — 33
§10.15
INTELLECTUAL PROPERTY LAW
14. Arbitration. Any controversy or claim arising or relating to this Agreement, or the breach thereof, shall be settled by arbitration under the rules of the American Arbitration Association using its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Such arbitration shall be conducted in [county name] County, Illinois, and shall be initiated within 6 months of the date of the dispute. Fees and costs for the arbitration shall be borne by the non-prevailing party. By signing below, the parties represent that they have the authority to bind their respective entities and that they agree to the terms and conditions herein stated. [studio name]
[photographer’s name]
By: _____________________________ Title: ___________________________
_________________________________
Date: __________, 20__
Date: __________, 20__ EXHIBIT A TO LICENSE AGREEMENT BETWEEN [PHOTOGRAPHER] AND [STUDIO]
Photographs and digital images licensed by Photographer to Studio: All photographs and digital images created by Photographer for commercial purposes beginning on [beginning date], to the date of the signing of this Agreement.
10 — 34
WWW.IICLE.COM
11
Copyright Infringement, Fair Use, and Remedies
WILLIAM T. MCGRATH Davis McGrath LLC Chicago
®
©COPYRIGHT 2017 BY IICLE .
11 — 1
INTELLECTUAL PROPERTY LAW
I. Jurisdiction and Prerequisites to Suit A. B. C. D.
[11.1] Subject-Matter Jurisdiction [11.2] Venue [11.3] Who May Bring Infringement Suits [11.4] Registration as Prerequisite to Suit 1. [11.5] Exceptions to Registration Requirement 2. [11.6] Registration Applied for but Not Yet Received E. [11.7] Statute of Limitations II. Elements of Proof of Infringement A. B. C. D.
[11.8] Generally [11.9] Essential Elements: Ownership and Copying [11.10] Access to Plaintiff’s Work [11.11] Direct, Contributory, and Vicarious Liability 1. [11.12] Direct Infringement 2. [11.13] Contributory Infringement 3. [11.14] Vicarious Liability 4. [11.15] Safe Harbors Under the Digital Millennium Copyright Act
III. Fair Use A. [11.16] Generally 1. [11.17] First Factor: Purpose and Character of the Use 2. [11.18] Second Factor: Nature of the Copyrighted Work 3. [11.19] Third Factor: Amount and Substantiality of the Use 4. [11.20] Fourth Factor: Effect on the Market B. [11.21] Parody C. [11.22] Technology IV. Remedies A. B. C. D. E. F. G.
11 — 2
[11.23] [11.24] [11.25] [11.26] [11.27] [11.28] [11.29]
Generally Actual Damages Profits of the Infringer Statutory Damages Willfulness Injunctive Relief Attorneys’ Fees
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.3
I. JURISDICTION AND PREREQUISITES TO SUIT A. [11.1] Subject-Matter Jurisdiction Federal courts have exclusive jurisdiction over copyright infringement matters. This exclusive subject-matter jurisdiction is provided in 28 U.S.C. §1338(a), which states: The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to . . . copyrights. . . . No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to . . . copyrights. The crucial question in determining whether subject-matter jurisdiction exists under §1338(a) is whether a case “arises under” the Copyright Act of 1976 (Copyright Act), Pub.L. No. 94-553, §101, 90 Stat. 2541. Not every lawsuit involving a copyright “arises under” the Copyright Act. “[A] dispute as to ownership or contractual enforcement turning on the facts or on ordinary principles of contract law” would not arise under the Copyright Act. Bassett v. Mashantucket Pequot Tribe, 204 F.3d 343, 347 (2d Cir. 2000), quoting T.B. Harms Co. v. Eliscu, 339 F.2d 823, 826 (2d Cir. 1964). See Edgenet, Inc. v. Home Depot U.S.A., Inc., 658 F.3d 662 (7th Cir. 2011). For example, a suit solely for nonpayment of a royalty in which no infringement is claimed would not give rise to jurisdiction under §1338(a), nor would an action for an accounting against a joint author. When there is a contract between the parties, courts must determine whether the dispute arises under the Copyright Act or is simply a matter of contract law. Typically, courts will find that subject-matter jurisdiction under §1338(a) is present if (1) the complaint is for a remedy expressly granted by the Copyright Act (e.g., a suit for infringement) or (2) the complaint asserts a claim requiring construction of the Copyright Act. Bassett, supra, 204 F.3d at 349, citing T.B. Harms, supra, 339 F.2d at 828. Thus, a claim requiring a determination of ownership based on the “work made for hire” provisions of the Act would arise under the Act, while a claim of ownership based entirely on a contractual assignment would not necessarily arise under the Act. B. [11.2] Venue Under 28 U.S.C. §1400(a), venue in a copyright case is proper “in the district in which the defendant or his agent resides or may be found.” In addressing venue determinations, the courts have noted that the “may be found” standard is equivalent to amenability to personal jurisdiction. Thus, venue under §1400(a) is proper in any district in which personal jurisdiction over the defendant would be proper. Milwaukee Concrete Studios, Ltd. v. Fjeld Manufacturing Co., 8 F.3d 441, 445 (7th Cir. 1993). C. [11.3] Who May Bring Infringement Suits An action for copyright infringement may be brought by the copyright owner or by an exclusive licensee. The Copyright Act states that the “legal or beneficial owner of an exclusive right under a copyright” may bring an action for infringement. 17 U.S.C. §501(b). Some courts refer to this as “standing” to sue, but the Seventh Circuit has pointed out that this section is not
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 3
§11.4
INTELLECTUAL PROPERTY LAW
derived from Article III standing, but, more precisely, spells out who has enforceable rights under the statute. One who fails to meet the statutory requirements of §501(b) fails to state a claim on which relief can be granted and is subject to dismissal under Federal Rule of Civil Procedure 12(b)(6). HyperQuest, Inc. v. N’Site Solutions, Inc., 632 F.3d 377, 381 (7th Cir. 2011). An exclusive licensee, however, may bring an action (1) only for the particular right the exclusive licensee owns and (2) only for an infringement “committed while he or she is the owner of it.” 17 U.S.C. §501(b). Because of these limitations in §501(b), an assignee or exclusive licensee cannot bring suit for infringements that occurred prior to the date of the assignment or exclusive license. See Wilson v. Electro Marine Systems, Inc., 915 F.2d 1110 (7th Cir. 1990) (affirming dismissal of infringement action when plaintiff did not present evidence that defendant had infringed after plaintiff had acquired copyright). For infringements that occur prior to an assignment, it is the assignor and not the assignee that has standing to sue. ABKCO Music, Inc. v. Harrisongs Music, Ltd., 944 F.2d 971, 980 (2d Cir. 1991). Even an assignment of “all rights, title and interest” is generally construed not to include preexisting causes of action. Intimo, Inc. v. Briefly Stated, Inc., 948 F.Supp. 315, 316 (S.D.N.Y. 1996). If the assignee or exclusive licensee wants the right to sue for prior causes of action, the transfer document should explicitly state that causes of action for prior infringement are being assigned. Some parties have circumvented this principle by obtaining a later amendment to the original transfer document transferring any accrued causes of action. As long as such a post hoc transfer of an accrued cause of action occurs before trial, courts have recognized it and allowed the transferee to have standing to sue. See Intimo, supra, 948 F.Supp. at 317; Infodek, Inc. v. Meredith-Webb Printing Co., 830 F.Supp. 614, 620 (N.D.Ga. 1993). D. [11.4] Registration as Prerequisite to Suit In most cases, it is necessary for a plaintiff to register copyright before filing suit. 17 U.S.C. §411(a). There are, however, some exceptions to the registration requirement, and in some situations courts will allow a suit to proceed when the plaintiff has applied for a registration but has not yet received the certificate from the U.S. Copyright Office. Prior to 2010, most courts treated §411(a) as a “jurisdictional prerequisite” to maintaining a copyright infringement action. However, in Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154, 176 L.Ed.2d 18, 130 S.Ct. 1237 (2010), the Court clarified that §411(a) is not “jurisdictional,” as that term is properly used, but is more in the nature of a claim-processing rule. While jurisdictional rules are applied stringently, claim-processing rules can be waived or cured by amendments. In Reed, the court of appeals had overturned a class action certification and settlement because many of the freelance authors who were members of the class had not registered their copyrights and the court, therefore, did not have jurisdiction. The Supreme Court reversed and remanded, holding that §411(a) was not a jurisdictional statute. It noted that the term “jurisdictional” refers only to the power of the court to adjudicate, not to conditions relating to the rights or obligations of the parties. It acknowledged that this distinction can be confusing. “Courts — including this Court — have sometimes mischaracterized claim-processing rules or elements of a cause of action as jurisdictional limitations.” 130 S.Ct. at 1244 – 1245. The Supreme Court has indicated a desire to curtail “drive-by jurisdictional rulings” that fail to appreciate the important difference
11 — 4
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.5
between “true jurisdictional conditions” and “non-jurisdictional limitations on causes of action.” 130 S.Ct. at 1245. A condition in a statute should be considered jurisdictional only if Congress clearly delineates it as such. Congress did not clearly state that the registration requirement in §411(a) is jurisdictional. It is more akin to a claim-processing rule or an element of the cause of action. The Court noted that neither 28 U.S.C. §1331, which confers subject-matter jurisdiction over questions of federal law, nor §1338(a), which provides subject-matter jurisdiction specifically to copyright claims, conditions its jurisdictional grant on the requirement of registration. 1. [11.5] Exceptions to Registration Requirement One exception to the formality of obtaining registration before filing a lawsuit was created when the Berne Convention Implementation Act of 1988 (BCIA), Pub.L. No. 100-568, 102 Stat. 2853, became effective in 1989. This exception dispensed with the requirement of registration as a prerequisite to filing suit for works governed by the Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886 (Berne Convention), www.wipo.int/treaties/en/text.jsp?file_id=283698, whose country of origin is not the United States. This exception was one of the changes made to bring the U.S. Copyright Act into compliance with the Berne Convention, which prohibits formalities affecting the rights of authors from other Berne member states. (Nothing in the Berne Convention prevents the United States from imposing this type of formality on its own authors, however.) The registration requirement applies to any “United States work” (17 U.S.C. §411(a)), a term defined in 17 U.S.C. §101 that includes works first published exclusively or simultaneously in the United States and unpublished works by nationals or domiciliaries of the United States. Thus, non-U.S. copyright owners seeking to enforce their copyrights against infringements in the United States may do so without having first obtained a registration of the copyright from the U.S. Copyright Office. It should be noted, however, that a timely registration for non-U.S. works is still necessary in order for those copyright owners to be eligible for statutory damages and attorneys’ fees under 17 U.S.C. §412. Another situation in which suit can be filed without a registration certificate occurs when the U.S. Copyright Office has refused to register a work after a proper application has been filed. 17 U.S.C. §411(a) provides that “where the deposit, application, and fee required for registration have been delivered to the Copyright Office in proper form and registration has been refused, the applicant is entitled to institute a civil action for infringement.” The applicant must serve notice of the suit and a copy of the complaint on the Register of Copyrights, and the Register has the option to become a party to the action with respect to the issue of registerability of the copyright claim. A third situation in which it is possible to file suit without a registration occurs when the plaintiff institutes an action under 17 U.S.C. §106A(a), added by the Visual Artists Rights Act of 1990 (VARA), Pub.L. No. 101-650, Title VI, §603(a), 104 Stat. 5128. VARA provides a cause of action for infringement of the moral rights of “attribution” and “integrity” for a narrow class of art works set forth in the definition of a “work of visual art” in 17 U.S.C. §101. Again, these rights were added to the Copyright Act in response to the United States’ accession to the Berne Convention, so requiring registration would be inappropriate. The legislative history of the BCIA
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 5
§11.6
INTELLECTUAL PROPERTY LAW
indicates that “moral rights are particularly inept for imposition of formalities.” H.R.Rep. No. 609, 100th Cong., 2d Sess. (1988). A final, and seldom used, exception to the registration requirement relates to works consisting of sounds or images. See, e.g., National Football League v. Rondor, Inc., 840 F.Supp. 1160, 1166 (N.D. Ohio 1993). 17 U.S.C. §411(b) provides that in the case of a work consisting of sounds, images, or both, when fixation is made simultaneously with its transmission, the copyright owner may institute an action for infringement without having previously registered the work if certain conditions are met. The legislative history shows that this provision was intended to allow a party to obtain an injunction to prevent the unauthorized use of material included in a live transmission prior to the transmission. General Electric Property Management Company of Colorado v. Broadcast Information Services, Inc., No. 88-A-325, 1988 WL 106018 (D.Colo. Oct. 12, 1988) (§411(b) is intended to deal with works that are transmitted live and does not apply to prerecorded programs). An injunction obtained prior to the transmission would necessarily be prior to the fixation of the work and, therefore, also prior to any registration. The conditions for this exception are that the copyright owner must serve notice to the infringer at least 48 hours before fixation, declaring an intention to secure copyright in the work. The copyright owner must then make registration of the work within three months after its first transmission. 17 U.S.C. §411(b). Other than works covered by these exceptions, it is necessary to have a registration or preregistration of a work before a plaintiff can sue for infringement of that work. Section 408(f) allows “preregistration” of certain types of works, such as movies, that are being prepared for commercial distribution but have not yet been released. Preregistration enables plaintiffs to file suit for infringement that occurs prior to commercial release of a work. Specifically, 17 U.S.C. §411(a) states that “no civil action for infringement . . . shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.” Section 410(a) authorizes the Register of Copyrights to register a claim and issue a certificate of registration when, after examination, the Register determines that the material deposited constitutes copyrightable subject matter and that other legal and formal requirements (e.g., a properly completed application and payment of the registration fee) have been met. It is important to note that the “effective date” of a copyright registration is not the date the Copyright Office issues the registration certificate but rather the date the Copyright Office receives the application, deposit, and fee, which are later determined to be acceptable. 2. [11.6] Registration Applied for but Not Yet Received The question sometimes arises as to whether 17 U.S.C. §411(a) requires that the plaintiff must actually have received the registration certificate at the time suit is filed or whether it is sufficient that the plaintiff has submitted a proper application, deposit, and fee. Prior to Reed Elsevier, Inc. v. Muchnick, 599 U.S. 154, 176 L.Ed.2d 18, 130 S.Ct. 1237 (2010), there were two schools of thought on this question and cases to support each side. Some courts held that registration is a jurisdictional prerequisite and dismissed any case in which the plaintiff does not allege possession of a certificate of registration (the “registration approach”). See, e.g., La Resolana Architects, PA v. Clay Realtors Angel Fire, 416 F.3d 1195 (10th Cir. 2005). Other courts held that §411(a) is satisfied if the plaintiff demonstrates that the U.S. Copyright Office
11 — 6
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.7
has received the application, deposit, and fee (the “application approach”). See, e.g., Positive Black Talk Inc. v. Cash Money Records Inc., 394 F.3d 357, 365 – 366 (5th Cir. 2004). Even after Reed-Elsevier, supra, courts have been split as to whether “registration” for purposes of compliance with §411(a) is complete when a copyright application is made, or only after the U.S. Copyright Office has acted on the application. Compare Cosmetic Ideas, Inc. v. IAC/Interactivecorp, 606 F.3d 612, 615 – 621 (9th Cir. 2010) (application approach), with Asche & Spencer Music, Inc. v. Principato-Young Entertainment, Inc., 147 F.Supp.3d 833, 835 – 838 (D.Minn. 2015) (registration approach). It can take up to eight months or more for the U.S. Copyright Office to process and issue a registration certificate. A plaintiff in a circuit that applies the registration approach may be faced with the choice of waiting months for a certificate in order to file suit or bearing the expense of obtaining a certificate on an expedited basis (the U.S. Copyright Office charges $855 for special handling compared to $55 for a normal registration; see 37 C.F.R. §201.3). The Seventh Circuit has not definitively resolved the issue. See Panoramic Stock Images, Ltd. v. John Wiley & Sons, Inc., 963 F.Supp.2d 842, 848 – 849 (N.D.Ill. 2013) (discussing caselaw and following application approach). Cf. Joint Commission on Accreditation of Healthcare Organizations v. Greeley Co., No. 14 C 10225, 2016 WL 1450051, *3 (N.D.Ill. Apr. 13, 2016) (dismissing complaint without prejudice when plaintiff did not file application to register until six months after suit was filed); Psihoyos v. John Wiley & Sons, Inc., 748 F.3d 120, 125 (2d Cir. 2014) (granting summary judgment to defendant regarding certain photos for which no application had even been filed before summary judgment motion was filed). E. [11.7] Statute of Limitations The statute of limitations in civil actions for copyright infringement is set forth in 17 U.S.C. §507(b): “No civil action shall be maintained under the provisions of this title unless it is commenced within three years after the claim accrued.” The question of when a cause of action accrues can be a difficult one. Generally, a cause of action accrues at the time of the infringement sued on. If any act of infringement occurs within the three-year limitation period, the lawsuit can be maintained, even if some of the acts of infringement occurred more than three years prior to filing suit. Petrella v. Metro-GoldwynMayer, Inc., ___ U.S. ___, 188 L.Ed.2d 979, 134 S.Ct. 1962, 1969 (2014) (under “separateaccrual rule,” statute of limitations runs separately from each violation). When a defendant has engaged in a series of discrete infringing acts over a period of many years, the infringing acts occurring within the three-year window will be actionable, but the suit will be untimely with respect to the same or similar infringement occurring before the three-year window. 134 S.Ct. at 1970. See also Chicago Building Design, P.C. v. Mongolian House, Inc., 770 F.3d 610 (7th Cir. 2014). If the plaintiff is not aware of the infringement at the time it occurs, most courts have held that the statute does not begin to run until the plaintiff discovers (or by reasonable diligence could have discovered) the infringement. Taylor v. Meirick, 712 F.2d 1112, 1118 (7th Cir. 1983) (“[I]t should be enough to toll the statute of limitations that a reasonable man would not have
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 7
§11.8
INTELLECTUAL PROPERTY LAW
discovered the infringement.”); Roley v. New World Pictures, Ltd., 19 F.3d 479, 481 (9th Cir. 1994) (“A cause of action for copyright infringement accrues when one has knowledge of a violation or is chargeable with such knowledge.”). See also Petrella, supra, 134 S.Ct. at 1969 n.4 (noting that majority of courts have adopted discovery rule); Chicago Building Design, supra (applying discovery rule); Psihoyos v. Wiley & Sons, Inc., 748 F.3d 120, 124 (2d Cir. 2014) (same). An effect of the separate-accrual rule is that a plaintiff may have been aware of infringing acts for decades and yet still file an action for damages. Prior to Petrella, supra, courts would sometimes apply the doctrine of laches to bar such suits. In Petrella, however, the Court held that laches could not be invoked to bar Petrella’s pursuit of a claim for damages brought within §507(b)’s three-year window. 134 S.Ct. at 1972 – 1977. Another basis for tolling the statute of limitations in a copyright case is equitable estoppel, sometimes referred to as “fraudulent concealment.” Taylor, supra, 712 F.2d at 1118; Bridgeport Music, Inc. v. Diamond Time, Ltd., 371 F.3d 883 (6th Cir. 2004). Petrella, supra, recognized that while the doctrine of laches does not supplant §507, the doctrine of equitable tolling, which lengthens the time for commencing an action, is still available in appropriate circumstances.
II. ELEMENTS OF PROOF OF INFRINGEMENT A. [11.8] Generally The Copyright Act provides that anyone who violates any of the exclusive rights of the copyright owner is an infringer of copyright. 17 U.S.C. §501. For example, one who makes an unauthorized reproduction of a work or who publicly performs a work without a license has infringed the copyright (unless one of the many exceptions set forth in 17 U.S.C. §§107 – 122 applies). The essence of copyright infringement is “copying.” If there has not been copying by the defendant, there is no infringement regardless of the amount of similarity. This point was made memorably by Judge Learned Hand in Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d 49, 54 (2d Cir. 1936), when he stated: [I]f by some magic a man who had never known it were to compose anew Keats’s Ode on a Grecian Urn, he would be an “author,” and, if he copyrighted it, others might not copy that poem, though they might of course copy Keats’s. This is known as the “doctrine of independent creation.” If a work is not copied from another, then it cannot infringe it. Exact copying is not required for infringement. The notion of copying encompasses any manner in which a work is duplicated, transcribed, or simulated. The legislative history of the Copyright Act notes that a “work would be infringed by reproducing it in whole or in any
11 — 8
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.9
substantial part, and by duplicating it exactly or by imitation or simulation.” H.R.Rep. No. 1476, 94th Cong., 2d Sess. 61 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5675. The exclusive rights of reproduction, adaptation, and publication, though closely related, are independent. A single act of infringement may violate all of these rights. However, infringement takes place when any one of the rights is violated. Id. The display and distribution rights have taken on greater significance in the Internet age. See Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146 (9th Cir. 2007) (display or distribution on Internet of copy of photograph stored in defendant’s computer memory can constitute infringement if not authorized). B. [11.9] Essential Elements: Ownership and Copying A plaintiff claiming copyright infringement must show both “(1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.” Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 113 L.Ed.2d 358, 111 S.Ct. 1282, 1296 (1991), quoted by Wildlife Express Corp. v. Carol Wright Sales, Inc., 18 F.3d 502, 507 (7th Cir. 1994). The substantive principles relating to ownership of a copyright are discussed in Chapter 10 of this handbook. As an essential element in an infringement case, proof of ownership of a valid copyright would also include proof of originality (see §9.5 of this handbook) and proof of copyrightability (see §§9.4 – 9.28). The Copyright Act contains an important evidentiary presumption for copyright owners who have made timely registration. 17 U.S.C. §410(c) provides that “the certificate of a registration made before or within five years after first publication of the work constitutes prima facie evidence of the validity of the copyright and of the facts stated in the certificate.” When applicable, the plaintiff in an infringement action can rely on this presumption as prima facie evidence of ownership of a valid copyright. The second element necessary to prove infringement is “copying” of protectable material. Since direct evidence of copying is often not available, copying may be inferred when the defendant had access to the copyrighted work and the accused work is substantially similar to the copyrighted work. Atari, Inc. v. North American Philips Consumer Electronics Corp., 672 F.2d 607, 614 (7th Cir. 1982); Roulo v. Russ Berrie & Co., 886 F.2d 931, 939 (7th Cir. 1989). Following the analysis in the seminal case Arnstein v. Porter, 154 F.2d 464, 468 (2d Cir. 1946), the Seventh Circuit, in Atari, supra, noted that the analysis of “substantial similarity” consists of two parts: (1) copying; and (2) improper appropriation. The first prong, “copying,” can be established by showing access and some degree of similarity that would make independent creation unlikely. It may or may not be substantial. This required similarity is sometimes referred to as “probative similarity.” See Laureyssens v. Idea Group, Inc., 964 F.2d 131, 140 (2d Cir. 1992); Alan Latman, “Probative Similarity” as Proof of Copying: Toward Dispelling Some Myths in Copyright Infringement, 90 Colum.L.Rev. 1187, 1204 (1990). “Copying,” as the first prong of substantial similarity, “is limited to the purely
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 9
§11.9
INTELLECTUAL PROPERTY LAW
factual issue of whether the defendant used the plaintiff’s work as a starting point for his own.” Stillman v. Leo Burnett Co., 720 F.Supp. 1353, 1357 (N.D.Ill. 1989). If there is access and sufficient objective or extrinsic similarities to be probative of copying, one moves to the second part of the substantial similarity analysis. This second prong — sometimes referred to as “improper appropriation” — looks to the response of the “ordinary observer.” Atari, supra; Arnstein, supra. This is a subjective or intrinsic test. Specifically, the test is whether the accused work is so similar to the plaintiff’s work that an ordinary reasonable person would conclude that the defendant unlawfully appropriated the plaintiff’s protectible expression by taking material of substance and value. Atari, supra, 672 F.2d at 614. This prong inquires into whether the ordinary, reasonable observer would conclude that “the accused work has captured the ‘total concept and feel’ of the copyrighted work.” Id. “Each of these two issues — copying and improper appropriation — is an issue of fact.” Arnstein, supra, 154 F.2d at 469. Because of the fact-intensive nature of access and copying and the subjective nature of the ordinary observer test for improper appropriation, courts frequently note that summary judgment is inappropriate to determine whether two works are substantially similar. “[B]ecause substantial similarity is customarily an extremely close question of fact, summary judgment has traditionally been frowned upon in copyright litigation.” Sturdza v. United Arab Emirates, 281 F.3d 1287, 1296 (D.C. Cir. 2002), quoting Hoehling v. Universal City Studios, Inc., 618 F.2d 972, 977 (2d Cir. 1980). Summary judgment will be granted only when the only similarities between the works are in non-copyrightable elements or when no rational jury could find the works substantially similar. “Where reasonable minds could differ on the issue of substantial similarity, however, summary judgment is improper.” Shaw v. Lindheim, 919 F.2d 1353, 1355 (9th Cir. 1990). Substantial similarity does not require exact copying and duplication, or near identity is not necessary to establish infringement. Atari, supra, 672 F.2d at 618; Wildlife Express, supra, 18 F.3d at 511; Sid & Marty Krofft Television Productions, Inc. v. McDonald’s Corp., 562 F.2d 1157, 1167 (9th Cir. 1977). [A]n infringement . . . includes also the various modes in which the matter of any work may be adopted, imitated, transferred, or reproduced, with more or less colorable alterations to disguise the piracy. [Citation omitted in original.] Atari, supra, 672 F.2d at 618, quoting Universal Pictures Co. v. Harold Lloyd Corp., 162 F.2d 354, 360 (9th Cir. 1947). See Wildlife Express, supra. When assessing substantial similarity, Atari, supra, also teaches that the focus is properly on the similarities, not the differences. 672 F.2d at 618 – 619. The focus in a copyright infringement action, however, is on the similarities in protectible expression. . . . “(I)t is enough that substantial parts were lifted; no plagiarist can excuse the wrong by showing how much of his work he did not
11 — 10
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.10
pirate.” Atari, supra, 672 F.2d at 619, quoting Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d 49, 56 (2d Cir. 1936) (Hand, J.). If the only copying from the plaintiff’s work is the copying of ideas or concepts and not expression, then there is no copying of protectable expression. The principles of this ideaexpression dichotomy are articulated in Atari. 672 F.2d at 615. If the only similarity between two works is the abstract idea, there is no infringement. However, if the “particular form in which [the work] is expressed (shapes, sizes, colors, sequences, arrangements, and sounds) provides something ‘new or additional over the idea,’ ” then it is protectable. 672 F.2d at 617. In Atari, the visual appearance of the defendant’s work went beyond copying just the idea of the plaintiff’s video games, and the court found that the defendant had copied protectable expression. See also Wildlife Express, supra, 18 F.3d at 511 n.7 (“When the similarities have been in features other than those features common to all objects of the species, the courts have protected the artistic expression exhibited in the product.”). In Susan Wakeen Doll Co. v. Ashton-Drake Galleries, 272 F.3d 441, 451 (7th Cir. 2001), a case involving infringement of a doll’s head, the court stated that the “idea” of the work was “a depiction of a toddler’s face.” The court rejected the defendant’s argument that the only similarities between the plaintiff’s and the defendant’s works were unprotectable ideas. There was evidence of similarities between the two dolls’ heads. These similarities related to features that were not necessary to capture the essence of a child. Thus, there was a rational basis for the jury’s conclusion that the two works were substantially similar. 272 F.3d at 451 – 452. When the similarities between two works result entirely from similarity of unprotectable ideas, however, there is no substantial similarity. This is often seen, for example, when the works in issue are items found in nature. See, e.g., Satava v. Lowry, 323 F.3d 805 (9th Cir. 2003). In addition, the idea-expression dichotomy has often defeated an infringement claim in cases asserting that the defendant’s Hollywood movie infringed some little-known literary work by the plaintiff. See, e.g., Beal v. Paramount Pictures Corp., 20 F.3d 454 (11th Cir. 1994); Kouf v. Walt Disney Pictures & Television, 16 F.3d 1042 (9th Cir. 1994); Arden v. Columbia Pictures Industries, Inc., 908 F.Supp. 1248 (S.D.N.Y. 1995). C. [11.10] Access to Plaintiff’s Work When there is no direct proof of copying, that element is typically established through circumstantial evidence. In most cases, proof of similarity alone is not sufficient. The plaintiff must also establish that the defendant had access to the plaintiff’s work. It is not necessary to prove that the defendant actually possessed or observed the plaintiff’s work. Rather, access refers to the opportunity to see or hear the work. Thus, proof of widespread distribution of the plaintiff’s work is sufficient to prove access. ABKCO Music, Inc. v. Harrisongs Music, Ltd., 722 F.2d 988 (2d Cir. 1983) (access could be inferred from fact that plaintiff’s song was on top 40 chart for several weeks). The Seventh Circuit stated, in Wildlife Express Corp. v. Carol Wright Sales, Inc., 18 F.3d 502, 508 n.5 (7th Cir. 1994), that “[a]ccess can be found to exist when the defendant had an opportunity to view the protected item.” See also Susan Wakeen Doll
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 11
§11.11
INTELLECTUAL PROPERTY LAW
Co. v. Ashton-Drake Galleries, 272 F.3d 441, 450 (7th Cir. 2001) (“opportunity to view” is sufficient to establish access). Some courts have held that when there is “striking similarity” between the plaintiff’s and the defendant’s works, access can be presumed. Gaste v. Kaiserman, 863 F.2d 1061 (2d Cir. 1988); Repp v. Webber, 132 F.3d 882 (2d Cir. 1997). In Selle v. Gibb, 741 F.2d 896, 901 (7th Cir. 1984), the Seventh Circuit stated that striking similarity between two works will not support a finding of infringement unless there is “at least some other evidence which would establish a reasonable possibility that the complaining work was available to the alleged infringer.” [Emphasis in original.] Subsequently, in Ty, Inc. v. GMA Accessories, Inc., 132 F.3d 1167, 1170 (7th Cir. 1997), the court interpreted Selle, supra, to allow a plaintiff to base proof of access solely on a striking similarity as long as there is no earlier exemplar that could have independently inspired both works. The Ty court noted that “a similarity that is so close as to be highly unlikely to have been an accident of independent creation is evidence of access.” Id. The court concluded that [a]ccess (and copying) may be inferred when two works are so similar to each other and not to anything in the public domain that it is likely that the creator of the second work copied the first, but the inference can be rebutted by disproving access or otherwise showing independent creation. 132 F.3d at 1171. D. [11.11] Direct, Contributory, and Vicarious Liability In recent years, the doctrines of contributory and vicarious liability have taken on tremendous significance due to peer-to-peer file sharing and other acts of copyright infringement on the Internet. Because of the practical problems of suing individual Internet users, entities such as software developers, website operators, and Internet service providers (ISPs) have become targets in copyright infringement actions under various theories of secondary liability. Sections 11.12 – 11.15 below address the basic principles of direct, contributory, and vicarious liability in the context of copyright infringement. 1. [11.12] Direct Infringement As mentioned in §11.8 above, anyone who engages in conduct that violates one of the copyright owner’s exclusive rights (and does not qualify for one of the many exemptions set forth in 17 U.S.C. §§107 – 122) is an infringer. The Copyright Act is, in essence, a strict liability statute. Intent is not a factor — copyright infringement is determined without regard to the intent or state of mind of the infringer. “Innocent” infringement is infringement nonetheless. A printer or photo lab can be held liable for making unauthorized reproductions even if it did not realize it was making an unauthorized copy. A nightclub can be held liable for an unauthorized public performance of a musical composition even if it did not know the song was protected by copyright. An infringer’s lack of knowledge of infringement may, however, affect the amount of statutory damages available. The Copyright Act allows the court to reduce a statutory damage award to as little as $200 per work infringed when the court finds that the infringer “was not aware and had no reason to believe that his or her acts constituted an infringement of copyright.”
11 — 12
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.13
17 U.S.C. §504(c)(2). If the work infringed bears a proper copyright notice, however, the defendant is precluded from asserting innocent infringement. 17 U.S.C. §401(d). 2. [11.13] Contributory Infringement Unlike the U.S. patent statutes, 35 U.S.C. §1, et seq., the Copyright Act contains no specific reference to contributory copyright infringement. Courts, however, have recognized contributory copyright liability under the application of general principles of law. See Sony Corporation of America v. Universal City Studios, Inc., 464 U.S. 417, 78 L.Ed.2d 574, 104 S.Ct. 774, 785 (1984) (“For vicarious liability is imposed in virtually all areas of the law, and the concept of contributory infringement is merely a species of the broader problem of identifying the circumstances in which it is just to hold one individual accountable for the actions of another.”). Contributory liability is a distinct concept from vicarious liability and has different elements of proof. Contributory infringement originates in tort law and stems from the notion that one who directly contributes to another’s infringement should be held accountable. It has been described as an outgrowth of the concept of enterprise liability. Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 264 (9th Cir. 1996). Vicarious liability, in contrast, was developed as an outgrowth of the agency principle of respondeat superior. Id. Contributory infringement requires proof of two elements: (a) knowledge of the infringing activity; and (b) substantial participation or material contribution. A classic statement of the doctrine is seen in Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir. 1971): “[O]ne who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a ‘contributory’ infringer.” Compare this to Flava Works, Inc. v. Gunter, 689 F.3d 754, 757 (7th Cir. 2012), which the court defines contributory infringement more succinctly as “personal conduct that encourages or assists the infringement.” Quoting Matthew Bender & Co. v. West Publishing Co., 158 F.3d 693, 706 (2d Cir. 1998)). The knowledge element may be met by showing that the defendant “knew or should have known” of the direct infringement. A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1020 (9th Cir. 2001), quoting Religious Technology Center v. Netcom On-Line Communication Services, Inc., 907 F.Supp. 1361, 1373 – 1374 (N.D.Cal. 1995). However, the Supreme Court made it clear in Sony, supra, that the knowledge element is not met when there are substantial noninfringing uses of the allegedly infringing product. In re Aimster Copyright Litigation, 334 F.3d 643, 647 (7th Cir. 2003). In such cases, more direct evidence of knowledge (such as inducement or inculpatory statements) is required to demonstrate the defendant’s knowledge of the direct infringement. This is sometimes referred to as the “staple article of commerce” doctrine. The participation element can be met by various types of conduct, including providing the site and facilities for known infringing conduct. In Fonovisa, supra, the court held the allegations that a flea market provided space, utilities, parking, advertising, and customers to vendors of infringing recordings were sufficient to state a claim for contributory infringement.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 13
§11.14
INTELLECTUAL PROPERTY LAW
Whether a party facilitating peer-to-peer file sharing of music is a contributory infringer has led to some interesting cases. In Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913, 162 L.Ed.2d 781, 125 S.Ct. 2764 (2005), the Supreme Court held that contributory copyright liability can arise when a distributor of peer-to-peer file-sharing software actively induces end users to use the software to engage in infringing activity. By relying on the inducement theory to overturn summary judgment for the defendants, the Court avoided the issue of whether the filesharing software had substantial noninfringing uses sufficient to preclude liability under the “staple article of commerce” doctrine relied on in Sony, supra. Other cases involving distribution of file-sharing software have resulted in findings of contributory liability. See A&M Records, supra; In re Aimster Copyright Litigation, supra. In Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146 (9th Cir. 2007), the court further refined the analysis in the context of cyberspace. In a case involving alleged contributory infringement by Google arising from its image search engine services, the court stated that a computer system operator can be held contributorily liable if it “has actual knowledge that specific infringing material is available using its system” . . . and can “take simple measures to prevent further damage” to copyrighted works . . . yet continues to provide access to infringing works.” [Emphasis in original.] 508 F.3d at 1172, quoting Napster, supra, 239 F.3d at 1022. See also Leonard v. Stemtech International Inc., 834 F.3d 376 (3d Cir. 2016) (upholding jury finding of contributory infringement of plaintiff’s photographs when defendant knew of its distributor’s infringing activities, knew photos were copyrighted, and provided infringing materials to distributors). In Perfect 10, Inc. v. Visa International Service, Ass’n, 494 F.3d 788 (9th Cir. 2007), the court held that credit card companies that processed payments to websites containing infringing materials were not contributorily liable for copyright infringement. The court found that the payment processing did not constitute a material contribution to the infringement. 3. [11.14] Vicarious Liability Vicarious liability in the copyright context extends beyond an employer-employee relationship. The doctrine applies to any infringement situation in which the defendant (a) has the right and ability to supervise the infringing activity and (b) has a direct financial benefit from or interest in the infringing activity. A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1022 – 1023 (9th Cir. 2001). See also Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913, 162 L.Ed.2d 781, 125 S.Ct. 2764, 2776 (2005) (“[one] infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it”). In Napster, supra, the court found that the defendant had the ability to locate infringing material listed on its search indices and the ability to block users’ access to the system. This gave it the requisite degree of supervision for vicarious liability. It also had a financial benefit from the availability of copyright-protected works on its system. This increased its user base, which in turn increased its likely advertising revenue. Similarly, in Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996), the court held that a flea market operator could be found vicariously liable for sales of
11 — 14
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.15
counterfeit recordings by vendors at the flea market. The defendant had the right to terminate vendors and, through that right, had the ability to control the activities of the vendors on the premises. Because the sale of pirated recordings served as a “draw” for customers, the owner of the flea market had a financial benefit resulting from admission fees, parking revenues, and concession stand sales. In contrast, in Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1173 – 1174 (9th Cir. 2007), the court held that Google was not vicariously liable for its image search engine services that allowed users to reach infringing websites because Google did not have the legal right to stop or limit the infringement of third-party websites. Likewise, in Perfect 10, Inc. v. Visa International Service, Ass’n, 494 F.3d 788 (9th Cir. 2007), the credit card companies were not vicariously liable for processing payments to infringing websites because the card companies did not have the right and ability to supervise and control the content of the websites. 4. [11.15] Safe Harbors Under the Digital Millennium Copyright Act Concerns about direct and contributory copyright infringement liability for Internet service providers gave rise to certain limitations on liability for ISPs set forth in the Digital Millennium Copyright Act (DMCA), Pub.L. No. 105-304, 112 Stat. 2860 (1998). See 17 U.S.C. §512. The DMCA sets up safe harbors for four types of activities frequently engaged in by service providers that might otherwise give rise to copyright liability. These are (a) transitory digital network communications, (b) system caching, (c) information residing on systems or networks at the direction of users, and (d) information location tools. 17 U.S.C. §§512(a) – 512(d). A service provider qualifying for one of the safe harbors cannot be held liable for monetary damages for engaging in conduct protected by the safe harbor. A service provider must comply with myriad conditions to qualify for the safe harbors. For example, among the conditions are that a service provider must (a) adopt a policy that provides for the termination of service access for repeat infringers in appropriate circumstances, (b) implement that policy in a reasonable manner, and (c) inform its subscribers of that policy. 17 U.S.C. §512(i)(1)(A). See Ellison v. Robertson, 357 F.3d 1072 (9th Cir. 2004) (analyzing whether ISP met necessary conditions for transitory digital network communications safe harbor); Perfect 10, Inc. v. CCBill LLC, 488 F.3d 1102 (9th Cir. 2007) (discussing reasonable implementation and knowledge conditions for safe harbors). With the increase of user-generated content on the Internet, the safe harbor of 17 U.S.C. §512(c) (regarding information posted by users) has taken on increased significance. Popular sites such as YouTube, eBay, and Facebook rely on §512(c) to avoid liability for infringing material posted by users. In addition to the implementation of reasonable policies under §512(i) mentioned above, three essential conditions must be met to receive the benefit of this safe harbor. First, the service provider must not have actual knowledge of infringement and must not be “aware of facts or circumstances from which infringing activity is apparent” (this is sometimes referred to as “red flag” awareness). 17 U.S.C. §512(c)(1)(A). If the service provider has red flag or actual awareness, it must act expeditiously to remove the infringing material. A second condition is that the ISP must not “receive a financial benefit directly attributable to the infringing activity, in a case in which the service provider has the right and ability to control such activity.” 17 U.S.C. §512(c)(1)(B). Third, if it receives a take-down notice that complies with the requirements of the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 15
§11.16
INTELLECTUAL PROPERTY LAW
DMCA, the service provider must remove the material (although it may put it back if the subscriber issues a counter-notification). 17 U.S.C. §512(c)(1)(C). Several cases have discussed whether a take-down notice is sufficiently specific to require action by the service provider. See, e.g., ALS Scan, Inc. v. RemarQ Communities, Inc., 239 F.3d 619 (4th Cir. 2001); Corbis Corp. v. Amazon.com, Inc., 351 F.Supp.2d 1090 (W.D.Wash. 2004). Several courts have held that general knowledge that an ISP’s services could be used to share infringing material is insufficient to meet the actual or red-flag knowledge requirements in §§512(c)(1)(A)(i) and 512(c)(1)(A)(ii). Rather, there must be knowledge of specific and identifiable infringements. Viacom International, Inc. v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012); UMG Recordings, Inc. v. Shelter Capital Partners LLC, 667 F.3d 1022 (9th Cir. 2011).
III. FAIR USE A. [11.16] Generally A U.S. court of appeals long ago called the question of fair use “the most troublesome in the whole law of copyright.” Dellar v. Samuel Goldwyn, Inc., 104 F.2d 661, 662 (2d Cir. 1939). That description remains accurate today. Each case involving a question of fair use requires a difficult case-by-case balancing of complex factors. This important doctrine in U.S. copyright law has been recognized since at least 1841, when the concept was invoked in Folsom v. Marsh, 9 F.Cas. 342 (D.Mass. 1841) (No. 4,901). Originally a judge-made doctrine, the fair use doctrine is now codified in the Copyright Act at 17 U.S.C. §107. While numerous cases over the years have addressed questions of “fair use,” there has never been a specific definition of the term, nor would it be possible to create such a definition. Rather, the doctrine is an equitable rule of reason applied to avoid an overly technical application of the copyright laws. While the Copyright Act does not define fair use, the Act does set forth four factors that must be taken into consideration in determining fair use. Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include — (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work;
11 — 16
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.17
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors. 17 U.S.C. §107. The fair use doctrine permits courts to avoid rigid application of the copyright statute when, on occasion, it would stifle the very creativity the copyright law is designed to foster. In addition to the four factors identified in the statute, the preamble of §107 provides several nonexclusive examples of uses that may qualify as a fair use. These include criticism, comment, news reporting, teaching, scholarship, and research. The most recent pronouncement of the U.S. Supreme Court on the fair use doctrine is Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 127 L.Ed.2d 500, 114 S.Ct. 1164 (1994). That case, involving parody, sets forth a comprehensive and instructive analysis of the fair use doctrine. It provides a very good road map of how one should address fair use questions and balance the various factors. The most important teaching of Campbell is that the four statutory fair use factors should not be treated in isolation from one another. All the factors are to be explored and the results weighed together in light of the purposes of copyright. The goals of copyright law are to “stimulate the creation and publication of edifying matter.” 114 S.Ct. at 1171 n.10, quoting Pierre N. Leval, Toward a Fair Use Standard, 103 Harv.L.Rev. 1105, 1134 (1990). The court also cautioned that the task of determining fair use “is not to be simplified with brightline rules, for the statute, like the doctrine it recognizes, calls for case-by-case analysis.” 114 S.Ct. at 1170. For an empirical analysis of the application of the four fair use factors, see Barton Beebe, An Empirical Study of U.S. Copyright Fair Use Opinions, 1978-2005, 156 Penn.L.Rev. 549 (2008). 1. [11.17] First Factor: Purpose and Character of the Use The first factor to be taken into consideration in determining fair use under 17 U.S.C. §107 looks to the nature of the use of the copyrighted material (e.g., whether the use is commercial or for nonprofit educational purposes). The court in Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 127 L.Ed.2d 500, 114 S.Ct. 1164 (1994), stated that the inquiry under this factor should be guided by the examples of fair use given in the preamble of §107, such as criticism, comment, news reporting, scholarship, and the like. These examples are illustrative and not limitative and must be weighed with all the facts of the case. Thus, for example, the fact that a use is to some degree commercial does not mean that it cannot also be a fair use. However, if a use is highly commercial or exploitative, that fact will weigh against a finding of fair use. This factor also makes inquiry into whether the new work is “transformative.” Courts look to whether the use merely supersedes or substitutes for the original copyrighted work or whether the use instead adds something new, with a further purpose or different character, complementing the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 17
§11.18
INTELLECTUAL PROPERTY LAW
original work with new expression, meaning, or message. The more transformative a use is, the more it weighs in favor of finding fair use. Also, the Supreme Court has indicated that if a work is highly transformative, other factors, like commercialism, may be less significant. The courts have not been entirely consistent as to what constitutes a transformative use. Compare, e.g., Castle Rock Entertainment, Inc. v. Carol Publishing Group, Inc., 150 F.3d 132, 142 – 143 (2d Cir. 1998) (key consideration under first factor was whether there was transformative purpose), with Infinity Broadcast Corp. v. Kirkwood, 150 F.3d 104, 108 (2d Cir. 1998) (“difference in purpose is not quite the same thing as transformation, and . . . transformativeness is the critical inquiry under this factor”). See Diane L. Zimmerman, The More Things Change, the Less They Seem “Transformed”: Some Reflections on Fair Use, 46 J. Copyright Soc’y of U.S.A. 251 (1999). 2. [11.18] Second Factor: Nature of the Copyrighted Work The second factor to be taken into consideration in determining fair use under 17 U.S.C. §107 calls for recognition that some works are closer to the core of intended copyright protection than others, with the consequence that fair use is more difficult to establish when the former works are copied. Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 127 L.Ed.2d 500, 114 S.Ct. 1164, 1175 (1994). Under this notion, copying from factual works or news accounts is more likely to be held fair use than is copying from fictional works or works of fantasy. While always acknowledging this aspect of the second factor, courts tend to give it little weight in the overall fair use analysis. This second factor also considers whether a work is unpublished or published. The unpublished status of a work tends to weigh against a finding of fair use. This was an important consideration in Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 85 L.Ed.2d 588, 105 S.Ct. 2218 (1985), in which the Supreme Court found that publishing in a news magazine a short excerpt from the unpublished manuscript of the memoirs of former U.S. President Gerald Ford was not fair use. In 1992, §107 was amended to clarify that there is no per se prohibition against applying the fair use doctrine to unpublished materials. Congress added the sentence to 17 U.S.C. §107, which provides that “[t]he fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.” Under the second factor, courts will sometimes inquire as to whether the work is out of print. The lack of availability of a work lends greater justification for reproducing some part of the work. 3. [11.19] Third Factor: Amount and Substantiality of the Use The third factor to be taken into consideration in determining fair use under 17 U.S.C. §107 asks whether the “ ‘quantity and value of the materials used’ . . . are reasonable in relation to the purpose of the copying.” Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 127 L.Ed.2d 500, 114 S.Ct. 1164, 1175 (1994), quoting Folsom v. Marsh, 9 F.Cas. 342, 348 (D.Mass. 1841) (Case No. 4,901). The extent of permissible copying varies with the purpose and character of the use. Courts look not only to the volume of the use but also to the value of the portion copied. Thus, in Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 85 L.Ed.2d 588, 105 S.Ct. 2218 (1985), copying only 300 – 400 words from an unpublished manuscript was not fair use
11 — 18
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.21
because the small amount copied constituted the “heart” of the original work. In contrast, in Sony Corporation of America v. Universal City Studios, Inc., 464 U.S. 417, 78 L.Ed.2d 574, 104 S.Ct. 774 (1984), copying an entire work was found to be fair use because of the noncommercial nature of the copying (taping television programs for private home use). There are no absolute rules as to how much of a copyrighted work may be copied and still be considered fair use. Courts look at whether the amount copied exceeds the amount necessary to accomplish the defendant’s legitimate purpose. 4. [11.20] Fourth Factor: Effect on the Market The fourth factor to be taken into consideration in determining fair use under 17 U.S.C. §107 requires the court to consider the extent of market harm caused by the use. Actual present harm need not be shown. It is enough to show that some meaningful likelihood of future harm exists. A use that has no demonstrable effect on the potential market for, or value of, the copyrighted work need not be prohibited in order to protect the author’s incentive to create. The prohibition of such noncommercial uses would merely inhibit access to ideas without any countervailing benefit. Sony Corporation of America v. Universal City Studios, Inc., 464 U.S. 417, 78 L.Ed.2d 574, 104 S.Ct. 774, 792 – 793 (1984). This factor requires courts to consider not only the extent of market harm caused by the particular actions of the alleged infringer but also whether unrestricted and widespread conduct of the sort engaged in by the defendant would result in a substantially adverse impact on the potential market for the original. The analysis under this factor must take account not only of harm to the original work but also of harm to the market for derivative works. B. [11.21] Parody Many of the leading fair use cases have involved parody. While not explicitly recognized in 17 U.S.C. §107 as an example of fair use, parody has long been recognized as a type of use that will often (but not always) qualify as a fair use. Courts look carefully at the question of whether the work copied from is the subject or target of the parody. If not, the work will not be considered a parody but rather merely a satire, which the courts treat as less deserving of fair use treatment. In Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 127 L.Ed.2d 500, 114 S.Ct. 1164 (1994), a music company filed suit against the rap music group 2 Live Crew claiming that 2 Live Crew’s rap song “Pretty Woman” infringed the plaintiff’s copyright in Roy Orbison’s rock ballad, “Oh, Pretty Woman.” The appellate court had found that 2 Live Crew’s version was not a fair use, relying largely on the commercial nature of the work. The U.S. Supreme Court reversed and remanded the case, finding that 2 Live Crew’s commercial parody might be a fair use within the meaning of §107. The lower court had placed too much emphasis on the commercial nature of the parody and had given insufficient weight to the other factors tending to show a fair use. The rap song was clearly transformative. The lower court erred in presuming that there would be market harm to the original work. The court found it unlikely that the 2 Live Crew song would act as a substitute for the original since the two works served different markets. The case was remanded to permit evaluation of the amount taken in light of the song’s parodic purpose and other fair use factors. See also Brownmark Films, LLC v. Comedy Partners, 682 F.3d 687 (7th Cir. 2012) (copying by South Park television show from “viral video” was obvious parody); Kienitz v. Sconnie Nation LLC, 766 F.3d 756 (7th Cir. 2014) (use of photo of politician on T-shirts as
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 19
§11.22
INTELLECTUAL PROPERTY LAW
critical comment was fair use); Cariou v. Prince, 714 F.3d 694 (2d Cir. 2013) (use of photos to create “appropriation art” was parody fair use); Leibovitz v. Paramount Pictures Corp., 137 F.3d 109 (2d Cir. 1998) (movie poster for NAKED GUN 331/3 depicting actor Leslie Nielsen in ridiculous pose parodying well-known photograph of actress Demi Moore that appeared on cover of Vanity Fair magazine was fair use). Not all purported parodies qualify as fair uses. Two important cases in which the court found the use to not qualify as a parody are Rogers v. Koons, 960 F.2d 301 (2d Cir. 1992), and Dr. Seuss Enterprises, L.P. v. Penguin Books USA, Inc., 109 F.3d 1394 (9th Cir. 1997). An important parody case is Suntrust Bank v. Houghton Mifflin Co., 268 F.3d 1257 (11th Cir. 2001). In Suntrust, the owners of copyright in GONE WITH THE WIND sued to prevent publication of an allegedly infringing book called THE WIND DONE GONE by Alice Randall. THE WIND DONE GONE is a novel critical of the portrayal of slavery in GONE WITH THE WIND. Randall’s work is in large part a critical retelling of events from GONE WITH THE WIND. The court of appeals held that Randall’s novel was a fair use. The court characterized Randall’s novel as a “parody,” despite the fact that THE WIND DONE GONE is not primarily a comic work but rather a novel with serious sociopolitical overtones. C. [11.22] Technology Fair use issues often come into play in cases involving copying made possible by new technologies. This was first addressed by the U.S. Supreme Court in Sony Corporation of America v. Universal City Studios, Inc., 464 U.S. 417, 78 L.Ed.2d 574, 104 S.Ct. 774, 785 (1984). This case arose with the advent of video cassette recorders in the early 1980s, which enabled consumers to tape television programs off the air. The court characterized the activity as “time-shifting” for private home use. It stated that such conduct was a noncommercial, nonprofit use of the copyrighted work. Because of the noncommercial nature of the copying, “the fact that the entire work is reproduced . . . does not have its ordinary effect of militating against a finding of fair use.” 104 S.Ct. at 792. The court found that there was no evidence of any meaningful market harm and thus held the copying to be fair use. An interesting contrast to Sony is A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001). This case involved the Napster peer-to-peer music-sharing technology, which allows users to download music from the computers of other users of the Napster service. The court found that downloading copyrighted music without permission constituted direct infringement by the users of the Napster service and was not a fair use under 17 U.S.C. §107. The court held that the activity was commercial even though the users were downloading the music for their own personal use and Napster was not charging for its software. The court stated that “repeated and exploitative copying of copyrighted works, even if the copies are not offered for sale, may constitute a commercial use.” 239 F.3d at 1015. See also Storm Impact, Inc. v. Software of the Month Club, 13 F.Supp.2d 782 (N.D.Ill. 1998) (copying software from Internet in violation of express restrictions posted with software was not fair use).
11 — 20
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.24
In contrast to Napster, the fair use doctrine was used to accommodate a new Internet technology in Kelly v. Arriba Soft Corp., 336 F.3d 811 (9th Cir. 2002), in which the court held that the display of small, low resolution “thumbnail” images on a visual search engine was a fair use. See also Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146 (9th Cir. 2007) (thumbnail images displayed on Google searches were fair use). Fair use has also been used to justify reverse engineering of a computer program in some instances. See Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992). The reverse engineering must be the only means of gaining access to the ideas and processes of the program. There must be a legitimate reason for gaining access, and the copying must not exceed what is strictly necessary to study or understand the unprotected elements of the program.
IV. REMEDIES A. [11.23] Generally As remedies for infringement, the Copyright Act provides for injunctive relief (17 U.S.C. §502), destruction of infringing articles (17 U.S.C. §503), monetary damages (17 U.S.C. §504), and costs and attorneys’ fees (17 U.S.C. §505). The provisions relating to money damages set forth in §504 entitle the copyright owner to choose between two alternative types of damages: (1) actual damages plus any additional profits of the infringer; or (2) statutory damages. The plaintiff may recover one type or the other, but not both. B. [11.24] Actual Damages Actual damages include any type of monetary damage proximately caused by the infringement. This category undertakes to compensate the copyright owner for any damages suffered by reason of the infringer’s illegal act. Fitzgerald Publishing Co. v. Baylor Publishing Co., 807 F.2d 1110, 1118 (2d Cir. 1986); Walker v. Forbes, Inc., 28 F.3d 409, 412 (4th Cir. 1994). For example, the plaintiff’s lost profits due to lost sales or injury to the market value of the work, if caused by the infringement, would constitute actual damages. Another form of actual damages is the value of the infringer’s use. In Deltak, Inc. v. Advanced Systems, Inc., 767 F.2d 357, 360 – 361 (7th Cir. 1985), the court stated that “[t]he value of the infringer’s use is a permissible basis for estimating actual damages.” The court held that the value of the use can be calculated by determining the defendant’s saved acquisition costs. See also McRoberts Software, Inc. v. Media 100, Inc., 329 F.3d 557, 566 (7th Cir. 2003). Other courts have characterized this type of damage as a lost license fee and allowed the plaintiff to recover the fair market value of a reasonable license fee. This measure of damages envisions recovery of a license fee on which a willing seller and a willing buyer would have agreed for the use taken by the infringer. Davis v. The Gap, Inc., 246 F.3d 152 (2d Cir. 2001).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 21
§11.25
INTELLECTUAL PROPERTY LAW
C. [11.25] Profits of the Infringer The second category of compensatory damages is recovery of the profits of the infringer attributable to the infringement. If the infringer has earned a profit from the infringing activity, this award makes the infringer disgorge the profit to make sure it does not benefit from the wrongdoing. The infringer’s profits may be recovered in addition to actual damages. However, the Copyright Act specifically prohibits double counting. 17 U.S.C. §504(b). It allows recovery only of infringer’s profits that “are not taken into account in computing the actual damages.” For example, a plaintiff could not recover both actual damages for lost sales of its copyrighted work and profits obtained by the defendant from sales of the infringing work that displaced the plaintiff’s sales. In McRoberts Software, Inc. v. Media 100, Inc., 329 F.3d 557, 568 – 569 (7th Cir. 2003), the court held that it was not double counting to award the plaintiff actual damages based on a lost license fee plus disgorgement of the infringer’s profits. In establishing the infringer’s profits, “the copyright owner is required to present proof only of the infringer’s gross revenue.” 17 U.S.C. §504(b). The burden is on the defendant to prove any deductible expenses or the amount of profit attributable to factors other than the copyrighted work. However, the term “gross revenue” under the statute means gross revenue reasonably related to the infringement, not unrelated revenues. Davis v. The Gap, Inc., 246 F.3d 152 (2d Cir. 2001). As Judge Posner noted in Taylor v. Meirick, 712 F.2d 1112, 1122 (7th Cir. 1983), “If General Motors were to steal your copyright and put it in a sales brochure, you could not just put a copy of General Motors’ corporate income tax return in the record and rest your case for an award of infringer’s profits.” See also Bouchat v. Baltimore Ravens Football Club, Inc., 346 F.3d 514 (4th Cir. 2003) (requiring causal link between infringement and revenues). The defendant is entitled to deduct costs attributable to the production or sale of the infringing goods. The defendant may not deduct indirect costs that it would have incurred even without the infringing sales. In general, variable costs are deductible, but fixed costs are not deductible. Taylor, supra, 712 F.2d at 1121; Kamar International, Inc. v. Russ Berrie & Co., 752 F.2d 1326 (9th Cir. 1984). If a defendant fails to introduce adequate evidence of deductible expenses, the amount of the defendant’s gross revenues from the infringement will be considered the amount of the defendant’s profits. Blackman v. Hustler Magazine, Inc., 800 F.2d 1160 (D.C.Cir. 1986). When an infringer’s profits are attributable to factors in addition to the use of the plaintiff’s work, an apportionment of profits is proper. The burden of proving apportionment is on the defendant. Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505 (9th Cir. 1985). For example, when the plaintiff proves that the defendant copied from the plaintiff’s literary work, the defendant may show that the infringing material constituted only one chapter out of ten in the defendant’s book. In such a case, the plaintiff would not be entitled to recover all the infringer’s profits from the sale of the book but rather a portion of the profits attributable to the infringement. Mathematical exactness is not required. However, a reasonable and just apportionment of the profits is required. Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 84 L.Ed. 825, 60 S.Ct. 681, 688 (1940).
11 — 22
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.26
In the case of actual damages, all infringers are jointly and severally liable. With respect to profits of the infringer, however, there is no joint liability. Each defendant is severally liable for its illegal profit; one defendant is not liable for the profit made by another. Frank Music, supra; MCA, Inc. v. Wilson, 677 F.2d 180 (2d Cir. 1981). D. [11.26] Statutory Damages Statutory damages, as provided in the Copyright Act, are an alternative to actual damages plus infringer’s profits. 17 U.S.C. §504(c). The purpose of statutory damages is to provide a monetary remedy to a plaintiff when proof of actual damages or an infringer’s profits would be difficult or actual damages would not provide adequate compensation. The plaintiff may elect to recover statutory damages at any time before final judgment is rendered. In 1998, the Supreme Court held that a copyright plaintiff seeking statutory damages has a constitutional right to a jury trial under the Seventh Amendment and that references in §504(c) to statutory awards by “the court” must be construed to include both judge and jury. Feltner v. Columbia Pictures Television, Inc., 523 U.S. 340, 140 L.Ed.2d 438, 118 S.Ct. 1279 (1998). Statutory damages can range from $750 to $30,000 for all infringements involved in the action for any one work. 17 U.S.C. §504(c)(1). When an action involves infringement of separate and independent works (e.g., when a copyright owner sues for infringement of different musical compositions), statutory damages are awarded for each such work. Peer International Corp. v. Pausa Records, Inc., 909 F.2d 1332 (9th Cir. 1990). In the case of willful infringement, the court or jury may increase the award of statutory damages up to $150,000 per work. 17 U.S.C. §504(c)(2). In the case of innocent infringement, the statutory damages may be reduced to as low as $200 per work. Id. The trial judge has broad discretion to award statutory damages within the ranges set forth in §504(c). “The court [is] not required to follow any rigid formula.” Chi-Boy Music v. Charlie Club, Inc., 930 F.2d 1224, 1229 (7th Cir. 1991). The Seventh Circuit has discussed the nature and purpose of statutory damages in several cases. In Video Views, Inc. v. Studio 21, Ltd., 925 F.2d 1010, 1016 (7th Cir. 1991), the court recognized that both deterrence and penalizing the infringer are among the goals of statutory damages: The goal of deterrence that statutory damages have been thought to serve “reflects more than a concern to provide equitable relief.” [Tull v. United States, 481 U.S. 412, 95 L.Ed.2d 365, 107 S.Ct. 1831, 1838 (1987)] This court has recently upheld as “wholly proper” an award of statutory damages that the district court imposed to “penalize” the infringer for “illbegotten profit and to deter future violations.” [Illinois Bell Telephone Co. v. Haines & Co., 905 F.2d 1081, 1089 (7th Cir. 1990)]. In assessing statutory damages, the court may consider “the difficulty or impossibility of proving actual damages . . . the circumstances of the infringement . . . and the efficacy of the damages as a deterrent to future copyright infringement.” [Citations omitted.] F.E.L.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 23
§11.27
INTELLECTUAL PROPERTY LAW
Publications, Ltd. v. Catholic Bishop of Chicago, 754 F.2d 216, 219 (7th Cir. 1985). The award of statutory damages need not be based on the measure of the plaintiff’s losses. Chi-Boy Music, supra, 930 F.2d at 1230 (“It is precisely because of the difficulty in measuring such losses, however, that statutory damages exist.”). A prevailing plaintiff is not always entitled to recover statutory damages. To be eligible, the plaintiff must have registered the copyright within the time limitations established in the Copyright Act. 17 U.S.C. §412. To be eligible for statutory damages for an unpublished work, the plaintiff must have registered the copyright before the infringement commenced. 17 U.S.C. §412(1). For published works, a similar rule applies except that there is a grace period for recently published works. Under 17 U.S.C. §412(2), no statutory damages can be awarded for an infringement commenced before registration “unless registration is made within three months after the first publication of the work.” E. [11.27] Willfulness As noted in §11.26 above, the court or jury can increase statutory damages up to $150,000 per work if it finds that the infringement was willful. 17 U.S.C. §504(c)(2). To establish willfulness, the plaintiff must demonstrate that the infringer “knows that its conduct is an infringement” or that the infringer “has acted in reckless disregard of the copyright owner’s right.” Video Views, Inc. v. Studio 21, Ltd., 925 F.2d 1010, 1020 (7th Cir. 1991). The court emphasized that “[i]ncreased statutory damages may be necessary in a particular case to prove that it ‘costs less to obey the copyright laws than to violate them.’ ” 925 F.2d at 1021, quoting International Korwin Corp. v. Kowalczyk, 855 F.2d 375, 383 (7th Cir. 1988). The court also stated that being put on notice is not the only way to establish willfulness. Other factors may demonstrate that the alleged infringer should have known that its conduct was infringement. That is, one who undertakes a course of infringing conduct may neither sneer in the face of the copyright owner nor hide its head in the sand like an ostrich. Video Views, supra, 925 F.2d at 1021. See also International Korwin, supra. F. [11.28] Injunctive Relief In addition to monetary damages, the Copyright Act also provides for injunctive relief: A court “may . . . grant temporary and final injunctions on such terms as it may deem reasonable to prevent or restrain infringement of a copyright.” 17 U.S.C. §502(a). Injunctive relief, whether preliminary or permanent, can be a powerful tool for a plaintiff in copyright infringement actions. It enables the plaintiff to halt the defendant’s distribution or sale of the infringing work and can provide the plaintiff with tremendous leverage for settlement, licensing, or payments of unpaid accounts. In many types of cases, the most difficult part of prevailing on a petition for injunctive relief is establishing irreparable harm. In the past, copyright cases often recited the principle that “[i]rreparable injury may normally be presumed from a showing of copyright infringement.”
11 — 24
WWW.IICLE.COM
COPYRIGHT INFRINGEMENT, FAIR USE, AND REMEDIES
§11.29
Atari, Inc. v. North American Philips Consumer Electronics Corp., 672 F.2d 607, 620 (7th Cir. 1982). That principle is presently undergoing considerable scrutiny in light of eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006). In eBay, the Supreme Court held that in patent cases, irreparable injury should not be presumed by a court considering whether to issue a permanent injunction. Some courts have applied eBay to copyright cases as well. For example, in Salinger v. Colting, 607 F.3d 68 (2d Cir. 2010), the famous writer J.D. Salinger brought a copyright infringement action against another author who had written a sequel to CATCHER IN THE RYE, claiming it was a parody of Salinger’s work. The district court rejected the parody defense and entered a preliminary injunction. The Second Circuit reversed, unequivocally holding that eBay applies to copyright cases as well as patent cases. See also Flava Works, Inc. v. Gunter, 689 F.3d 754, 755 (7th Cir. 2012) (finding that eBay governs preliminary injunctions in copyright cases as well as patent cases); Perfect 10, Inc. v. Google, Inc., 653 F.3d 976 (9th Cir. 2011) (prior copyright cases relying on presumption of irreparable harm have been effectively overruled by eBay). The thrust of eBay and its major impact on intellectual property cases of all types is that it abrogates the longstanding precept that irreparable harm is presumed when infringement is shown. The eBay case teaches that courts must not adopt a categorical or general rule or presume that the plaintiff will suffer irreparable harm. However, the Salinger court notes that historically copyright infringement has in fact caused irreparable injury, and while courts should not presume such harm, they should keep “one eye on historical tendencies.” 607 F.3d at 82. Salinger also answers another question lingering in the aftermath of eBay. Does eBay apply with equal force to preliminary injunctions as well as permanent injunctions? It does. According to the Salinger court, nothing in eBay or other Supreme Court cases permits an easier grant of a preliminary injunction than of a permanent injunction. Accord Perfect 10, supra. G. [11.29] Attorneys’ Fees The Copyright Act allows the court, in its discretion, to award attorneys’ fees to the “prevailing party” in a copyright action. 17 U.S.C. §505. Such an award can be made to either a prevailing plaintiff or a prevailing defendant. However, for a plaintiff to be eligible to recover attorneys’ fees, it must have made a timely registration under 17 U.S.C. §412. These are the same registration conditions that govern eligibility for statutory damages. See §11.26 above. Prior to 1994, some courts applied a double standard when deciding whether a prevailing party should recover attorneys’ fees. These courts routinely awarded attorneys’ fees to an eligible plaintiff but awarded fees to a prevailing defendant only if the plaintiff’s suit was frivolous or brought in bad faith. However, in Fogerty v. Fantasy, Inc., 510 U.S. 517, 127 L.Ed.2d 455, 114 S.Ct. 1023 (1994), the court ruled that 17 U.S.C. §505 did not intend such a dual standard. The Supreme Court held that although fee awards were in the trial court’s discretion, prevailing plaintiffs and prevailing defendants are to be treated alike. The Court also rejected the other extreme of adopting the “British Rule,” which allows for the recovery of attorneys’ fees as a matter of course by prevailing plaintiffs and prevailing defendants. The Supreme Court did not impose any standards for determining whether fees should be awarded but did endorse
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
11 — 25
§11.29
INTELLECTUAL PROPERTY LAW
consideration of factors such as frivolousness, motivation, objective unreasonableness, and the need, in certain cases, to advance considerations of compensation and deterrence, as long as such factors are faithful to the purposes of the Copyright Act. 114 S.Ct. at 1023. See also Lieb v. Topstone Industries, Inc., 788 F.2d 151 (3d Cir. 1986). Since 2004, the Seventh Circuit has held that the prevailing defendant in a copyright case is presumptively entitled to attorneys’ fees, going so far as to say the presumption is “very strong.” Assessment Technologies of WI, LLC v. WIREdata, Inc., 361 F.3d 434, 437 (2004); Mostly Memories, Inc. v. For Your Ease Only, Inc., 526 F.3d 1093, 1099 (7th Cir. 2008). Other courts have argued that the Seventh Circuit’s presumption conflicts with Fogerty, supra. See Lava Records LLC v. Amurao, 354 Fed.Appx. 461 (2d Cir. 2009); Jovani Fashion, Ltd. v. Cinderella Divine, Inc., 820 F.Supp.2d 569 (S.D.N.Y. 2011); Klein & Huechan, Inc. v. CoStar Realty Information, Inc., No. 8:08-cv-1227-T-30EAJ, 2011 WL 6097980 (M.D.Fla. Dec. 7, 2011). In 2016, the Supreme Court’s issued a decision on copyright attorneys’ fees providing guidance to district courts on the issue of whether attorneys’ fees should be awarded in copyright cases. Kirtsaeng v. John Wiley & Sons, Inc., ___ U.S. ___, 195 L.Ed.2d 368, 136 S.Ct. 1979 (2016). Kirtsaeng may indicate that it is inappropriate to apply a presumption of entitlement to the prevailing party in a copyright case. The Court held that district courts should look at the totality of the circumstances, giving substantial weight to objective reasonableness, but also taking into account all other relevant factors. Like Fogerty, supra, Kirtsaeng emphasizes the importance of the district court’s discretion. The Supreme Court vacated the Second Circuit’s ruling, stating that the court’s language suggested a finding of reasonableness that “raises a presumption against granting fees.” 136 S.Ct. at 1989. That, wrote the Court, “goes too far in cabining how a district court must structure its analysis.” Id. The Court’s holding and analysis seem to leave no room for a presumption in favor of a prevailing party.
11 — 26
WWW.IICLE.COM
Part IV: Trade Secrets
12
The Identification and Protection of Trade Secrets
R. MARK HALLIGAN FisherBroyles, LLP Chicago
®
©COPYRIGHT 2017 BY IICLE .
12 — 1
INTELLECTUAL PROPERTY LAW
I. The Nature of Trade Secrets A. B. C. D.
[12.1] [12.2] [12.3] [12.4]
“Trade Secret” Defined Development of Trade Secret Law in Illinois Trade Secrets Under the Illinois Trade Secrets Act Combination Analysis
II. [12.5] The Importance of Trade Secret Protection in the Information Age III. [12.6] Trade Secret Audits A. [12.7] Six-Factor Test for the Identification of Trade Secrets B. [12.8] Examples of Protectable Trade Secrets IV. [12.9] Trade Secret Protection Programs A. [12.10] List of Reasonable Security Measures B. [12.11] Computer Security 1. [12.12] Traps for Theft 2. [12.13] Company-Owned Computers 3. [12.14] Password Protection/User Level Access 4. [12.15] Encryption 5. [12.16] Cellular Communications 6. [12.17] E-Mail Communications 7. [12.18] A Sizable Budget and Trusted IT Professionals 8. [12.19] Large (Locked) Waste Bins 9. [12.20] No Private Scanners or Faxes 10. [12.21] Red Team Attacks 11. [12.22] Manual Typewriters and Writing by Hand 12. [12.23] Anti-Copy and Anti-Fax Paper 13. [12.24] 800 Number for Reporting Suspicious Activities C. [12.25] Trade Secret Control Committee V. [12.26] The Economic Espionage Act of 1996 and Subsequent Amendments A. [12.27] The Theft of Trade Secrets Clarification Act of 2012 B. [12.28] The Foreign and Economic Penalty Enhancement Act of 2012 C. [12.29] Racketeer Influenced and Corrupt Organizations Act Predicate Offenses
12 — 2
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
VI. [12.30] The Defend Trade Secrets Act of 2016 A. B. C. D. E. F. G.
[12.31] [12.32] [12.33] [12.34] [12.35] [12.36] [12.37]
Correction of the Definition of “Trade Secret” Statute of Limitations Ex Parte Seizure Provisions The Inevitable Disclosure Doctrine Whistleblower Protection Immunity Use of Trade Secret in Anti-Retaliation Lawsuit
VII. [12.38] The Computer Fraud and Abuse Act of 1986 VIII. [12.39] Forfeiture of Trade Secret Rights IX. [12.40] 24/7 Computer Monitoring and Security X. [12.41] “John Doe” Lawsuits XI. [12.42] Trade Secret Asset Management
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 3
§12.1
INTELLECTUAL PROPERTY LAW
I. THE NATURE OF TRADE SECRETS A. [12.1] “Trade Secret” Defined The term “trade secret” is defined by a number of sources. First, the RESTATEMENT OF TORTS §757, cmt. b (1939), states: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. Second, in §1(4) of the Uniform Trade Secrets Act (UTSA), www.uniformlaws.org/shared/ docs/trade%20secrets/utsa_final_85.pdf, a “trade secret” is defined as information, including a formula, pattern, compilation, program, device, method, technique, or process that: (i) 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 (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Third, the RESTATEMENT (THIRD) OF UNFAIR COMPETITION §39 (1995) defines a “trade secret” as any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others. In Illinois, the statutory definition of “trade secret” is found in §2(d) of the Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1, et seq. See §12.3 below. B. [12.2] Development of Trade Secret Law in Illinois The National Conference of Commissioners on Uniform State Laws approved the Uniform Trade Secrets Act in 1979 and amended it in 1985. Every state, except New York and Massachusetts, has enacted the UTSA or a slightly modified version of it. The Illinois version of the UTSA, the Illinois Trade Secrets Act, was approved September 11, 1987, and became effective January 1, 1988. Prior to 1988, the protection of trade secrets was a common-law right, and the Illinois courts applied a variety of different, and often conflicting, tests in trade secret misappropriation cases.
12 — 4
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.2
For example, some courts properly analyzed the protection of customer information and customer lists in the same manner as other types of trade secrets. See, e.g., Armour & Co. v. United American Food Processors, Inc., 37 Ill.App.3d 132, 345 N.E.2d 795 (1st Dist. 1976). However, other courts incorrectly held that customer lists were not protectable absent a restrictive covenant. See, e.g., Smith Oil Corp. v. Viking Chemical Co., 127 Ill.App.3d 423, 468 N.E.2d 797, 803, 82 Ill.Dec. 250 (2d Dist. 1984). Confusing the law of trade secrets with restrictive covenant law began to lead to decisions that required a finding of a “near-permanent customer relationship” to protect customer information as a trade secret. See, e.g., Lincoln Towers Insurance Agency v. Farrell, 99 Ill.App.3d 353, 425 N.E.2d 1034, 1036, 54 Ill.Dec. 817 (1st Dist. 1981). The last straw was put into place by Disher v. Fulgoni, 124 Ill.App.3d 257, 464 N.E.2d 639, 79 Ill.Dec. 735 (1st Dist. 1984), and Cincinnati Tool Steel Co. v. Breed, 136 Ill.App.3d 267, 482 N.E.2d 170, 90 Ill.Dec. 463 (2d Dist. 1985). In Disher, a case of first impression, the court ruled that under Illinois law an employee confidentiality agreement not to disclose trade secrets — like a covenant-not-to-compete agreement — can be held invalid for being overly broad in scope or in duration. Cincinnati Tool Steel followed the same logic. These radical developments in the Illinois common law of trade secrets threatened the very existence of a trade secret right in Illinois and provided the impetus for the enactment of the ITSA. See generally Melvin F. Jager, Illinois Returns to the Mainstream of Trade-Secret Protection, 2 CBA Rec., No. 9, 18 (Oct. 1988). Effective January 1, 1988, all civil causes of action for trade secret misappropriation are governed exclusively by the ITSA. For a review of cases that have cited the ITSA since its enactment, see Colson Co. v. Wittel, 210 Ill.App.3d 1030, 569 N.E.2d 1082, 155 Ill.Dec. 471 (4th Dist. 1991), Gillis Associated Industries, Inc. v. Cari-All, Inc., 206 Ill.App.3d 184, 564 N.E.2d 881, 151 Ill.Dec. 426 (1st Dist. 1990), Tie Systems, Inc. v. Telcom Midwest, Inc., 203 Ill.App.3d 142, 560 N.E.2d 1080, 148 Ill.Dec. 483 (1st Dist. 1990), Hamer Holding Group, Inc. v. Elmore, 202 Ill.App.3d 994, 560 N.E.2d 907, 148 Ill.Dec. 310 (1st Dist. 1990), Carbonic Fire Extinguishers, Inc. v. Heath, 190 Ill.App.3d 948, 547 N.E.2d 675, 138 Ill.Dec. 508 (2d Dist. 1989), and Service Centers of Chicago, Inc. v. Minogue, 180 Ill.App.3d 447, 535 N.E.2d 1132, 129 Ill.Dec. 367 (1st Dist. 1989). The ITSA expressly displaces “conflicting tort, restitutionary, unfair competition, and other laws . . . providing civil remedies for misappropriation of a trade secret.” 765 ILCS 1065/8(a). Also, the ITSA has expressly overruled the holdings in Disher, supra, and Cincinnati Tool Steel, supra, with statutory language stating “that a contractual or other duty to maintain secrecy or limit use of a trade secret shall not be deemed to be void or unforceable solely for lack of durational or geographical limitation on the duty.” 765 ILCS 1065/8(b). Since prior, conflicting law has been expressly displaced by the ITSA, one must understand the ITSA to analyze a trade secret matter. See §12.3 below.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 5
§12.3
INTELLECTUAL PROPERTY LAW
C. [12.3] Trade Secrets Under the Illinois Trade Secrets Act Section 2(d) of the Illinois Trade Secrets Act provides: “Trade secret” means information, including but not limited to, technical or nontechnical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that: (1) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality. 765 ILCS 1065/2. Several aspects of the ITSA definition of “trade secret” are worthy of note: 1. The ITSA has deleted from the Uniform Trade Secrets Act’s definition the word “independent” as a modifier of “economic value” since this term has confused courts and is unnecessary. Also, the “readily ascertainable by proper means” clause was dropped in the ITSA definition to eliminate any defense by the alleged misappropriator that there is no liability for misappropriation because the trade secret information could have been derived by “readily ascertainable” means. Melvin F. Jager, Illinois Returns to the Mainstream of Trade-Secret Protection, 2 CBA Rec., No. 9, 18, 20 (Oct. 1988). 2. The definition of a “trade secret” as “information” in the ITSA is very expansive. In addition, the statutory list of examples is not exhaustive, as indicated by the language “including but not limited to.” 3. Both technical and nontechnical data are protectable as trade secrets under the ITSA. In other words, any nontechnical information, such as customer information, can be protected as a trade secret. 4. Lists of actual or potential customers or suppliers are given as specific examples of protectable trade secrets in the ITSA. As an example of prior inconsistent decisions, see Smith Oil Corp. v. Viking Chemical Co., 127 Ill.App.3d 423, 468 N.E.2d 797, 803, 82 Ill.Dec. 250 (2d Dist. 1984) (holding that customer list could be protected only by restrictive covenant). 5. Negative know-how (what does not work or what does not solve the problem) is protectable as a trade secret under both the UTSA and the ITSA. See Comment, UTSA §1, which states: The definition of “trade secret” contains a reasonable departure from the Restatement of Torts (First) definition which required that a trade secret be “continuously used in one’s business.” The broader definition in the proposed Act
12 — 6
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.5
extends protection to a plaintiff who has not yet had an opportunity or acquired the means to put a trade secret to use. The definition includes information that has commercial value from a negative viewpoint, for example the results of lengthy and expensive research which proves that a certain process will not work could be of great value to a competitor. [Emphasis in original.] 6. Absolute secrecy is not required by the ITSA. The standard is “sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use.” 765 ILCS 1065/2(d)(1). 7. A trade secret need not be locked in a safe; the standard under the ITSA is “efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.” 765 ILCS 1065/2(d)(2). D. [12.4] Combination Analysis Unlike patents, novelty is not required for trade secret protection. Many trade secrets are really combinations of known art. It is well established that a trade secret can exist in a combination of known characteristics and components, each process, design, and operation of which, in unique combination, affords a competitive advantage and is a protectable secret. The fundamental test is the economic value, actual or potential, derived from the secrecy of the information vis-à-vis competitors. The idea need not be complicated; it may be intrinsically simple and nevertheless qualify as a secret unless it is already generally known in the trade or readily accessible from a public or a well-known source in the trade.
II.
[12.5] THE IMPORTANCE OF TRADE SECRET PROTECTION IN THE INFORMATION AGE
Today, in the information age, trade secrets have become the intellectual property right of choice in many instances. Trade secrets no longer reside primarily in paper documents locked in file cabinets. Instead, trade secrets are being created instantaneously and continuously in an electronic environment. The computer revolution has changed the rules of the game. The importance of conducting trade secret audits and setting up trade secret protection programs cannot be overemphasized. In theory, everyone recognizes the importance of these tasks. In practice, however, most U.S. corporations pay lip service and invest very few resources in these areas. The consequences have been staggering. A survey conducted for the ASIS International, PricewaterhouseCoopers, and the U.S. Chamber of Commerce revealed that Fortune 1,000 companies lost over $59 billion in trade secret assets in 2002. Trends in Proprietary Information Loss Survey Report (Sept. 2002), www.diogenesllc.com/trendsproprietaryloss.pdf. Companies tend to “wait until the horse is out of the barn.” Many trade secret misappropriation suits are lost because issues regarding the identification and protection of trade secrets have never been addressed until outside counsel faces them for the first time in the litigation process.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 7
§12.6
INTELLECTUAL PROPERTY LAW
A 2009 study showed that 85 percent of trade secret misappropriation involves insiders (employees/former employees). Dr. Larry Ponemon of the Ponemon Institute found that 60 percent of workers admitted to taking confidential information. A Monster.com survey found that 17 percent of surveyed workers admitted that they would disclose company trade secrets if paid, and an additional 8 percent admitted that they had already done so. See Christopher J. Morvillo and Megan E. Farrell, Speaking Confidentially: Tips For Protecting Trade Secrets And Other Confidential Business Information, The Metropolitan Corporate Counsel, p. 37 (Apr. 2012), www.metrocorpcounsel.com/pdf/2012/April/37.pdf (case sensitive). At the same time, corporate economic espionage and computer thefts are on the rise. In 2012, the FBI ran a billboard campaign in nine major U.S. cities with the legend “$13 Billion Lost: Protect America’s Trade Secrets.” See Evan Perez, FBI’s New Campaign Targets Corporate Espionage, Wall Street Journal, May 11, 2012, www.wsj.com/articles/SB10001424052702304543904577396520137905 092 (case sensitive). At the same time that the information economy has made trade secrets more important, it has made them more likely to be stolen. A more mobile workforce, increased use of contractors and consultants, and increased outsourcing of infrastructure all provide opportunities for trade secret information to leave the company’s control. Information technology itself contributes to the mobility of information. Increasingly, information is stored in computer files, and Internet connectivity and high-density media such as thumb drives make these files easy to transport. A disgruntled employee can literally walk out the door with the company in his or her pocket.
III. [12.6] TRADE SECRET AUDITS The identification and protection of trade secrets and confidential business information is a dynamic process, not a static one. A company’s portfolio of trade secrets is constantly changing — some information becomes obsolete and is no longer commercially valuable, while new information is created that is extremely valuable but may not be properly protected. Therefore, the starting point for the development of a trade secret protection program is a trade secret audit to identify the company’s protectable trade secrets. If possible, the trade secret audit should be done in conjunction with counsel so the results of the audit can be protected from discovery by the attorney-client and work-product privileges. Today, there are ongoing efforts to develop software to automate the identification and classification of trade secrets. A. [12.7] Six-Factor Test for the Identification of Trade Secrets Trade secrets require identification and protection. A company must first know what its trade secrets are and where they are located. The law has established a six-factor test for the identification of trade secrets that provides the benchmarks necessary for assisting a company in identifying trade secret assets. These six factors are as follows: Factor 1: The extent to which the information is known outside the company. The more extensively the information is known outside the company, the less likely that it is a protectable trade secret.
12 — 8
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.8
Factor 2: The extent to which the information is known by employees and others involved in the company. The greater the number of employees who know the information, the less likely that it is a protectable trade secret. Factor 3: The extent of measures taken by the company to guard the secrecy of the information. The greater the security measures, the more likely that it is a protectable trade secret. Factor 4: The value of the information to the company and its competitors. The greater the value of the information to the company and its competitors, the more likely that it is a protectable trade secret. Factor 5: The amount of time, effort, and money expended by the company in developing the information. The more time, effort, and money expended by the company in developing the information, the more likely that it is a protectable trade secret. Factor 6: The ease or difficulty with which the information could be properly acquired or duplicated by others. The easier it is to duplicate the information, the less likely that it is a protectable trade secret. Applying these six factors, companies can identify trade secrets in advance of litigation and then take the necessary steps to ensure that sufficient documentation is in place to identify these assets and that reasonable measures are in place to protect them. B. [12.8] Examples of Protectable Trade Secrets The following is a non-exhaustive list of protectable trade secrets in a typical manufacturing company: Research and Development algorithms analytical data blueprints calculations charts (all types) chemical processes coding compilations compounds data structures definitions design data and design manuals diagrams — all types drawings — all types
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
laboratory notebooks linking lists of components needed to make products measurements models plans procedures processes product designs proprietary information concerning research and development proprietary technology information prototypes recipes
12 — 9
§12.8
INTELLECTUAL PROPERTY LAW
Research and Development (cont.) engineering and technical specifications engineering plans experiments and experimental data flow charts formulas inventions know-how and negative know-how (i.e., what does not work)
research and development reports — all types source code symbols system designs system interface designs test records testing apparatus
Production/Process Information components computer run-time libraries computer software control diagrams designs devices and machines engineering plans error resolution procedures information internal software manufacturing techniques mean time between failure analysis measurements methodologies
models product life cycle production know-how and negative know-how quantitative analyses settings source code special production machinery specifications statistical analyses statistical modeling techniques statistical models systems integration plans test plans test record tools
Quality Control Information customer service methods maintenance procedures debugging protocols preventive maintenance methods environmental analysis problem resolution procedures information concerning quality control prototyping procedures maintenance data quality assurance and control methods maintenance instructions quality control manuals maintenance know-how and negative quality control procedures know-how quality control records troubleshooting methodologies
12 — 10
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.8
Sales and Marketing Information bid estimations market survey results competitive analysis marketing and sales promotion plans competitive intelligence marketing plans customer development cycle marketing techniques customer information methods for obtaining greater market share customer lists pricing formulas and methods customer needs and buying habits product life cycle customer service procedures sales and attack plans focus group data sales and marketing studies and reports internal analysis of current economic sales call reports factors sales forecasting techniques know-how concerning the management sales techniques of customer confidence strategic business plans market analyses supply and demand models vendor and supplier information Internal Financial Information balance sheets bank records budgets business planning techniques cash-flow analysis cash management procedures cash management techniques computer printouts cost-benefit analyses employee compensation systems estimation formulas forecasts income and expense statements internal bookkeeping records and procedures internal financial information investment records investment strategies
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
investment techniques management methods market analyses operating reports product costs product margins product pricing formulas and methods profit and loss statements profit plans proprietary administrative information proprietary financial information quantitative and statistical analyses sales forecasts sales quotas strategic financial plans supply-and-demand models techniques for analyzing economic factors vendors
12 — 11
§12.9
INTELLECTUAL PROPERTY LAW
Internal Administrative Information business plans cash management procedures customer codes decision tables and trees employee compensation programs employee compensation systems employee incentive programs employee suggestion programs flow charts human resources policies implementation plans internal analysis internal computer software internal management policies
internal organization charts key decision-makers management methods management plans part numbers parts and equipment replacement programs product codes product pricing methods project planning systems succession plan for key employees training plans training programs vendor and supplier codes vendor and supplier information
In short, any information that is not generally known in the trade from which potential or actual economic advantage is derived from the secrecy of the information can be protected as a trade secret.
IV. [12.9] TRADE SECRET PROTECTION PROGRAMS Once the company has identified its protectable trade secrets (see §12.8 above), the next step is to implement a trade secret protection program. The most fundamental and effective way to protect trade secrets is to restrict access to the trade secret information on a “need-to-know” basis. A. [12.10] List of Reasonable Security Measures Examples of traditional security measures are set forth below. Special procedures for computer security are discussed in §§12.11 – 12.24 below. • Provide notice to the recipient of trade secrets, preferably in writing, that the information is proprietary and not to be disclosed or used by the recipient for the recipient’s benefit or the benefit of others without the express consent of the trade secret owner. •
Enter into confidentiality and nondisclosure agreements with employees and third parties.
•
Establish and maintain written confidentiality policies to be distributed to all employees.
• Establish and maintain oversight policies and procedures to prevent the inadvertent disclosure of trade secrets by employees in written publications, seminars, speaking engagements, or trade shows.
12 — 12
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.10
• Institute overall plant physical security precautions, such as fencing the perimeter of the company premises, limiting the number of entrances and exits, using alarmed or self-locking doors, and hiring after-hours security personnel. •
Install visitor control systems.
•
Establish secretly coded ingredients or data.
• Separate components of a trade secret between or among departments and/or company personnel so that each has only a “piece of the puzzle.” •
Keep drawers or areas for secret documents separated and locked.
•
Stamp documents and drawings “CONFIDENTIAL” or “PROPRIETARY.”
•
Establish vendor secrecy agreements.
• Establish physical barriers to prevent unauthorized viewing of proprietary process technology. • Install “KEEP OUT” or “AUTHORIZED PERSONNEL ONLY” signs at the access points to sensitive areas of the plant and have a policy of enforcement. • Establish and maintain written rules and regulations prohibiting employees from remaining in the plant after hours without express permission from properly authorized personnel. • Establish and maintain rules and regulations for employees to stay in controlled areas about their work stations. •
Require employees to wear identification badges or carry identification cards.
•
Require sign-out/sign-in procedures for access to and return of sensitive materials.
• Reproduce only a limited number of sensitive documents and maintain procedures for collecting all copies after use. •
Require authorized codes or passwords for access to copying machines and computers.
• Use key and encrypted computer data access to control theft of secret computer-stored information. • Establish and maintain policies and procedures for destruction of documents (using shredders).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 13
§12.11
INTELLECTUAL PROPERTY LAW
• Establish and maintain a policy and practice for advising employees, on a regular basis, regarding the company’s trade secrets and confidential business information. • Hold exit interviews to obtain return of company documents and to remind ex-employees of their obligation not to use confidential information of the company for their own benefit or the benefit of others. In the real world, very few companies take all of the measures or precautions listed above. The law is clear that “absolute secrecy” is not required. The standard is “relative secrecy,” i.e., measures that are reasonable under the circumstances to maintain secrecy or confidentiality. Sometimes only one measure may be required to maintain secrecy or confidentiality, sometimes several measures may be required, and sometimes all possible measures may be required. The courts, however, do not require that extreme or unduly expensive procedures be taken to protect trade secrets. B. [12.11] Computer Security In the information age, computers are the focal point of trade secrets. In addition to the traditional types of security measures discussed in §12.10 above, special procedures are necessary to protect against the loss of trade secret rights via computers. The Internet has become an engine for the destruction of trade secret rights. Within seconds, a disgruntled employee can upload and transmit trade secret information and make it accessible to millions of people around the world. 1. [12.12] Traps for Theft Deterrence of trade secret theft via the Internet is a daunting task. Hackers are always one step ahead of legitimate computer users. In designing trade secret protection programs, theft should be anticipated and traps set so that if a theft occurs the offender can be identified and tracked down. Dummy routines in source code, for example, provide a “fingerprint” for proving up the theft of source code by a former employee. 2. [12.13] Company-Owned Computers All computers and other electronic devices used by employees should be company-owned. The company should make it clear to all employees that they are not authorized to use any personal computers or devices to conduct company business and that violation of the company policy can result in immediate discharge. All employees should be advised that there is no “expectation of privacy.” Company computers should be regularly monitored, backed up, and subject to company inspection at any time.
12 — 14
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.18
These company computers and other devices should be preloaded with company-approved antivirus software and security software. Today, “self-destruct” software is available to eradicate the hard drive of a stolen computer or other device the first time it is connected to the Internet after it is stolen. 3. [12.14] Password Protection/User Level Access “Need-to-know” access is one of the most effective ways to protect trade secrets. In a computer environment, this protection is implemented through assigning different levels of user access to computer files and data. Passwords should be issued randomly and changed often. An automatic “lockout” mechanism should be installed in the computer network that is triggered under defined circumstances (e.g., employee resignations, unexcused absenteeism, etc.). 4. [12.15] Encryption Encryption is the ultimate form of protection for electronic data. The most important and most valuable trade secrets should be encrypted. For maximum protection, the encryption keys should be held in escrow. 5. [12.16] Cellular Communications The use of cellular phones creates a major security risk. Today, special telephones can be purchased that encrypt voice communications. The top executives in the company should use these special telephones. 6. [12.17] E-Mail Communications The heart of discovery in every trade secret case today involves e-mail communications. Unfortunately, most e-mail communications are not encrypted. Employees must understand that e-mail communications are recorded and can be retrieved later. If encryption is not used, then code names and special language should be used to protect the proprietary nature of the communications. 7. [12.18] A Sizable Budget and Trusted IT Professionals Cybersecurity is expensive. Computers and networks need to be monitored on a 24/7 basis. Firewalls with multiple security layers are required. Antivirus software (updated daily) is required. Companies must take prophylactic measures to prevent trade secret theft. Once the horse is out of the barn, it is too late.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 15
§12.19
INTELLECTUAL PROPERTY LAW
Information security should not be outsourced to a third party. The company should hire trusted information technology (IT) employees to monitor the company’s information security and procedures for the simple reason that a third party does not have the same loyalty to the organization as trusted employees. 8. [12.19] Large (Locked) Waste Bins As everyone knows, electronic data can be printed. Printed data, in turn, can be scanned and converted into electronic data. To prevent the circumvention of computer security measures, then, paper copies of all company proprietary documents should be discarded in large company bins that are locked. The use of large bins that can hold several weeks or months of materials can provide an excellent source of evidence in a trade secret misappropriation case. After the bin fills up, a mobile shredding service should be used to destroy the documents onsite. If a departing employee claims that the proprietary documents were discarded in the bin, this claim can be readily checked by company security. 9. [12.20] No Private Scanners or Faxes Even if a company has one central location for faxes with 24/7 security monitors, this security measure can be defeated by an employee who can fax trade secret documents directly from his or her own computer. To prevent this type of security lapse, the company should advise employees that all company faxes must be sent from company-approved locations. The same type of policy should exist for scanners. No personal fax machines or personal scanners should be used for company business. 10. [12.21] Red Team Attacks So-called “red team attacks” should be utilized to test the adequacy of computer security measures. This procedure involves hiring an outside computer specialist and authorizing the computer specialist to “attack” the company’s computers to determine whether they can be penetrated. If the attack is successful, upgrading the computer security is required. 11. [12.22] Manual Typewriters and Writing by Hand One of the most effective ways to protect against the computer theft of trade secrets is never to place the information on the computer in the first place. Manually recording the information in a person’s own handwriting or using a typewriter can thwart the loss of trade secret rights on the Internet. 12. [12.23] Anti-Copy and Anti-Fax Paper Special anti-copy and anti-fax paper can now be purchased. If a document printed on this paper is copied, words such as “Illegal Copy” immediately surface on the copy and remain permanently. If the document is faxed, the faxed copy turns “black.” Special envelopes can alert the user if someone attempts to tamper with the envelope and open it.
12 — 16
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.26
13. [12.24] 800 Number for Reporting Suspicious Activities Employees are often reluctant to tattle on coworkers. A convenient way to eliminate this problem is to provide employees with an 800 number to report suspected trade secret theft or any other suspicious activities. C. [12.25] Trade Secret Control Committee Every company needs to identify its protectable trade secrets and confidential business information on a regular, ongoing basis. Unfortunately, many companies set up a trade secret protection scheme and then neglect it. Employee manuals contain policies that become outdated or are simply not followed. Contractual definitions of sensitive, proprietary information often bear no reasonable relationship to the types of information that qualify as actual trade secrets in the company. Some companies claim that everything is a trade secret, and the net legal effect in court is that nothing is a trade secret. Worse yet, some companies designate the wrong information as trade secrets or neglect to protect economically valuable information that would otherwise qualify as a trade secret. To combat these problems, companies should establish committees responsible for classifying, declassifying, and archiving trade secrets as well as establishing and reviewing the company’s security measures for trade secret protection because new ideas, new techniques, and new compilations of information with economic value to the company are being created daily and sometimes hourly.
V.
[12.26] THE ECONOMIC ESPIONAGE ACT OF 1996 AND SUBSEQUENT AMENDMENTS
A primary defense to the theft of trade secrets on the Internet is exposure to criminal liability under the Economic Espionage Act of 1996 (EEA), Pub.L. No. 104-294, 110 Stat. 3488, codified in part at 18 U.S.C. §1831, et seq., which was signed into law by former President Clinton on October 11, 1996. Under the EEA, the theft of trade secrets is a federal criminal offense. This was a major development in the law of trade secrets in the United States and internationally, giving the Department of Justice sweeping authority to prosecute trade secret theft, whether in the United States, via the Internet, or outside the United States. 18 U.S.C. §1832 makes it a federal criminal act for any person to convert a trade secret to his or her own benefit or the benefit of others intending or knowing that the offense will injure any owner of the trade secret. “Convert a trade secret” is defined broadly to cover every conceivable act of trade secret misappropriation, including stealing; obtaining by fraud, artifice, or deception; and appropriating, taking, carrying away, concealing, copying, duplicating, sketching, drawing, photographing, downloading, uploading, altering, destroying, photocopying, transmitting, delivering, mailing, communicating, or conveying a trade secret without authorization. Id.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 17
§12.26
INTELLECTUAL PROPERTY LAW
The EEA also makes it a federal criminal offense to receive, buy, or possess the trade secret information of another person knowing it to have been stolen, appropriated, obtained, or converted without the trade secret owner’s authorization. Id. The definition of a “trade secret” in the EEA generally tracks the definition of a “trade secret” in the Uniform Trade Secrets Act but expands the definition to include the new technological ways that trade secrets are created and stored: [T]he term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if — (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information. 18 U.S.C. §1839(3). A violation of §1832 can result in stiff criminal penalties. A person who commits an offense in violation of §1832(a) can be imprisoned up to ten years and fined up to $500,000. A corporation or other organization can be fined up to $5 million “or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.” 18 U.S.C. §1832(b). If the trade secret theft benefits a foreign government, foreign instrumentality, or foreign agent, the penalties are much greater. See 18 U.S.C. §1831, discussed in §12.28 below. A “foreign instrumentality” is defined under the EEA to mean “any agency, bureau, ministry, component, institution, association, or any legal, commercial, or business organization, corporation, firm, or entity that is substantially owned, controlled, sponsored, commanded, managed, or dominated by a foreign government.” 18 U.S.C. §1839(1). The term “foreign agent” is defined by the EEA to mean “any officer, employee, proxy, servant, delegate, or representative of a foreign government.” 18 U.S.C. §1839(2). Both “attempts” and “conspiracies” to commit §§1831 and 1832 offenses are proscribed by the EEA. 18 U.S.C. §§1831(a)(4), 1831(a)(5), 1832(a)(4), 1832(a)(5). The same penalties apply to these offenses with increased penalties if the trade secret misappropriation benefits a foreign government, foreign instrumentality, or foreign agent. 18 U.S.C. §§1831, 1832. Under the EEA, there is also criminal forfeiture to the United States of (a) any property constituting or derived from the proceeds of violations of the EEA and (b) any property used or
12 — 18
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.26
intended to be used, in any manner or part, to commit or facilitate a violation of the EEA. 18 U.S.C. §§1834, 2323. The criminal forfeiture provisions enable federal prosecutors to dismantle entire Internet networks and seek criminal forfeiture of all the computers, printers, and other devices used to commit or facilitate the offenses proscribed by the EEA. The EEA also amended the federal wiretap statutes to authorize the Attorney General, the Deputy Attorney General, the Associate Attorney General, or any assistant attorney general in the Criminal Division of the Justice Department specially designated by the Attorney General to apply for a federal court order authorizing or approving the interception of wire or oral communications by the FBI or other federal agencies having responsibility for the investigation of the offense. 18 U.S.C. §2516(1)(a). These are the same investigative tools available in other federal criminal prosecutions. The EEA also applies to offenses committed outside the United States if (a) the offender is a citizen or permanent resident alien of the United States or an organization organized under the laws of the United States or a state or subdivision thereof or (b) an act in furtherance of the offense was committed in the United States. 18 U.S.C. §1837. These extraterritorial provisions in the EEA provide the Justice Department with broad authority to prosecute the international theft of trade secrets and prevent the willful evasion of liability for trade secret misappropriation by using the Internet or other means to transfer the trade secret information outside the United States. The Attorney General is also authorized to commence civil actions to obtain injunctive relief to protect the trade secret owner from any violations or further violations of the EEA. 18 U.S.C. §1836(a). There is no requirement in the EEA that criminal indictments be issued first. Therefore, the Justice Department may commence a civil action for injunctive relief at any stage of the investigation. In any prosecution or other proceeding under the EEA, the court is required to issue protective orders and to take such other action as is necessary to preserve the confidentiality of the trade secret(s) consistent with the requirements of the Federal Rules of Criminal and Civil Procedure, the Federal Rules of Evidence, and all other applicable laws. 18 U.S.C. §1835. The federal courts have exclusive original jurisdiction. 18 U.S.C. §1836(c). However, the EEA states that it shall not be construed to preempt or displace any other remedies, whether civil or criminal, relating to the misappropriation or theft of trade secrets or the otherwise lawful disclosure of information required by law or necessary actions by a governmental entity of the United States, a state, or a political subdivision of a state. 18 U.S.C. §1838. Although there is no private cause of action for trade secret misappropriation under the EEA, the federal criminal penalties imposed for the misappropriation of trade secrets are generally more severe than criminal violations of other intellectual property rights. Persons engaged in trade secret misappropriation can no longer be assured that liability will be limited to civil remedies and damages imposed for such misconduct. By passage of this legislation, the United States recognized that the protection of trade secrets is vital to the U.S. economy. Companies spend millions of dollars to create and protect trade
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 19
§12.27
INTELLECTUAL PROPERTY LAW
secret information from competitors, and unless there are strong deterrents to trade secret theft, the competitive advantage of U.S. companies afforded by trade secrets will inevitably be stifled. A. [12.27] The Theft of Trade Secrets Clarification Act of 2012 On December 28, 2012, President Obama signed the Theft of Trade Secrets Clarification Act of 2012, Pub.L. No. 112-236, 126 Stat. 1627, into law. The Act clarifies the scope of the interstate commerce clause in 18 U.S.C. §1832(a). The amendment changed the interstate commerce requirement of §1832 from “related to or included in a product that is produced for or placed in interstate or foreign commerce” to “related to a product or service used in or intended for use in interstate or foreign commerce.” Id. This “clarification” of the interstate commerce requirement in §1832 left no doubt that the Economic Espionage Act was intended to protect confidential, internal information relating to products or services that are “used in” or “intended for use in” in interstate commerce. The Theft of Trade Secrets Clarification Act overruled the Second Circuit decision in United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012). B. [12.28] The Foreign and Economic Penalty Enhancement Act of 2012 On January 14, 2013, President Obama signed the Foreign and Economic Espionage Penalty Enhancement Act of 2012, Pub.L. No. 112-269, 126 Stat. 242 (2013), into law. The Act increased the upper limit of penalties for individual foreign economic espionage individual offenses under 18 U.S.C. §1831(a) from $500,000 to $5 million and the upper limit for corporate offenses under 18 U.S.C. §1831(b) from $10 million to “not more than the greater of $10,000,000 or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.” C. [12.29] Racketeer Influenced and Corrupt Organizations Act Predicate Offenses On May 11, 2016, violations of 18 U.S.C. §§1831 (economic espionage) and 1832 (theft of trade secrets) were added to the Racketeer Influenced and Corrupt Organizations Act (RICO), Pub.L. No. 91-452, Title IX, 84 Stat. 941 (1970), as predicate offenses. 18 U.S.C. §1961. Now RICO violations can be premised on a pattern of trade secret misappropriation violations, which broadens the reach of both criminal and civil actions under the Defend Trade Secrets Act of 2016, discussed in §§12.30 – 12.37 below.
VI. [12.30] THE DEFEND TRADE SECRETS ACT OF 2016 The Defend Trade Secrets Act of 2016 (DTSA), Pub.L. No. 114-153, 130 Stat. 376, was signed into law on May 11, 2016. The DTSA amended the Economic Espionage Act of 1996, 18.U.S.C. §§1831 – 1839. In 2008, this author published a law review article proposing two critical amendments to the EEA: (a) a federal EEA civil cause of action; and (b) a civil ex parte seizure provision. See R. Mark Halligan, Protection of U.S. Trade Secret Assets: Critical Amendments to the Economic Espionage Act of 1996, 7 John Marshall Rev.Intell.Prop.L. 656 (2008).
12 — 20
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.30
Senator Hebert Kohl (D-Wis.) and his legislative staff began working on these two proposed amendments to the EEA. Senator Kohl was one of the original sponsors of the Economic Espionage Act of 1996. On July 17, 2012, in the 112th Congress, Senator Kohl and Senator Christopher Coons (D-Del.) introduced S. 3389, the “Protecting American Trade Secrets and Innovation Act of 2012.” The bill, which proposed the two amendments discussed in the 2008 law review article, was referred to the Senate Judiciary Committee, but no further action was taken on the bill. On April 29, 2014, after Senator Kohl’s retirement, Senator Coons and Senator Orrin Hatch (R-Utah) introduced S. 2267 in the 113th Congress, titled the “Defend Trade Secrets Act of 2014.” Once again, this proposed legislation advanced the two proposed amendments to the EEA. It was referred to the Senate Judiciary Committee, where a hearing on the bill was held. However, S. 2267 now had bipartisan support with the addition of Senator Hatch, a prominent Republican senator and another original sponsor of the EEA. On the House side, H.R. 5233, the Trade Secrets Protection Act of 2014, was introduced on July 29, 2014, in the 113th Congress by Representative George Holding (R-N.C.) together with strong bipartisan support including Representatives Steve Chabot (R-Ohio), Howard Coble (RN.C.), John Conyers (D-Mich.), Hakeem Jefferies (D-N.Y.), and Jerrold Nadler (D-N.Y.). Once again, the proposed legislation contained the two critical amendments. However, H.R. 5233 added additional provisions to protect against any potential abuse of the ex parte civil seizure provisions. After a markup hearing, H.R. 5233 was reported out of the House Judiciary Committee but no further action was taken on the floor of the House of Representatives as the 113th Congress expired. On July 29, 2015, S. 1890 and H.R. 3326 were introduced the same day in the 114th Congress. This was a bipartisan, bicameral introduction of the same bill, called the “Defend Trade Secrets Act of 2015,” and both (identical) bills were modeled after the previous House bill, H.R. 5233, reported out of the House Judiciary Committee in the 113th Congress. In the 114th Congress, the Senate Judiciary Committee took the lead in scheduling a hearing (and the discussion of additional amendments) and final consideration of amendments since the House Judiciary Committee had already marked up the identical bill (H.R. 5233) and reported the bill to the House floor in the 113th Congress. On December 2, 2015, the Senate Judiciary Committee held an historical hearing that would presage the enactment of the proposed DTSA legislation. The foundation of the two critical amendments were now well established, but the Senate Judiciary Committee weighed in on a final set of amendments designed to strengthen the DTSA. On January 28, 2016, the Senate Judiciary Committee held a voice vote in favor of passing the Defend Trade Secrets Act of 2016 with the various amendments discussed above and other cleanup amendments that strengthened the legislation. Thereafter, through various legislative maneuvers, the House Judiciary Committee approved the Senate version of the bill without the necessity of any further hearing in the House Judiciary Committee.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 21
§12.31
INTELLECTUAL PROPERTY LAW
The full Senate passed the DTSA on April 4, 2016 (87-0). Thereafter, the House of Representatives passed the DTSA on April 27, 2016 (410-2). President Obama signed the DTSA into law on May 11, 2016. This is a historic event in the law of trade secrets that will provide the United States with a competitive advantage in the world marketplace, prevent the theft of trade secret assets, and encourage invention and innovation in the United States and worldwide. The DTSA provides (a) a private civil cause of action and (b) ex parte seizure provisions. The federal civil cause of action is codified as 18 U.S.C. §1836(b)(1): An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. The new ex parte civil seizure provisions are codified as 18 U.S.C. §1836(b)(2)(A)(i): Based on an affidavit or verified complaint satisfying the requirements of this paragraph, the court may, upon ex parte application but only in extraordinary circumstances, issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action. The DTSA applies to any misappropriation of a trade secret (as defined in the DTSA) for which any act occurs on or after the date of the enactment of the Act (May 11, 2016). The DTSA provides a federal civil cause of action for trade secret misappropriation together with provisions for an emergency application and issuance of an ex parte seizure order, fulfilling this author’s recommendations in the original 2008 law review article (and a follow-up 2015 law review article). See R. Mark Halligan, Revisited 2015: Protection of U.S. Trade Secret Assets: Critical Amendments to the Economic Espionage Act of 1996, 14 J. Marshall Rev.Intell.Prop.L. 476 (2015). The DTSA is an amalgamation of the Uniform Trade Secrets Act and the EEA with certain amendments to harmonize U.S. trade secret law. The federal courts have original but not exclusive jurisdiction. There is no preemption. Several DTSA provisions are discussed in §§12.31 – 12.37 below. A. [12.31] Correction of the Definition of “Trade Secret” It is a fundamental tenet of trade secret law that a trade secret must provide an actual or potential competitive or economic advantage to the trade — not the public. Information may be generally unknown to the public but well known in the trade. This defect in the 1996 Economic Espionage Act was fixed by the Senate Judiciary Committee’s amendment of 18 U.S.C. §1839(3)(B), so that the definition of “trade secret” now reads:
12 — 22
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.33
[T]he term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if — (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information. 18 U.S.C. §1839(3). B. [12.32] Statute of Limitations The Uniform Trade Secrets Act has a three-year statute of limitations. See UTSA §6. Most of the UTSA states adopted a three-year statute of limitations (although there are exceptions; for example, the Illinois Trade Secrets Act has a five-year statute of limitations in 765 ILCS 1065/7). However, to prevent a conflict between federal and state law in most states, the Senate Judiciary Committee changed the five-year statute of limitations in the Defend Trade Secrets Act of 2015 to a three-year statute of limitations in the Defend Trade Secrets Act of 2016. See 18 U.S.C. §1836(d). C. [12.33] Ex Parte Seizure Provisions The ex parte seizure provisions were restricted in the Senate amendments even more so than the restrictions imposed in the previous House bill, H.R. 5233. See §12.30 above. Once again, the driving force for restrictions was to insure that the ex parte seizure provisions were not abused by trade secret plaintiffs. First, the ex parte provisions are available to trade-secret plaintiffs only in extraordinary circumstances. Second, the Defend Trade Secrets Act implements a number of procedural protections that require the trade secret plaintiff to be able to submit (verified) specific facts and clear-cut evidence of the actual or alleged misappropriation of trade secrets on an emergency basis. There are eight requirements for issuing an ex parte seizure order: 1. The relief available under Fed.R.Civ.P. 65 must be inadequate (because the defendant will evade, avoid, or otherwise not comply with the order). 2. An immediate and irreparable injury will occur if such seizure is not ordered.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 23
§12.33
INTELLECTUAL PROPERTY LAW
3. The harm to the plaintiff of denying the application outweighs the harm to the legitimate interests of the defendant. 4. The plaintiff must be likely to succeed in showing that there is trade secret misappropriation and acquisition by the defendant by improper means or a conspiracy to misappropriate the trade secret using improper means. 5. The person against whom seizure is ordered must have actual possession of the trade secret. 6. The ex parte seizure application must describe with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, the location where the matter is to be seized. 7. The plaintiff must show that the person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court if the applicant were to proceed with notice to such person. 8. The applicant must not have publicized the requested seizure. See 18 U.S.C. §1836(b)(2)(A). In addition to these statutory elements of an ex parte seizure application, the DTSA also requires the trial court to do the following: 1. The court order must contain findings of fact and conclusions of law. 2. The court order must provide the narrowest seizure of property necessary to achieve the purpose of the ex parte seizure and be conducted in a manner that minimizes any interruption of the business operations of third parties; and, to the extent possible, the court order must prevent undue damage to the legitimate business operations of the person subject to the seizure order. 3. The court order must be accompanied (by another court order) protecting the seized property from disclosure and prohibiting access by the applicant or the person against whom the order is issued. 4. The court order must provide specific guidance to law enforcement officials, including the time when the seizure is to occur and whether force may be used to access locked areas. 5. The court must set a date for a hearing, at the earliest possible time, but not later than seven days after the ex parte seizure order has been issued. 6. The applicant must provide adequate security in the event the seizure is wrongful. See 18 U.S.C. §1836(b)(2)(B).
12 — 24
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.36
D. [12.34] The Inevitable Disclosure Doctrine It is another fundamental tenet of trade secret law that the actual or threatened misappropriation of trade secrets may be enjoined. The primary remedy in any trade secret case is an injunction. The value of a trade secret rests on secrecy. Any unauthorized acquisition, disclosure, or use of a trade secret causes irreparable harm as a matter of law because once another person or entity obtains improper access to the trade secret, the value of the trade secret is diminished or destroyed. See R. Mark Halligan, Trade Secrets and the Inevitable Disclosure Doctrine, 5 Briefly: Persp. on Legis., Reg. & Litig., No. 10 (Oct. 2001). There has always been a tension in the law between the employer’s right to protect trade secrets and the employee’s right to pursue his or her livelihood. The issuance of an injunction is an extraordinary remedy. The trade secret plaintiff must present sufficient evidence of a probable loss or injury to justify the entry of injunctive relief. Courts of equity have centuries of experience with granting and fashioning injunctive relief narrowly tailored to protect the employer’s legitimate interest in protecting trade secrets. Overbroad injunctions are routinely reversed by appellate courts. In any case in which injunctive relief is sought, the courts have fashioned rulings based on a careful weighing of both the employer’s and the employee’s interests as well as the public interest in free and fair competition. The Defend Trade Secrets Act reflects this balance. In the “Remedies” section of the DTSA, the DTSA follows the Uniform Trade Secrets Act in providing that a court may grant an injunction to prevent any actual or threatened misappropriation of a trade secret on such terms as the court deems reasonable. However, the injunction cannot prevent a person from entering an employment relationship or place restrictions on an employment relationship based “merely on the information the person knows.” 18 U.S.C. §1836(3)(A)(i)(I). E. [12.35] Whistleblower Protection The Uniform Trade Secrets Act does not address whistleblower defenses to liability for trade secret misappropriation. It is a violation of the UTSA to make any unauthorized disclosure or use of a trade secret. There are no exemptions in the UTSA for third-party disclosures (even to one’s own lawyer) and no public policy exemptions for reporting misconduct or even for complying with a subpoena. F. [12.36] Immunity The Economic Espionage Act as originally passed did contain “Exceptions to Prohibitions” in 18 U.S.C. §1833, granting immunity to lawful activity conducted by a governmental entity of the United States or a political subdivision of a state and “the reporting of a suspected violation of law to any governmental entity of the United States, a State, or a political subdivision of a State, if such entity has lawful authority with respect to that violation.” See former 18 U.S.C. §1833 (before the Defend Trade Secrets Act amendments).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 25
§12.37
INTELLECTUAL PROPERTY LAW
However, what was missing in the EEA was protection of the trade secret when such disclosures were made. An unprotected disclosure of a trade secret to a third party, without an obligation of confidentiality, vitiates the status of such information as a trade secret. There is immunity from liability for the “confidential” disclosure of a trade secret to the government or in a court filing. See 18 U.S.C. §§1833(b)(1)(A), 1833(b)(1)(B). The Defend Trade Secrets Act imposes an obligation on the employer to provide a §1833 “notice of immunity” to an “employee.” 18 U.S.C. §1833(b)(3)(C). The term “employee” is defined in §1833 to include “any individual performing work as a contractor or consultant for an employer.” 18 U.S.C. §1833(b)(4). The notice of immunity requirement applies to contracts and agreements that are entered into or updated after May 11, 2016 (the date of enactment of the DTSA). 18 U.S.C. §1833(b)(4)(D). The notice of immunity must be added to any contract or agreement with an employee that governs the use of a trade secret or other confidential information. However, the DTSA provides that an employer will be in compliance with the notice of immunity requirement if the employer provides the notice of immunity in a “policy document” as a “cross-reference.” 18 U.S.C. §1833(b)(3). The penalty for noncompliance with the notice of immunity requirement is an abrogation of the remedies available to the employer. The employer cannot recover increased damages or attorneys’ fees from the employee to whom notice was not provided. 18 U.S.C. §1833(b)(4)(C). G. [12.37] Use of Trade Secret in Anti-Retaliation Lawsuit An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to his or her attorney and use the trade secret information in the court proceeding if the trade secret information is filed under seal and protected by a confidential protective order entered by the court. The employee/ex-employee shall not disclose the trade secret except pursuant to court order. 18 U.S.C. §1833(b)(2).
VII. [12.38] THE COMPUTER FRAUD AND ABUSE ACT OF 1986 The Computer Fraud and Abuse Act of 1986 (CFAA), Pub.L. No. 99-474, 100 Stat. 1213, codified at 18 U.S.C. §1030, was originally enacted as a criminal statute to protect classified information on government and financial institution computers, but was amended in the 1990s to add a private civil cause of action and to apply to any “protected computer,” which is defined by statute to include any computer that is used in interstate or foreign commerce, whether that computer is located within the United States or outside of the United States. 18 U.S.C. §1030(b)(2). The CFAA has been used as the basis for bringing Uniform Trade Secrets Act trade secret misappropriation claims into federal court. Today, “[e]mployers . . . are increasingly taking
12 — 26
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.38
advantage of the CFAA’s civil remedies to sue former employees and their new companies who seek a competitive edge through wrongful use of information from the former employer’s computer system.” Pacific Aerospace & Electronics, Inc. v. Taylor, 295 F.Supp.2d 1188, 1196 (E.D.Wash. 2003). 18 U.S.C. §1030(a) enumerates various categories of misconduct, but the cases involving departing employees focus on the elements of “without authorization” or “exceeding authorized access.” There have been cases that recognized that the CFAA provides a remedy against disloyal employees who download, transfer, or delete trade secret information on company computers and who engage in other acts of trade secret misappropriation involving computers. The seminal decisions in Shurgard Storage Centers, Inc. v. Safeguard Self Storage, Inc., 119 F.Supp.2d 1121 (W.D.Wash. 2000), and International Airport Centers, L.L.C. v. Citrin, 440 F.3d 418 (7th Cir. 2006), illustrate the use of the CFAA to combat trade secret misappropriation and to provide access to the U.S. federal courts. In Shurgard, employees accessed the plaintiff’s computer to transmit trade secrets to the new employer. The district court rejected the argument that these employees had authorized access to Shurgard’s computer system because they were still employed at Shurgard. Instead, the court held that these employees lost their authorization and were “without authorization” when they accessed the Shurgard’s computer system to send proprietary information via e-mail to their new employer. In Citrin, supra, the reasoning in Shurgard was buttressed in an opinion by Judge Posner writing for the Seventh Circuit Court of Appeals. Once again, the facts involved an employee who decided to quit and start up his own competing business. Before he quit, however, Citrin deleted all the data he had collected on potential acquisition targets for the benefit of the International Airport Centers. The issue was whether such pretermination activities violated the CFAA because Citrin was authorized to use the laptop computer. The Seventh Circuit made short shrift of this argument, holding that Citrin’s authorization to access the company-issued laptop computer terminated when he breached his duty of loyalty to his former employer. In other words, Citrin’s breach of the duty of loyalty automatically terminated the agency relationship, which, in turn, automatically terminated Citrin’s authority to access the company-owned laptop computer. In Modis, Inc. v. Bardelli, 531 F.Supp.2d 314, 319 (D.Conn. 2008), the court held that the existence of an employment agreement restricting the defendant’s access unless “in furtherance of Modis’ Business” was sufficient to establish that the defendant had exceeded her authorized access. The court chose not to discuss whether the defendant had an improper purpose or breached the duty of loyalty; the employment agreement’s prohibition on access was enough. The impact of these CFAA decisions is apparent. Since most trade secrets now reside in an electronic environment, the use of the CFAA to combat the theft of trade secrets by disloyal employees is on the rise. There have been dozens of cases involving the litigation of trade secret misappropriation claims under the CFAA in recent years, and this trend will continue. The CFAA provides a plaintiff with the option to file suit in federal court under the district courts’ federal
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 27
§12.38
INTELLECTUAL PROPERTY LAW
question jurisdiction. See 28 U.S.C. §1331. Federal jurisdiction for a trade secret misappropriation claim may be only a mouse click away. However, there is a split of authority in the federal courts. Citrin, supra, is still the controlling authority in the Seventh Circuit. In Citrin, Judge Posner held that an employee acts “without authorization” from the point in time when the principal-agent relationship is terminated by the wrongful acts of the employee. In contrast, the Ninth Circuit rejected this interpretation. In LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009), the Ninth Circuit held that an employer’s decision to allow access or terminate access defines whether an employee acts “with authorization” or “without authorization” (even though there are wrongful acts during this access period such as stealing trade secrets). Another interpretation of the CFAA focuses on “exceeding authorized access.” Once again, there is a split in the courts. Sitting en banc, the Ninth Circuit rejected an interpretation of the CFAA that would impose liability for violations of computer-use policies. United States v. Nosal, 676 F.3d 854 (9th Cir. 2012). The Ninth Circuit views the CFAA as a “hacker” statute that does not apply to the misuse of information obtained from a computer but instead criminalizes only “access” violations by outside hackers or inside hackers. The Ninth Circuit decision in Nosal once again conflicts with the Citrin decision as well as decisions in other circuits. For example, the First Circuit concluded more than a decade ago in EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577 (1st Cir. 2001), that violations of computer-use restrictions can serve as the basis for a CFAA violation. The Eleventh Circuit also provides for CFAA liability for violations of computer-use policies. See United States v. Rodriguez, 628 F.3d 1258 (11th Cir. 2010). On July 5, 2016, the Ninth Circuit affirmed defendant Nosal’s Economic Espionage Act conviction for knowingly and with intent to defraud accessing a protected computer “without authorization” in violation of the CFAA. See United States v. Nosal, 828 F.3d 865 (9th Cir. 2016); 18 U.S.C. §1030(a)(4). Nosal worked at an executive search firm, Korn/Ferry, when he decided to launch a competitor with a group of coworkers. When Nosal left Korn/Ferry, the company revoked his computer access credentials, but Nosal continued to access and download Korn/Ferry files using another means of entry into the Korn/Ferry database called Searcher. The conviction was summarily confirmed. A person uses a computer “without authorization” under the CFAA when the employer has rescinded permission to access the computer and the defendant uses the computer anyway. This straightforward principle “embodies the common sense, ordinary meaning of the ‘without authorization’ prohibition.” 828 F.3d at 869. In Illinois, the CFAA causes of action will continue to be adjudicated under the Citrin, supra, standard. Trade secret misappropriation of computer files by a disloyal employee is and should be considered to be “computer fraud.” Company policies should continue to clearly and conspicuously provide that employees are strictly prohibited and are “without authorization” to access company computers to obtain proprietary and confidential electronic files for their own benefit or the benefit of others. The use of company computers, networks, and Internet access is a privilege subject to computer-use restrictions that may be revoked at any time for unauthorized or inappropriate
12 — 28
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.39
conduct, including the unauthorized acquisition, disclosure, or use of company confidential computer files and information for the personal benefit of the employee or third parties. Whether the misappropriation of computer files by an employee is characterized as conduct “without authorization” or “exceeding authorized access,” the violation of the company’s computer use policies is and should be a CFAA violation. The theft of trade secrets from computer systems can now be litigated in federal court under the Defend Trade Secrets Act. Therefore, the use of the CFAA to establish subject-matter jurisdiction in federal district court actions is expected to decline since independent subjectmatter jurisdiction now exists under the DTSA.
VIII. [12.39] FORFEITURE OF TRADE SECRET RIGHTS Once trade secret information becomes generally known, it loses its status as a trade secret. A competitive advantage cannot be derived from information generally known in the trade because all the competitors know it. For example, if the Coca-Cola formula were disclosed on the front page of the New York Times, then trade secret rights in the formula would be lost. The same is not necessarily true in the Internet environment. The posting of trade secret information on the Internet may not be fatal to the trade secret status of the information depending on the factual circumstances. For example, there are family home pages on the Internet that have been there since 1994 but have never been visited by anyone other than close family members. If the information remains on the Internet long enough to spread around to all the user groups and chat rooms, etc., it probably has become generally known in the trade. However, if the company acts quickly and eradicates the information from the Internet before the trade secret information spreads, and if the company notifies persons who received the information that it is confidential and not to be disclosed or used without the company’s consent, then the information should not lose its trade secret status. Some of the early cases involving the Internet appeared to adopt a per se rule that once information was posted to the Internet, the secret status of the information was lost instantly because the information became (potentially) accessible to millions of people worldwide. Since then, courts have retreated from this extreme position and returned to the proper approach of evaluating each case based on the totality of the circumstances. The Illinois Trade Secrets Act contains the following provision imposing liability on a third party for trade secret misappropriation under the following circumstances: (b) “Misappropriation” means *** (2) disclosure or use of a trade secret of a person without express or implied consent by another person who: ***
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 29
§12.40
INTELLECTUAL PROPERTY LAW
(C) before a material change of position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. 765 ILCS 1065/2. This provision establishes a basis for preserving trade secrets that are posted on the Internet. If the company moves quickly and identifies an unauthorized posting of trade secret information on the Internet and then proceeds immediately (before there is a material change in position) to provide notice to all persons who had access to the website in question that the posting was unauthorized and that the third parties are not authorized to disclose or use such trade secret information, then any misuse after such notice should constitute the basis of a trade secret misappropriation claim against such third party.
IX. [12.40] 24/7 COMPUTER MONITORING AND SECURITY Companies must recognize the serious vulnerability of a major loss of trade secret rights via the Internet and take the steps necessary to monitor Internet activities on a 24/7 basis to identify unauthorized postings of trade secret information. The company can then move quickly to shut down the site and eradicate the improper postings before a loss of trade secret rights occurs. Once again, time is of the essence. Third-party services are available to constantly monitor the Internet, including user groups and chat rooms, for any mention of “XYZ Company,” with daily reports available to selected members of the management team. Loss of trade secret rights can occur in many ways on the Internet, whether intentionally or by accident. For example, unbeknownst to the company, an employee may post a resume on the Internet that discloses in the “accomplishments” section a highly confidential research and development project on which the employee is working. In such an event, quick action is required to remove the resume before the trade secret status of the project is lost forever.
X. [12.41] “JOHN DOE” LAWSUITS The privacy offered by Internet “handles” gives some people a sense of freedom and adventure. Only the Internet service provider (ISP) knows who “Shurdag” or “Topwig” really is, so some people disguised by such pseudonyms feel free to indulge themselves on bulletin boards and in chat rooms. Many users of pseudonyms do nothing offensive, but others post libelous and defamatory “cybersmears.” Still others try to manipulate the stock market. But perhaps the most dangerous “John Does” are those who reveal trade secrets on the Internet. It is well established in trade secret law that “once lost, a trade secret is lost forever.” Trade secrets are fragile assets, and the trade secret owner must move quickly to stop an unauthorized disclosure or use before the secret information becomes so widely dispersed on the Internet that it loses its competitive economic value.
12 — 30
WWW.IICLE.COM
THE IDENTIFICATION AND PROTECTION OF TRADE SECRETS
§12.42
If a “John Doe” is threatening a company’s trade secrets, a “John Doe” lawsuit should be filed with an emergency motion for a court order requiring the ISP to divulge the true identity of the poster so he or she can be named in the suit, served with the complaint, and ordered to cease and desist from these illegal activities. Nothing less will suffice.
XI. [12.42] TRADE SECRET ASSET MANAGEMENT Trade secret assets are corporate assets. At all times, reasonable measures must be taken to protect the confidentiality of trade secret assets because “once lost, a trade secret is lost forever.” Today, 80 percent of the assets of New Economy companies are intangible assets and only 20 percent are tangible assets; this is a complete reversal from the 1970s (at the start of the computer revolution), when 80 percent of the assets of U.S. companies were tangible assets and only 20 percent were intangible assets. Trade secret assets are fragile assets that must be managed properly. It is a dynamic, active process. Trade secret asset management involves four stages: (a) identification; (b) classification; (c) protection; and (d) valuation. Today, automated systems have been developed to assist companies with trade secret asset management. See R. Mark Halligan and Richard F. Weyand, TRADE SECRET ASSET MANAGEMENT: A GUIDE TO INFORMATION ASSET MANAGEMENT INCLUDING THE DEFEND TRADE SECRETS ACT OF 2016 (2016).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
12 — 31
13
Misappropriation of Trade Secrets
STEVEN E. FELDMAN SHERRY L. ROLLO Hahn Loeser & Parks LLP Chicago
®
©COPYRIGHT 2017 BY IICLE .
13 — 1
INTELLECTUAL PROPERTY LAW
I. [13.1] Introduction II. [13.2] Defend Trade Secrets Act III. [13.3] How Trade Secrets Are Misappropriated A. B. C. D.
[13.4] Unauthorized Use [13.5] Unauthorized Disclosure [13.6] Acquisition Through Improper Means Acquiring Trade Secrets Using Proper Means Does Not Constitute Misappropriation 1. [13.7] Failure To Maintain Secrecy 2. [13.8] Reverse Engineering
IV. [13.9] Analyzing Potential Trade Secret Misappropriation V. [13.10] Notice VI. Enforcement Mechanisms and Considerations A. [13.11] Litigation B. [13.12] Additional Possible Causes of Action VII. [13.13] Strategic Considerations in Trade Secret Misappropriation Litigation VIII. [13.14] Electronic Discovery and Trade Secret Misappropriation IX. [13.15] Trade Secret Misappropriation as a Federal Criminal Offense
13 — 2
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.2
I. [13.1] INTRODUCTION Trade secret misappropriation is a tort that involves the improper disclosure, use, or acquisition of a trade secret. Whether an act constitutes trade secret “misappropriation” is highly dependent on whether there is a confidential relationship between the trade secret owner and the party alleged to have misappropriated the trade secret and whether the trade secret owner has taken adequate steps to protect its trade secret. When trade secret misappropriation occurs, a trade secret owner often has no choice but to pursue litigation to protect its trade secret rights. Trade secret rights are most often given life and meaning in litigation. Litigation over trade secret misappropriation presents complex and cuttingedge issues for litigators, and the skill of the litigator in defining or attacking the trade secret correctly is usually outcome determinative. Definitional battles over exactly what “it” is that was allegedly misappropriated and whether this “it” even constitutes a trade secret start during the pleading stage of the litigation and carry through to the end, even to the scope of a permanent injunction that may be entered. With the passage of the Defend Trade Secrets Act of 2016 (DTSA), Pub.L. No. 114-153, 130 Stat. 376, on May 11, 2016, trade secret misappropriation has taken on another dimension, with the federal statute authorizing direct access to the federal courts to enforce trade secret rights, in addition to traditional state law statutory remedies and venues. This generates a host of new strategic issues as well as obligations on trade secret owners and their employees. This chapter begins by providing a summary of the DTSA and then addressing how trade secrets are misappropriated, focusing on the DTSA as well as traditional state jurisprudence. Next, the chapter discusses what to do once a client informs counsel that it believes a trade secret misappropriation has occurred. The chapter then discusses some strategic aspects of litigating a trade secret misappropriation case, including a discussion of the role electronic discovery plays in trade secret misappropriation cases, and ends with a short discussion of the Economic Espionage Act of 1996 (EEA), Pub.L. No. 104-294, 110 Stat. 3488, which makes trade secret misappropriation a federal criminal offense.
II. [13.2] DEFEND TRADE SECRETS ACT The Defend Trade Secrets Act creates a federal cause of action for the misappropriation of trade secrets. The legislation largely mimics the Uniform Trade Secrets Act (UTSA), www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf, which has been adopted by 48 states. It also does not displace, but rather is complimentary to, the state law trade secret causes of action. Therefore, a decision will need to be made at the outset of a trade secret case as to whether to proceed under the DTSA or under a state cause of action. As discussed further in §13.3 below, the DTSA’s definition of “misappropriation” of a trade secret is similar to that of the UTSA. However, there are some unique clauses of the DTSA. First, the DTSA provides for an ex parte seizure order, which is available in extraordinary situations to prevent the dissemination or propagation of trade secrets. See 18 U.S.C. §1836(b)(2). This provision permits,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 3
§13.2
INTELLECTUAL PROPERTY LAW
assuming certain criteria as outlined below are met, expedited relief from a federal court on an ex parte basis in the form of a seizure of property from a party accused of trade secret misappropriation. Section 1836(b)(2)(A)(ii) lists the requirements for seeking an ex parte seizure order. Under the DTSA, an ex parte seizure order will not be granted unless a. a temporary restraining order issued pursuant to Federal Rule of Civil Procedure 65(b) would be inadequate because the party to which the order would be issued would evade, avoid, or otherwise not comply with it; b. immediate and irreparable injury will occur if the seizure is not ordered; c. the harm to the applicant of denying the application outweighs the harm to the legitimate interests of the person against whom the seizure is ordered and substantially outweighs the harm to any third parties; d. the applicant is likely to succeed in showing that the person against whom the seizure is ordered misappropriated the trade secret by improper means, or conspired to misappropriate the trade secret by improper means, and is in actual possession of it and any property to be seized; e. the applicant describes with reasonable particularity the matter to be seized and, to the extent reasonable, identifies the location where the matter is to be seized; f.
the person against whom the seizure would be ordered, or those working in concert with that person, would destroy, move, hide, or otherwise make such matter inaccessible if the applicant were to provide that person notice; and
g. the applicant has not publicized the requested seizure. 18 U.S.C. §1836(b)(2)(A)(ii). Assuming the party seeking the seizure order is successful, the federal court will issue an order directing law enforcement to seize certain property that contains the misappropriated trade secret. The seized property is not copied or disclosed without the consent of the defendant, and a hearing is required to take place within seven days of the seizure. If the federal court determines after that hearing that the seizure order should not have issued, the party seeking the order may be subject to attorneys’ fees and damages for an improper seizure. 18 U.S.C. §1836(b)(2)(B). It remains to be seen how the courts will interpret the high burden of proof outlined in the statute when determining whether to issue the seizure orders. Second, the DTSA also provides immunity for “whistleblowers.” See 18 U.S.C. §1833(b). This provision permits employees to share evidence of alleged misconduct with the government or present that evidence in support of a retaliation claim under seal. Importantly, the DTSA requires employers to provide notice to employees of the immunity provisions set forth in the DTSA. 18 U.S.C. §1833(b)(3). If an employer does not provide adequate notice, the employer may lose exemplary damages and/or attorneys’ fees in an action against an employee who was not provided notice. Id. For these purposes, it is important to note that the DTSA defines
13 — 4
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.3
“employee” broadly to include “any individual performing work as a contractor or consultant for an employer.” 18 U.S.C. §1833(b)(4). The third unique feature is that the DTSA prohibits injunctions that would prevent an employee “from entering into an employment relationship” and requires “that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” 18 U.S.C. §1836(b)(3)(A)(i)(I). It will be interesting to see how this provision is interpreted in view of the inevitable disclosure doctrine; it also presents a strategic choice regarding whether to proceed under the DTSA or under a state trade secret cause of action. Similar to the UTSA, the DTSA also provides for a three-year statute of limitations. A civil action under subsection (b) may not be commenced later than 3 years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered. For purposes of this subsection, a continuing misappropriation constitutes a single claim of misappropriation. 18 U.S.C. §1836(d).
III. [13.3] HOW TRADE SECRETS ARE MISAPPROPRIATED Most jurisdictions recognize three primary ways in which trade secrets are misappropriated: a. unauthorized disclosure; b. unauthorized use; and c. acquisition through improper means. See, e.g., Destiny Health, Inc. v. Connecticut General Life Insurance Co., 2015 IL App (1st) 142530, ¶28, 39 N.E.3d 275, 395 Ill.Dec. 808 (“Under the Trade Secrets Act, misappropriation can be shown in one of three ways: by improper acquisition, unauthorized disclosure, or unauthorized use.”). There are several blackletter formulations for articulating trade secret misappropriation, which come from (a) the Defend Trade Secrets Act, which relies on the Economic Espionage Act definitions to establish a federal trade secret law, (b) the Uniform Trade Secrets Act, (c) RESTATEMENT (THIRD) OF UNFAIR COMPETITION §40 (1995), and (d) RESTATEMENT OF TORTS §757 (1939), which is relied on by many pre-UTSA cases and still establishes the trade secret misappropriation standard in the few jurisdictions (most notably New York) that have not yet adopted some form of the UTSA. The definitions of trade secret “misappropriation” contained in these sources are set forth below.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 5
§13.3
INTELLECTUAL PROPERTY LAW
The DTSA and EEA define “misappropriation” of a trade secret as follows: [T]he term “misappropriation” means — (A) 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 (B) disclosure or use of a trade secret of another without express or implied consent by a person who — (i) used improper means to acquire knowledge of the trade secret; (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was — (I) derived from or through a person who had used improper means to acquire the trade secret; (II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or (iii) before a material change of the position of the person, knew or had reason to know that — (I) the trade secret was a trade secret; and (II) knowledge of the trade secret had been acquired by accident or mistake. 18 U.SC. §1839(5). Illinois’ version of the UTSA, the Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1, et seq., defines trade secret “misappropriation” as follows: “Misappropriation” means: (1) acquisition of a trade secret of a person by another person who knows or has reason to know that the trade secret was acquired by improper means; or (2) disclosure or use of a trade secret of a person without express or implied consent by another person who: (A) used improper means to acquire knowledge of the trade secret; or
13 — 6
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.3
(B) at the time of disclosure or use, knew or had reason to know that knowledge of the trade secret was: (I) derived from or through a person who utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. 765 ILCS 1065/2(b). RESTATEMENT (THIRD) OF UNFAIR COMPETITION §40 defines “misappropriation” as follows: One is subject to liability for the appropriation of another’s trade secret if: (a) the actor acquires by means that are improper under the rule stated in §43 [improper acquisition of trade secrets] information that the actor knows or has reason to know is the other’s trade secret; or (b) the actor uses or discloses the other’s trade secret without the other’s consent and, at the time of the use or disclosure, (1) the actor knows or has reason to know that the information is a trade secret that the actor acquired under circumstances creating a duty of confidence owed by the actor to the other under the rule stated in §41 [duty of confidence]; or (2) the actor knows or has reason to know that the information is a trade secret that the actor acquired by means that are improper under the rule stated in §43; or (3) the actor knows or has reason to know that the information is a trade secret that the actor acquired from or through a person who acquired it by means that are improper under the rule stated in §43 or whose disclosure of the trade secret constituted a breach of a duty of confidence owed to the other under the rule stated in §41; or (4) the actor knows or has reason to know that the information is a trade secret that the actor acquired through an accident or mistake, unless the acquisition was the result of the other’s failure to take reasonable precautions to maintain the secrecy of the information.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 7
§13.4
INTELLECTUAL PROPERTY LAW
RESTATEMENT OF TORTS §757 provides further clarity on this issue: One who discloses or uses another’s trade secret, without a privilege to do so, is liable to the other if (a) he discovered the secret by improper means, or (b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or (c) he learned the secret from a third person with notice of the facts that it was a secret and that the third person discovered it by improper means or that the third person’s disclosure of it was otherwise a breach of his duty to the other, or (d) he learned the secret with notice of the facts that it was a secret and that its disclosure was made to him by mistake. A. [13.4] Unauthorized Use Use-type misappropriation involves “any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant.” RESTATEMENT (THIRD) OF UNFAIR COMPETITION §40, cmt. c (1995). The RESTATEMENT cites examples of usetype misappropriation, including “marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, relying on the trade secret to assist or accelerate research or development, or soliciting customers through the use of information that is a trade secret.” Id. See also Garth v. Staktek Corp., 876 S.W.2d 545, 548 (Tex.App. 1994) (“Any misappropriation of trade secrets, followed by an exercise of control and domination, is considered a commercial use.”). Idea submission cases are another common use-type misappropriation fact pattern. In these cases, an individual submits an idea or business proposal to a company. The company rejects the idea as impractical or undesirable, but then proceeds to implement the idea in its business. Critical in these cases is whether a confidential relationship, either express or implied, was formed between the idea submitter and the recipient. Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714 (7th Cir. 2003); All Pro Sports Camp, Inc. v. Walt Disney Co., 727 So.2d 363 (Fla.App. 1999). If such a confidential relationship was formed and the use was unauthorized, then there is a basis for asserting a claim for use-type trade secret misappropriation. Derivation is another form of use-type misappropriation. Mangren Research & Development Corp. v. National Chemical Co., 87 F.3d 937, 944 (7th Cir. 1996) (“the user of another’s trade secret is liable even if he uses it with modifications or improvements upon it effected by his own efforts, so long as the substance of the process used by the actor is derived from the other’s secret”), quoting In re Innovative Construction Systems, Inc., 793 F.2d 875, 887 (7th Cir. 1986). See also Thermodyne Food Service Products, Inc. v. McDonald’s Corp., 940 F.Supp. 1300, 1308 (N.D.Ill. 1996) (“Although a product appears to be a new or modified product, a violation of the [Illinois Trade Secrets Act] occurs if the modification or new product was substantially derived
13 — 8
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.4
from another’s trade secret.”); Lucini Italia Co. v. Grappolini, No. 01 C 6405, 2003 WL 1989605, *17 (N.D.Ill. Apr. 28, 2003) (“The limited extent to which defendant modified Lucini’s essential oil products and packaging to suit themselves does not change the fact that such products and packaging are substantially derived from Lucini’s trade secret information.”). Use-type misappropriation also occurs when a defendant uses a plaintiff’s trade secrets to understand what pitfalls to avoid. Most jurisdictions recognize this so-called “negative knowhow” as a potential form of trade secret. See Chapter 12 of this handbook. See also Affiliated Hospital Products, Inc. v. Baldwin, 57 Ill.App.3d 800, 373 N.E.2d 1000, 1006, 15 Ill.Dec. 528 (1st Dist. 1978) (“Even accepting their denial of any literal copying of MPL drawings, these drawings aided defendants in the design of Hypomed machinery, if only to demonstrate what pitfalls to avoid.”); Glaxo Inc. v. Novopharm Ltd., 931 F.Supp. 1280, 1299 (E.D.N.C. 1996) (“A trade secret need not necessarily be comprised of positive information, such as a specific formula, but can include negative, inconclusive, or sufficiently suggestive research data that would give a person skilled in the art a competitive advantage he might not otherwise enjoy but for the knowledge gleaned from the owner’s research investment.”), aff’d, 110 F.3d 1562 (Fed.Cir. 1997); Merck & Co. v. SmithKline Beecham Pharmaceuticals Co., No. C.A. 15443-NC, 1999 WL 669354 (Del.Ch. Aug. 5, 1999), aff’d, 766 A.2d 442 (Del. 2000). In a typical fact pattern, a startup company made up of employees who left a competitor immediately begins manufacturing a competitive product without having to go through the normal development cycle of determining what works and what does not work because it had obtained this information from the competitor. Thus, it is able to start at level five rather than ground zero on a particular project. In certain circumstances, a true clean-room approach to development, in which no one who was involved in a particular project for the competitor is permitted to be involved in the development cycle of a similar competing product for the new company, is implemented to reduce risk of use-type trade secret misappropriation based on negative know-how. Use-type misappropriation often encompasses predicate acts of misappropriation, such as improper acquisition or unauthorized disclosure (see, e.g., Fedders Corp. v. Haier America Trading, LLC, No. 00 Civ. 5583(JSM), 2002 WL 519733 (S.D.N.Y. Apr. 4, 2002) (use of competitive bid information improperly acquired and disclosed without authorization to prepare and submit competing bid)), but it does not have to. For example, an employee or former employee who has authorized access to trade secrets can still commit an act of misappropriation by using the trade secret in a way that was not authorized by the trade secret owner. This also occurs when a licensee of trade secret information uses trade secret information in a manner that exceeds the scope of the license. Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147 (1st Cir.) (licensee given access to and use rights in proprietary source code for purposes of maintenance and repair not authorized to use such information for other purposes, such as creation of functionally similar software), partial summary judgment granted after remand, 886 F.Supp. 927 (D.Mass. 1994); Boeing Co. v. Sierracin Corp., 108 Wash.2d 38, 738 P.2d 665 (1987). There is a split of authority regarding whether the “use” must be for a competitive purpose. The competitive use defense has been rejected by several courts that have considered it, either based on the express language of the Uniform Trade Secrets Act, which does not define use-type misappropriation as requiring competition, or by suggesting that the issue of type of use is really
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 9
§13.5
INTELLECTUAL PROPERTY LAW
a damages issue. See Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 665 (4th Cir. 1993) (“The [Maryland UTSA] does not require proof of competition, but only proof of improper acquisition or improper use.”); Merckle GmbH v. Johnson & Johnson, 961 F.Supp. 721, 734 (D.N.J. 1997) (“Ortho indisputably ‘used’ Merckle’s information. To the extent such use is found to be detrimental to Merckle, the nature of Ortho’s use is an issue rightly argued with respect to damages to Merckle.”). Other courts, however, have recognized a competitive use defense. For example, in Omnitech International, Inc. v. Clorox Co., 11 F.3d 1316 (5th Cir. 1994), a suit was brought by an insecticide manufacturer against a potential investor under Louisiana’s version of the UTSA. The potential investor received confidential trade secrets as a result of a nondisclosure agreement and then backed out of the purchase after acquiring a competitor. Even though the potential investor apparently relied on, and therefore in a sense used, the confidential information that he received in deciding to purchase the competitor as opposed to the plaintiff, this was deemed insufficient to establish use-type misappropriation of a trade secret because the alleged “use” did not involve an unfair competitive advantage. Of course, even if a trade secret owner is unable to prove competitive use, there potentially still can be a misappropriation claim based on wrongful acquisition or wrongful disclosure. See Southwestern Energy Co. v. Eickenhorst, 955 F. Supp. 1078, 1085 (W.D. Ark. 1997) (recognizing competitive use defense when attorney used information obtained pursuant to confidentiality agreement in another litigation to draft class action complaint, but finding that these facts supported claim for wrongful-disclosure-type misappropriation). On the other hand, merely gaining knowledge from being exposed to confidential information is not considered use. Destiny Health, Inc. v. Connecticut General Life Insurance Co., 2015 IL App (1st) 142530, ¶41, 39 N.E.3d 275, 395 Ill.Dec. 808 (“The fact that the information provided by Destiny might have made Cigna more informed in evaluating whether to partner with Destiny or another vendor in the development of an incentive-points program does not support an inference that Cigna misappropriated Destiny’s trade secrets absent some showing that Cigna would not have been able to develop its incentive-points program without the use of Destiny’s trade secrets.”). Thus, a departing employee who has received trade secrets during the course of employment but does not use them after departing is not guilty of trade secret misappropriation. Zellweger Analytics, Inc. v. Milgram, No. 95 C 5998, 1997 WL 667778 (N.D.Ill. Oct. 21, 1997); News America Marketing In-Store, Inc. v. Marquis, 86 Conn.App. 527, 862 A.2d 837 (2004) (finding documents taken from former employer and then thrown in garbage by former employee after notice that former employer might sue caused no harm or injury to support causes of action for breach of fiduciary duty, violation of UTSA, or conversion.), aff’d, 276 Conn. 310 (2005). B. [13.5] Unauthorized Disclosure Trade secret misappropriation through unauthorized disclosure involves telling the trade secret to someone who is not entitled to know it. Unauthorized disclosure can occur through employees or former employees disclosing the trade secret to a competitor, who in some cases is their new employer. There are numerous examples of a key departing employee taking the trade secret formula or critical manufacturing process and disclosing it to a competitor. Other examples
13 — 10
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.5
of disclosure-type misappropriation include disclosing customer lists or distributor lists to the competitor. RKI, Inc. v. Grimes, 177 F.Supp.2d 859 (N.D.Ill. 2001) (new employer also misappropriated former employer’s trade secrets in that, shortly after former employee started working for new employer, he disclosed former employer’s trade secret information to other personnel); Mangren Research & Development Corp. v. National Chemical Co., 87 F.3d 937 (7th Cir. 1996) (once former employee of plaintiff apprised new employer of plaintiff’s trade secrets and new employer made use of trade secrets, new employer was liable for misappropriation under Illinois Trade Secrets Act). There are also cases in which a third party under a confidentiality agreement makes unauthorized disclosure of trade secrets to a competitor, such as when a consultant working for one company goes off to consult with a competitor and ends up disclosing trade secret information to the competitor. Another way in which trade secrets are misappropriated through unauthorized disclosure is in the company prospectus of a departing employee’s new company, which is handed out to investors or potential investors. In some cases, actual disclosure of the trade secret is not required as long as the facts and circumstances surrounding an employee’s departure create a threat of misappropriation. Thus, a trade secret owner need not wait until the horse is out of the barn to try to enforce its trade secret rights and may proceed on an “inevitable disclosure” theory. PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1268 (7th Cir. 1995). The U.S. District Court for the Northern District of Illinois discussed the factors giving rise to inevitable-disclosure-type misappropriation in RKI, supra, 177 F.Supp.2d at 875 – 876: Alternatively, Grimes and Roll-Kraft unlawfully misappropriated Roll-Kraft’s trade secret information because it is inevitable Grimes will use the information he obtained through improper means in his job with Roll-Kraft. This inevitable use of Roll-Kraft’s trade secret information will allow Chicago Roll to gain a substantial unfair competitive advantage over Roll-Kraft. . . . The factors to determine whether disclosure of trade secrets is inevitable are: 1) the level of competition between the former employer and the new employer; 2) whether the employee’s position with the new employer is comparable to the position he held with the former employer; and 3) the actions the new employer has taken to prevent the former employee from using or disclosing trade secrets of the former employer. . . . In this case, there is no dispute Roll-Kraft and Chicago Roll are direct competitors. The Court also concludes Roll-Kraft has shown Grimes’ new position is sufficiently comparable to his former position at Roll-Kraft to make disclosure of Roll-Kraft’s trade secrets inevitable in his new position. Grimes territory as a [salesman] with Chicago Roll is substantially similar to his territory when he was at Roll-Kraft. As to the last element, “it is only fair to shift the burden to defendants, to prove” that Grimes will not use or disclose Roll-Kraft’s confidential information. [Citations omitted.] Quoting PepsiCo, Inc. v. Redmond, No. 94 C 6838, 1996 WL 3965, *21 (N.D.Ill. Jan. 2, 1996). It is also important to note that the inevitable disclosure doctrine was not explicitly adopted by the Defend Trade Secrets Act. There was significant discussion regarding the inevitable disclosure doctrine during the legislative hearings for the DTSA. The result of those hearings was a careful balance that attempts to ensure the DTSA will not introduce the inevitable disclosure doctrine to states, such as California, that have expressly rejected the doctrine. California has
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 11
§13.6
INTELLECTUAL PROPERTY LAW
rejected “the doctrine of inevitable disclosure [because] it ‘creates a de facto covenant not to compete’ and ‘run[s] counter to the strong policy in California favoring employee mobility.’ ” Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443, 1463 (2002), quoting Bayer Corp. v. Roche Molecular Systems, Inc., 72 F.Supp.2d 1111, 1120 (1999). The court went on to state emphatically, “Lest there be any doubt about our holding, our rejection of the inevitable disclosure doctrine is complete.” Whyte, supra, 101 Cal.App.4th at 1463. After the discussions during the legislative hearings, it was decided to include language in the DTSA that expressly prohibits injunctions that (1) “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business” (18 U.S.C. §1836(b)(3)(A)(i)(II)) or (2) limit employment based “merely on the information the person knows” (18 U.S.C. §1836(b)(3)(A)(i)(I)). The inevitable disclosure doctrine is discussed in greater detail in Chapter 14 of this handbook. C. [13.6] Acquisition Through Improper Means The acquisition of a trade secret can also constitute misappropriation. However, it is not enough that the acquisition is merely unauthorized. After all, a trade secret owner may not authorize someone to reverse engineer trade secret information from a product that is sold, but reverse engineering does not constitute misappropriation. See §13.8 below. Thus, an additional element of improper means is required to establish acquisition-type misappropriation. The Defend Trade Secrets Act makes this point explicitly — expressly carving out “reverse engineering, independent derivation, or any other lawful means of acquisition” from the definition of “improper means”: [T]he term “improper means” — (A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and (B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition. 18 U.S.C. §1839(6). The RESTATEMENT standards focus on similar “improper means” factors, with the RESTATEMENT (THIRD) OF UNFAIR COMPETITION §43 (1995) also emphasizing that independent discovery and analysis of publicly available products or information are not improper means of acquisition. RESTATEMENT OF TORTS §757, cmt. f (1939), defines “improper means” as “means which fall below the generally accepted standards of commercial morality and reasonable conduct.” Examples cited in §757 include fraudulent misrepresentation to induce disclosure, tapping of telephone wires, eavesdropping, and other espionage. Id.
13 — 12
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.6
The RESTATEMENT (THIRD) OF UNFAIR COMPETITION devotes an entire section to the “Improper Acquisition of Trade Secrets”: “Improper” means of acquiring another’s trade secret under the rule stated in §40 include theft, fraud, unauthorized interception of communications, inducement of or knowing participation in breach of confidence, and other means either wrongful in themselves or wrongful under the circumstances of the case. Independent discovery and analysis of publicly available products or information are not improper means of acquisition. RESTATEMENT (THIRD) OF UNFAIR COMPETITION §43. The Supreme Court similarly has recognized that proper means such as reverse engineering through normal business channels or acquisition through disclosure by a trade secret owner who failed to take reasonable measures to preserve secrecy does not constitute misappropriation. See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 40 L.Ed.2d 315, 94 S.Ct. 1879, 1883 (1974) (“A trade secret law, however, does not offer protection against discovery by. . . so-called reverse engineering, that is by starting with the known product and working backward to divine the process which aided in its development or manufacture.”); Priority Care, Inc. v. Gentiva Health Services, Inc., No. CV044002756, 2005 WL 246711 (Conn.Super. Jan. 7, 2005) (finding no trade secret if customer names can be readily ascertained through normal business channels). See also Chicago Lock Co. v. Fanberg, 676 F.2d 400, 405 (9th Cir. 1982) (“A lock purchaser’s own reverse-engineering of his own lock, and subsequent publication of the serial number-key code correlation, is an example of the independent invention and reverse engineering expressly allowed by trade secret doctrine.”). Determining whether improper means have been employed to acquire a trade secret sometimes calls into question the reasonable security measures of the trade secret owner. Maybe the means were legitimate, but the trade secret owner did not take sufficient steps to protect the trade secret. This issue was vividly demonstrated in E.I. duPont deNemours & Co. v. Christopher, 431 F.2d 1012 (5th Cir. 1970), in which an unidentified third party hired photographers to fly over the plaintiff’s new facility and take pictures. The court deemed this aerial reconnaissance to constitute improper means, applying the standard from RESTATEMENT OF TORTS §757, cmt. f. The court determined that the plaintiff had taken reasonable measures to protect its trade secret information regarding the facility but could not have reasonably anticipated aerial reconnaissance efforts to discover its trade secrets: “Improper” will always be a word of many nuances, determined by time, place, and circumstances. We therefore need not proclaim a catalogue of commercial improprieties. Clearly, however, one of its commandments does say “thou shall not appropriate a trade secret through deviousness under circumstances in which countervailing defenses are not reasonably available.” 431 F.2d at 1017. While perhaps aerial surveillance under the particular facts of E.I. duPont was a form of improper means back in 1970, in today’s age of satellite reconnaissance, it is at least questionable whether such surveillance would still be considered improper means. It also should be understood that the E.I. duPont decision arose in the context of a mandamus petition following denial of a
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 13
§13.7
INTELLECTUAL PROPERTY LAW
motion to dismiss for failure to state a claim and was based solely on the pleadings in the context of a motion to dismiss and the Fifth Circuit Court of Appeals’ predictions of how the Texas State Supreme Court might decide the question of whether aerial surveillance would constitute improper means. Other examples of using improper means to acquire trade secrets involve third parties using former employees to get information from a competitor, computer theft, computer hacking, and false pretenses (i.e., falsely posing as someone in a position of trust). An interesting twist on this scenario occurs when employees use their positions and access to trade secrets in an attempt to make a quick buck. For example, take the situation that unfolded involving soda giants Coca-Cola and Pepsi. In May 2006, a letter appeared at Pepsi’s headquarters offering to sell Pepsi a new Coke drink recipe. Pepsi, however, took the high road and, instead of investigating the potential financial gain if it were to buy Coke’s new trade secret, immediately contacted Coke regarding the apparent breach of security. Coke contacted the FBI, which began a sting operation. In the end, three Coke employees were arrested and charged with wire fraud and stealing and selling trade secrets. In this instance, Pepsi executives did the right thing and averted a trade secret misappropriation crisis. Nikki Swartz, Safeguarding Corporate Secrets, 40 Information Management J., No. 5, 24 (Sept./Oct. 2006), www.arma.org/bookstore/files/edge_swartz.pdf. Even if the trade secret is not physically taken, there can still be acquisition-type misappropriation. For example, a departing employee’s memorization of his or her employer’s customer list has been found to constitute misappropriation. Stampede Tool Warehouse, Inc. v. May, 272 Ill.App.3d 580, 651 N.E.2d 209, 217, 209 Ill.Dec. 281 (1st Dist. 1995) (“A trade secret can be misappropriated by physical copying or by memorization.”); Al Minor & Assoc., Inc. v. Martin, 117 Ohio St.3d 58, 881 N.E.2d 850, 855 (2008) (“Information that constitutes a trade secret . . . does not lose its character as a trade secret if it has been memorized. It is the information that is protected by the [Uniform Trade Secrets Act], regardless of the manner, mode, or form in which it is stored — whether on paper, in a computer, in one’s memory or in any other medium.”). D. Acquiring Trade Secrets Using Proper Means Does Not Constitute Misappropriation 1. [13.7] Failure To Maintain Secrecy To be a trade secret, information must be treated as a trade secret. BDT Products, Inc. v. Lexmark International, Inc., 274 F.Supp.2d 880, 891 (E.D.Ky. 2003) (“It is axiomatic that without secrecy, no trade secret can exist.”). When information is not protected or is disclosed to third parties without a duty of confidentiality, the trade secret status of the information can be forfeited. Company websites and trade shows are common sources of trade secret forfeiture. See Ruckelshaus v. Monsanto Co., 467 U.S. 986, 81 L.Ed.2d 815, 104 S.Ct. 2862, 2872 (1984) (“If an individual discloses his trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the secret, his property right is extinguished.”). Companies will hire competitive intelligence professionals to elicit confidential company information from company employees and other sources (e.g., cold-calling the company, setting up job interviews with employees of a company, sending representatives to trade show booths, listening in elevators, and attending receptions). Successful competitive
13 — 14
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.8
intelligence calls into question a competitor’s security measures. Situations involving false pretenses raise a more controversial issue regarding whether the means are proper or improper. Note that the Strategic and Competitive Intelligence Professionals’ Code of Ethics for CI Professionals, available at www.scip.org, prohibits the use of false pretenses by requiring all competitive intelligence professionals “[t]o accurately disclose all relevant information, including one’s identity and organization, prior to all interviews.” While the use of the word “espionage” in RESTATEMENT OF TORTS §757, cmt. f (1939), seems to call into question legitimate competitive business intelligence activities, RESTATEMENT (THIRD) OF UNFAIR COMPETITION §43, cmt. b (1995), clarifies that, in addition to reverse engineering, proper means include acquiring a trade secret “through an analysis of published materials or through observation of objects or events that are in public view or otherwise accessible by proper means.” 2. [13.8] Reverse Engineering Reverse engineering is not an act of misappropriation. 18 U.S.C. §1839(6)(B). Indeed, the law encourages reverse engineering, as explained by the Supreme Court in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 40 L.Ed.2d 315, 94 S.Ct. 1879, 1890 (1974): Trade secret law provides far weaker protection in many respects than the patent law. While trade secret law does not forbid the discovery of the trade secret by fair and honest means, e.g., independent creation or reverse engineering, patent law operates “against the world,” forbidding any use of the invention for whatever purpose for a significant length of time. The holder of a trade secret also takes a substantial risk that the secret will be passed on to his competitors, by theft or by breach of a confidential relationship, in a manner not easily susceptible of discovery or proof. [Painton & Co. v. Bourns, Inc., 442 F.2d 216, 224 (2d Cir. 1971)]. Where patent law acts as a barrier, trade secret law functions relatively as a sieve. The possibility that an inventor who believes his invention meets the standards of patentability will sit back, rely on trade secret law, and after one year of use forfeit any right to patent protection, 35 U.S.C. §102(b), is remote indeed. See also Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 103 L.Ed.2d 118, 109 S.Ct. 971 (1989) (rejecting Florida statute that prohibited reverse engineering as preempted by federal patent laws and contrary to trade secret laws). However, the mere fact that information would be readily ascertainable once a product becomes public does not mean that there can be no trade secret misappropriation. [T]he district court concluded that PlayWood’s concept was not a trade secret because it could have been easily duplicated, stating that “[h]ad PlayWood succeeded in producing and marketing [the] notched track, the appearance of the track product itself would have fully revealed the concept PlayWood now claims as a secret.” [PlayWood Toys, Inc. v. Learning Curve Toys, L.P., No. 94 C 6884, 2002 WL 391361 (N.D.Ill. Mar. 13, 2002)]. Of course, the district court was correct in one
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 15
§13.9
INTELLECTUAL PROPERTY LAW
sense; PlayWood’s own expert recognized that, in the absence of patent or copyright protection, the track could have been reverse engineered just by looking at it. See [2002 WL 391361 at *6.] However, the district court failed to appreciate the fact that PlayWood’s concept was not publicly available. As Professor Milgrim states: “A potent distinction exists between a trade secret which will be disclosed if and when the product in which it is embodied is placed on sale, and a ‘trade secret’ embodied in a product which has been placed on sale, which product admits of discovery of the ‘secret’ upon inspection, analysis, or reverse engineering.” 1 Roger M. Milgrim, Milgrim on Trade Secrets §1.05[4], at 1-228 (2002). “Until disclosed by sale the trade secret should be entitled to protection.” Id.; see also 2 Rudolf Callmann, The Law of Unfair Competition, Trademarks and Monopolies §14.15, at 14-123 (4th ed. 2003) (“The fact that a secret is easy to duplicate after it becomes known does not militate against its being a trade secret prior to that time.”). Reverse engineering can defeat a trade secret claim, but only if the product could have been properly acquired by others, as is the case when the product is publicly sold. Here, PlayWood disclosed its concept to Learning Curve (and Learning Curve alone) in the context of a confidential relationship; Learning Curve had no legal authority to reverse engineer the prototype that it received in confidence. See Laff v. John O. Butler Co., [64 Ill.App.3d 603, 381 N.E.2d 423, 433, 21 Ill.Dec. 314 (1st Dist. 1978)] (“[A] trade secret is open to anyone, not bound by a confidential relationship or a contract with the secret’s owner, who can discover the secret through lawful means.”). Accordingly, we must conclude that the jury was entitled to determine that PlayWood’s concept could not easily have been acquired or duplicated through proper means. Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714, 729 – 730 (7th Cir. 2003). See also Reingold v. Swiftships, Inc., 126 F.3d 645 (5th Cir. 1997). Finally, while state trade secret laws cannot bar reverse engineering or independent discovery, protection will be accorded a trade secret holder against disclosure or unauthorized use gained by improper means even if others might have discovered the trade secret by legitimate means. RESTATEMENT (THIRD) OF UNFAIR COMPETITION §39, cmt. f (1995).
IV. [13.9] ANALYZING POTENTIAL TRADE SECRET MISAPPROPRIATION In analyzing a potential trade secret misappropriation, the first steps are to identify what was taken and determine whether it constitutes a trade secret. How to identify and protect a trade secret are addressed in Chapter 12 of this handbook and are not discussed at length here. Once the potential trade secret has been identified, the next step is to define the relationship between the trade secret owner and the alleged perpetrator. Whether the alleged perpetrator has some relationship to the trade secret owner (e.g., as an employee or former employee) or is a third party is highly significant to deciding whether the recipient of trade secret information has a “duty of confidence.” While outright theft of a trade secret by an unrelated third party does certainly occur, most trade secret misappropriation fact patterns arise out of acts by related parties
13 — 16
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.9
in which a duty of confidence exists. This happens most often in the employee or former employee context and between two businesses with a confidential relationship. RESTATEMENT (THIRD) OF UNFAIR COMPETITION §41 (1995) defines the “duty of confidence” as follows: A person to whom a trade secret has been disclosed owes a duty of confidence to the owner of the trade secret for purposes of the rule stated in §40 if: (a) the person made an express promise of confidentiality prior to the disclosure of the trade secret; or (b) the trade secret was disclosed to the person under circumstances in which the relationship between the parties to the disclosure or the other facts surrounding the disclosure justify the conclusions that, at the time of the disclosure, (1) the person knew or had reason to know that the disclosure was intended to be in confidence, and (2) the other party to the disclosure was reasonable in inferring that the person consented to an obligation of confidentiality. An employee or former employee is held to a different standard with respect to his or her duties and responsibilities, vis-à-vis an employer’s trade secret rights, than is a third party. This is because the employment relationship itself creates a duty of confidence. The duty of confidence derives from the employee’s duty of loyalty to its employer. During the course of employment, an employee owes an undivided duty of fidelity and loyalty to his or her employer. RKI, Inc. v. Grimes, 177 F.Supp.2d 859 (N.D.Ill. 2001); Dames & Moore v. Baxter & Woodman, Inc., 21 F.Supp.2d 817 (N.D.Ill. 1998); ABC Trans National Transport, Inc. v. Aeronautics Forwarders, Inc., 62 Ill.App.3d 671, 379 N.E.2d 1228, 1237, 20 Ill.Dec. 160 (1st Dist. 1978). This duty is defined in RESTATEMENT (SECOND) OF AGENCY §§393 – 395 (1958) as including “a duty to the principal not to use or to communicate information confidentially given him by the principal or acquired by him during the course of or on account of his agency or in violation of his duties as agent, in competition with or to the injury of the principal, on his own account or on behalf of another, although such information does not relate to the transaction in which he is then employed, unless the information is a matter of general knowledge.” RESTATEMENT (SECOND) OF AGENCY §395. Employees sometimes also have entered into employment contracts and covenants not to compete as a condition of employment. See Chapter 15 of this handbook, discussing restrictive covenants. These contracts generally are supplemental to the duties of loyalty and confidence that arise out of the employment relationship. However, even without an agreement, a former employee still is subject to the general rules prohibiting use or disclosure of another’s trade secrets in breach of a duty of confidence.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 17
§13.9
INTELLECTUAL PROPERTY LAW
Once the employment relationship terminates, the general rule is that an employee can compete with his or her former employer absent an enforceable agreement to the contrary. However, even absent a post-termination agreement, an employee is not entitled to use his or her employer’s trade secrets: “Even after the employment has ceased, however, ‘the employee remains subject to a duty not to use trade secrets, or other confidential information, which he has acquired in the course of his employment, for his own benefit or that of a competitor to the detriment of his former employer.’ ” Elm City Cheese Co. v. Federico, 251 Conn. 59, 752 A.2d 1037, 1044 (1999), quoting Allen Manufacturing Co. v. Loika, 145 Conn. 509, 144 A.2d 306, 309 (1958). A post-termination agreement or covenant not to compete (if enforceable) can temper further the employee’s ability to compete. One potential problem with these post-employment agreements, however, is that they are often vague on the very issue of what constitutes a company’s trade secret such that the employee is left to figure this out himself or herself. One might posit that obviously everything at the company cannot be a trade secret, and this is borne out in the caselaw, in which cases involving companies that relied on a culture of confidentiality rather than specific security measures have proved difficult. Compare Omega Optical, Inc. v. Chroma Technology Corp., 174 Vt. 10, 800 A.2d 1064 (2002) (rejecting culture of confidentiality), with Elm City Cheese, supra (accepting culture of confidentiality). Agreements that more explicitly spell out the trade secrets also can pose problems, however, as they are sometimes too narrow, thus leaving open an argument that the information taken was not on the “list” and thus could not have been considered a trade secret. In former employee-employer trade secret disputes, policy issues regarding an employee’s ability to switch jobs and still make a living in his or her chosen profession commonly arise. The blackletter rule on departing employees is that employees are permitted to take their generalized skills and knowledge but not specialized skills imparted by the company during the course of their employment: Illinois courts have recognized that an employee whose employment has been terminated may not take “ ‘confidential and particularized plans or processes developed by the employer’, but may take ‘generalized skills and knowledge acquired during his tenure with the former employer.’ ” Smith Oil Corp. v. Viking Chemical Co., [127 Ill.App.3d 423, 468 N.E.2d 797, 800, 82 Ill.Dec. 250] (2d Dist. 1984) (quoting Schulenburg v. Signatrol, Inc., 33 Ill.2d 379, 212 N.E.2d 865 (1965)). Glenayre Electronics, Ltd. v. Sandahl, 830 F.Supp. 1149, 1153 (C.D.Ill. 1993). However, it is often difficult to determine on which side of these lines of demarcation the departing employee falls. Is the employee using generalized skills or specific ones? The courts also express concerns over employee mobility. As Judge Shadur observed in Fleming Sales Co. v. Bailey, 611 F.Supp. 507, 514 (N.D.Ill. 1985): That is not to say Bailey may not have derived some benefit from his access to the collective experience of Fleming’s OEM division (experience to which Bailey himself doubtless contributed significantly during the course of his employment). It is rather
13 — 18
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.9
to say such information comprises general skills and knowledge acquired in the course of employment. Those are things an employee is free to take and to use in later pursuits, especially if they do not take the form of written records, compilations or analyses. See MBL (USA) Corp. v. Diekman, [112 Ill.App.3d 229, 445 N.E.2d 418, 424, 67 Ill. Dec. 938] (1st Dist. 1983). Any other rule would force a departing employee to perform a prefrontal lobotomy on himself or herself. It would disserve the free market goal of maximizing available resources to foster competition. . . . [I]t would not strike a proper balance between the purposes of trade secrets law and the strong policy in favor of fair and vigorous business competition. The Seventh Circuit expressed a similar concern over employee mobility in AMP Inc. v. Fleischhacker, 823 F.2d 1199, 1205 (7th Cir. 1987): This is not a case where the plaintiff can point to any tangible work product, such as blueprints, designs, plans, processes, or other technical specifications, at risk of misappropriation. See [Midwest Micro Media, Inc. v. Machotka, 76 Ill.App.3d 698, 395 N.E.2d 188, 192 – 193, 32 Ill.Dec. 241 (2d Dist. 1979)]. Nor is this a case, like many cited by AMP, involving a former employee who held a technical or engineering position and was responsible for distinct areas of technology and research. Mr. Fleischhacker was a high-level managerial executive who had broad supervisory responsibility for 1200 employees and over 10,000 different products at AMP. AMP now requests that we restrain him from in any way making use of or relying on his independent recollections of generalized business and technical information to which he had access while employed at AMP. Illinois law simply does not authorize such relief. Any other result would severely impede employee mobility and undermine the competitive basis of our free economy. Like the district court here, many courts have noted that the hiring of a close competitor’s executives is a usual and permissible practice in any industry. See Litton Systems, Inc. v. Sundstrand Corp., 750 F.2d 952, 957 (Fed.Cir. 1984); Fleming Sales Co. v. Bailey, 611 F.Supp. 507, 514 (N.D.Ill. 1985). However, as noted in §13.5 above in the discussion of PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), and the inevitable disclosure doctrine (and as further discussed in Chapter 14 of this handbook), an overt threat of misappropriation is not necessarily required to enjoin a departing employee if the facts and circumstances surrounding an employee’s departure demonstrate that there is a real threat of misappropriation. Thus, in litigation, it is important to develop the facts and circumstances surrounding an employee’s departure as well as the serious and likely nature of the potential competitive harm to demonstrate that injunctive relief is needed. Another situation in which trade secret misappropriation is potentially a concern is when purchasing a corporation that owns trade secrets. Trade secrets should be a part of the due diligence when considering the purchase of an entity. For example, Nortel made the news for not
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 19
§13.10
INTELLECTUAL PROPERTY LAW
disclosing longtime misappropriation by third parties who apparently hacked into the Nortel computer system. See Siobhan Gorman, Chinese Hackers Suspected In Long-Term Nortel Breach, Wall Street Journal, Feb. 14, 2012, www.wsj.com/articles/SB100014240529702033635 04577187502201577054 (case sensitive). The hacking allegedly was not reported by Nortel to any of the prospective purchasers of the company. This situation has called into question the reporting requirements for corporate officials who discover the company’s computer systems have been compromised. Currently, a publicly held company has no formal obligation to disclose a breach to another company as part of an acquisition. As a result of the Nortel incident, the U.S. Securities and Exchange Commission issued a guidance memo stating that cyber attacks can be “material” and that companies may have obligations to investigate a breach to determine if it is in fact material. CF Disclosure Guidance: Topic No. 2, Cybersecurity (Oct. 13, 2011), www.sec.gov/divisions/corpfin/guidance/cfguidancetopic2.htm.
V.
[13.10] NOTICE
Another recurring issue in trade secret misappropriation cases is “notice.” Was an employee on notice that the information he or she disclosed to a competitor or used for his or her own benefit after leaving the company was a “trade secret”? Must an employee actually have been warned that information that is a trade secret is not to be used or disseminated without company permission? How specific must this notice be, and when must it be given? Both the RESTATEMENT (THIRD) OF UNFAIR COMPETITION §41 (1995) and the Uniform Trade Secrets Act apply a “knew or had reason to know” standard. In other words, actual notice is not required if the actor should have known that the information was secret. This necessarily is a facts-and-circumstances analysis. Courts must weigh “the policy which strives to extend some protection to an employer from the breach of confidence of a former employee in taking away and utilizing trade secrets with the policy of the law which protects an employee in his right to carry on his trade or profession after he leaves his employer.” [Cybertek Computer Products, Inc. v. Whitfield, 203 U.S.P.Q. (BNA) 1020, 1977 WL 22730 (Cal.Super. 1977)]. Where that balance is struck in individual cases depends largely upon the facts and circumstances surrounding the employer-employee relationship. Vermont Microsystems, Inc. v. Autodesk, Inc., 88 F.3d 142, 150 (2d Cir. 1996). See also Elmer Miller, Inc. v. Landis, 253 Ill.App.3d 129, 625 N.E.2d 338, 342, 192 Ill.Dec. 378 (1st Dist. 1993) (“under the circumstances to maintain secrecy. . . reasonable steps for a two or three person shop may be different from reasonable steps for a larger company”). In cases involving use of trade secrets by third parties rather than departing employees, notice of the specific trade secrets that allegedly were misappropriated is critical. Factors that courts look to in determining “notice” include confidentiality notices and agreements, documents
13 — 20
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.10
marked with proprietary legends, and policies of nondisclosure to third parties, together with many of the other security measures discussed in Chapter 12 of this handbook. These factors are described by the court in ISC-Bunker Ramo Corp. v. Altech, Inc., 765 F.Supp. 1310, 1334 (N.D.Ill. 1990): Based on the Findings, the Court rejects Altech’s contention that ISC’s trade secrets were not sufficiently confidential, or that Altech did not know that ISC considered and treated its computer programs, compilations, technical information and procedures as confidential. Altech intentionally obliterated ISC’s “proprietary” legends from the Guide before copying and disseminating it. The principals of Altech, Messrs. Fries and Beyer, are both former ISC employees who not only signed their own confidentiality agreements with ISC, but received training at ISC predicated on manuals and other materials which contained confidentiality designations. In addition, Altech has approximately 20 other ex-ISC employees who each executed a confidentiality agreement, received extensive training from confidential materials, and were otherwise given access to ISC documentation marked “proprietary,” with detailed legends explaining the meaning of that term. Moreover, Altech itself safeguarded the confidentiality of the ISC-generated materials in its possession by, inter alia, refusing to give them to competitors, and requiring confidentiality agreements from its own employees and customers. . . . Under such circumstances, Altech was on notice that ISC’s computer programs, service related materials and technical information were confidential. See also Technicon Data Systems Corp. v. Curtis 1000, Inc., 224 U.S.P.Q. (BNA) 286, 1984 WL 8268 (Del.Ch. 1984); Integrated Cash Management Services, Inc. v. Digital Transactions, Inc., 732 F.Supp. 370, 377 (S.D.N.Y. 1989) (“The existence of a nondisclosure agreement puts the employee on notice that the programs are considered trade secrets.”); Structural Dynamics Research Corp. v. Engineering Mechanics Research Corp., 401 F.Supp. 1102, 1116 (E.D.Mich. 1975) (“Confidentiality of information can be determined from the manner in which defendants themselves treated the information prior to the litigation.”); Telerate Systems, Inc. v. Caro, 689 F.Supp. 221, 232 (S.D.N.Y. 1988) (“Caro’s steadfast denials of knowledge of the secrecy of the [Standard Telerate Protocol (STP)] is curious when it is considered that the document he authored for Telerate, which describes in detail the STP, bears a legend that the information therein contained is proprietary in nature and may not be reproduced without the express consent of Telerate.”); Digital Development Corp. v. International Memory Systems, 185 U.S.P.Q. (BNA) 136, 1973 WL 19875 (S.D.Cal. 1973); A.H. Emery Co. v. Marcan Products Corp., 389 F.2d 11, 16 (2d Cir.) (use of improper means to obtain trade secrets evidence of their confidentiality), cert. denied, 89 S.Ct. 109 (1968). In C & F Packing Co. v. IBP, Inc., No. 93 C 1601, 1998 WL 1147139, *6 (N.D.Ill. Mar. 16, 1998), the court, citing Computer Associates International, Inc. v. Altai, Inc., 982 F.2d 693, 718 (2d Cir. 1992), Rohm & Haas Co. v. Adco Chemical Co., 689 F.2d 424, 431 (3d Cir. 1982), and Fabkom, Inc. v. R.W. Smith & Associates, Inc., No. 95 Civ. 4552 (MBM), 1996 WL 531873, *12 (S.D.N.Y. Sept. 19, 1996), stated: Thus, a defendant may be on constructive notice that the information proffered by a third person is the trade secret of another when, based on the information in the
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 21
§13.10
INTELLECTUAL PROPERTY LAW
defendant’s possession, a reasonable person would have been put on inquiry and an inquiry pursued with reasonable diligence would have disclosed that the information provided to the defendant was actually wrongfully obtained from another. In the case of a departing employee, most courts also do not require a specific list of trade secrets and are willing to rely on more general identifications as sufficient to place the departing employee on notice that he or she is not to use the former employer’s trade secrets. In Vermont Microsystems, supra, the court stated: As VMI’s key software programmer, Berkes was well aware of the value of the main trade secret at issue — the architecture of the display list driver. He was proud of his many contributions to the product and even referred to himself in his resume as the “chief architect of AutoMate.” In two separate exit interviews with VMI, Berkes was reminded of his confidentiality obligations under the Invention and Nondisclosure Agreement. He also was given a copy of the letter that Reed sent Autodesk warning against an inadvertent technology transfer. In view of these oral and written warnings, the district court did not err in finding that “Berkes understood the concept of intellectual property ownership rights when he left VMI and had every reason to know what VMI considered its proprietary technology.” 88 F.3d at 150. Other courts, however, do not consider generalized descriptions to be sufficient: According to IDX, “a 43-page description of the methods and processes underlying and the inter-relationships among various features making up IDX’s software package” is specific enough. No, it isn’t. These 43 pages describe the software; although the document was created for this litigation, it does not separate the trade secrets from the other information that goes into any software package. Which aspects are known to the trade, and which are not? That’s vital under the statutory definition. Likewise, IDX’s tender of the complete documentation for the software leaves mysterious exactly which pieces of information are the trade secrets. As we remarked in Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1266 (7th Cir. 1992), a plaintiff must do more than just identify a kind of technology and then invite the court to hunt through the details in search of items meeting the statutory definition. See also AMP Inc. v. Fleischhacker, 823 F.2d 1199, 1203 (7th Cir. 1987). What is more, many of the items that appear in the 43-page description, such as the appearance of data-entry screens, are exceedingly hard to call trade secrets: things that any user or passer-by sees at a glance are “readily ascertainable by proper means”. Perhaps screen displays could be copyrighted, but no copyright claim has been advanced, and a trade-secret claim based on readily observable material is a bust. Minnesota Mining & Manufacturing Co. v. Pribyl, 259 F.3d 587 (7th Cir. 2001), on which IDX principally relies, did not involve such self-revealing information. Other details, such as the algorithms that the software uses to do realtime error checking (a vaunted feature of IDX’s software), may be genuine trade secrets, but IDX has not tried to separate them from elements such as its input and
13 — 22
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.11
output formats. Nor does it contend that the defendants decompiled the object code or otherwise obtained access to the algorithms that power the program; it alleges only that Foundation transferred to Epic those details that ordinary users of the software could observe without reverse engineering. IDX Systems Corp. v. Epic Systems Corp., 285 F.3d 581, 583 – 584 (7th Cir. 2002). Regarding the issue of when someone must receive notice that information is a trade secret, the general rule is at the time of disclosure. However, when dealing with departing employees as opposed to third parties, it must be kept in mind that the employee has an overall duty of confidence with respect to all information received from an employer. “The employment relationship by its nature ordinarily justifies an inference that the employee consents to a duty of confidence with respect to any information acquired through the employment that the employee knows or has reason to know is confidential.” RESTATEMENT (THIRD) OF UNFAIR COMPETITION §42, cmt. c. Thus, if an employee receives notice that information is a trade secret during employment and before departing to work for a third party, this should be adequate to place the departing employee on notice that the information is a trade secret and that he or she does not have “express or implied consent” to use or disclose the trade secret. See 765 ILCS 1065/2(b)(2). But see Omega Optical, Inc. v. Chroma Technology Corp., 174 Vt. 10, 800 A.2d 1064 (2002) (applying notice standard of RESTATEMENT (THIRD) OF UNFAIR COMPETITION §41 for third parties to departing employee situation).
VI. ENFORCEMENT MECHANISMS AND CONSIDERATIONS A. [13.11] Litigation In litigation over trade secret misappropriation, there is now a significant strategic decision that needs to be made regarding where to bring the case in light of the Defend Trade Secrets Act. Particular considerations, such as whether a trade secret owner is seeking an ex parte seizure order or seeking to rely on the inevitable disclosure doctrine, can be considered in deciding whether to proceed under state or federal trade secret law. In some cases it may be clear that there is an advantage to proceeding under one or the other, depending on the facts of the case. For example, the DTSA, like the Uniform Trade Secrets Act, uses a definition of “trade secret” that includes that the information is “not readily ascertainable through proper means.” However, California, for example, does not include this language in its definition of “trade secret,” but rather has an affirmative defense available to defendants who can show that the information was ascertained through proper means. Depending on the circumstances of the case, there may be an advantage under state or federal law. Other considerations, such as the applicable statute of limitations, ease of taking depositions in multiple states, and procedures for obtaining injunctions also should be taken into account. Additional factors to consider include the experience of a particular venue with trade secret and other complex business tort types of cases as well as the venue’s attitude towards employer vs. employee rights and employee mobility. One issue in particular is how willing a court will be to enter a protective order early in the case to preserve the confidentiality of information that is included in filings with the court and in arguments made to the court. Some courts, including
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 23
§13.11
INTELLECTUAL PROPERTY LAW
courts in the Seventh Circuit, require a more stringent showing of need before entering a protective order or permitting documents to be filed under seal. Fortunately, trade secrets is one of the categories for which the need for the protections of a protective order is generally recognized. Litigants, however, should not take for granted the entry of a protective order and should be prepared to support a basis for its entry. Once entered, it is important to be vigilant with respect to pleadings and exhibits to ensure that all such filings containing confidential information are filed under seal or else risk forfeiture. The DTSA provides additional protections for trade secret owners and, therefore, may be yet another consideration when determining in which jurisdiction to bring the litigation. Specifically, the DTSA states: The court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential. No submission under seal made under this subsection may be used in a prosecution under this chapter for any purpose other than those set forth in this section, or otherwise required by law. The provision of information relating to a trade secret to the United States or the court in connection with a prosecution under this chapter shall not constitute a waiver of trade secret protection, and the disclosure of information relating to a trade secret in connection with a prosecution under this chapter shall not constitute a waiver of trade secret protection unless the trade secret owner expressly consents to such waiver. 18 U.S.C. §1835(b). Therefore, unlike some state-specific procedures which tend to weigh against permitting submissions under seal, the DTSA expressly provides for such a procedure.
PRACTICE POINTER
After the case terminates, litigants must be careful to ensure that documents containing trade secrets that were filed under seal with the court remain under seal or are returned or destroyed. Local Rule 79.1(c) of the U.S. District Court for the Northern District of Illinois places the burden on litigants to retrieve confidential information or risk public disclosure or sale.
Prospective litigants also should consider the pleading requirements of a particular jurisdiction. For example, Illinois state courts require fact pleading. Weiss v. Waterhouse Securities, Inc., 208 Ill.2d 439, 804 N.E.2d 536, 543, 281 Ill.Dec. 571 (2004) (“As we have stated time and again, ‘Illinois is a fact-pleading jurisdiction.’ ”), quoting Beahringer v. Page, 204 Ill.2d 363, 789 N.E.2d 1216, 1221, 273 Ill.Dec. 784 (2003); 735 ILCS 5/2-603(a). Federal courts require notice pleading. See Fed.R.Civ.P. 8. Fact pleading can cause tension in a trade secret case when a plaintiff tries, on the one hand, to protect its trade secret rights but, on the other, must comply with the Illinois pleading requirements. A careful reading of the rules governing fact pleading in Illinois would seem to readily resolve this issue in favor of not requiring trade secrets
13 — 24
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.12
to be pleaded in a complaint. After all, pleadings are not a substitute for discovery. Illinois fact pleading requires only that ultimate facts, not evidentiary facts, be stated, with the purpose being to provide a defendant with notice of the action against it and the bases. People ex rel. Fahner v. Carriage Way West, Inc., 88 Ill.2d 300, 430 N.E.2d 1005, 1008, 58 Ill.Dec. 754 (1981) (“Perhaps the best measure of a complaint’s sufficiency, then, is whether the defendant is able to answer the essential allegations.”); Zeitz v. Village of Glenview, 227 Ill.App.3d 891, 592 N.E.2d 384, 387, 169 Ill.Dec. 897 (1st Dist. 1992) (“In Illinois a pleader is not required to set forth his evidence. To the contrary, a pleading is only required to allege ultimate facts and not the evidentiary facts tending to prove such ultimate facts.” [Emphasis added.]); People ex rel. Scott v. College Hills Corp., 91 Ill.2d 138, 435 N.E.2d 463, 467, 61 Ill.Dec. 766 (1982) (“The allegations are sufficiently specific if they reasonably inform the defendants by factually setting forth the elements necessary to state a cause of action.”). Nevertheless, a routine tactic for a defendant in a trade secret case brought in an Illinois state court is to challenge the sufficiency of the pleadings and seek more detail in the pleadings. When additional detailed pleadings are required and may disclose the very trade secret the plaintiff is seeking to protect, it is imperative that a protective order be entered prior to the filing of the pleading to permit filing under seal and preserve confidentiality; otherwise, the plaintiff runs the risk of forfeiting the trade secret. B. [13.12] Additional Possible Causes of Action A trade secret litigant asserting a claim for trade secret misappropriation may wish to consider additional causes of action. Commonly, in trade secret cases, there may be other related causes of action that arise, such as 1. breach of contract; 2. breach of fiduciary duties; 3. conversion; 4. copyright infringement; 5. computer crimes; 6. actions under the Racketeer Influenced and Corrupt Organizations Act, Pub.L. No. 91452, Title IX, 84 Stat. 941 (1970); 7. actions under the Lanham Patent Act, ch. 451, 53 Stat. 1212 (1939); 8. patent infringement; 9. tortious interference with contract;
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 25
§13.12
INTELLECTUAL PROPERTY LAW
10. tortious interference with business relations; or 11. actions under the Computer Fraud and Abuse Act of 1986 (CFAA), Pub.L. No. 99-474, 100 Stat. 1213. One note of caution, however, is that there are preemption provisions in the Uniform Trade Secrets Act that may limit the types of causes of action that may be brought arising out of the same facts as the trade secret misappropriation claim. For example, the Illinois Trade Secrets Act states that it is “intended to displace conflicting tort, restitutionary, unfair competition, and other laws of this State providing civil remedies for misappropriation of a trade secret.” 765 ILCS 1065/8(a). See Fox Controls, Inc. v. Honeywell Inc., No. 02 C 346, 2002 WL 1949723, *2 (N.D.Ill. Aug. 22, 2002), in which the court stated: Our colleagues in this district have held in numerous instances that the ITSA preempts all of these types of claims where, as here, they are based on a misappropriation of trade secrets. See [Automed Technologies, Inc. v. Eller, 160 F.Supp.2d 915, 921 – 922 (N.D.Ill. 2001)] (conversion claim preempted); [Thomas & Betts Corp. v. Panduit Corp., 108 F.Supp.2d 968, 972 – 974 (N.D.Ill. 2000)] (conversion, tortious interference with business relations, and breach of fiduciary duty claims preempted); [Learning Curve Toys, L.P. v. PlayWood Toys, Inc., No. 94 C 6884, 1999 WL 529572, **2 – 3 (N.D.Ill. July 20, 1999)] (unjust enrichment claim preempted); [C & F Packing Co. v. IBP, Inc., No. 93 C 1601, 1998 WL 1147139, **9 – 10 (N.D.Ill. Mar. 16, 1998)], adopted in full, 1998 WL 160915 (N.D.Ill. Mar. 31, 1998) (interference with business expectancy claim preempted); [Nilssen v. Motorola, Inc., 963 F.Supp. 664, 683 – 684 (N.D.Ill. 1997)] (unjust enrichment and quantum meruit claims preempted); [Thermodyne Food Service Products, Inc. v. McDonald’s Corp., 940 F.Supp. 1300, 1309 (N.D.Ill. 1996)] (breach of fiduciary duty claim preempted); [J.D. Chapman Group, Ltd. v. Chapman, No. 95 C 7716, 1996 WL 89075 (N.D.Ill. Feb. 28, 1996)] (breach of fiduciary duty claim preempted); Web Communications Group, Inc. v. Gateway 2000, Inc., 889 F.Supp. 316, 321 (N.D.Ill. 1995) (unjust enrichment claim preempted); [Ace Novelty Co. v. Vijuk Equipment, Inc., No. 90 C 3116, 1990 WL 129510, *3 (N.D.Ill. Aug. 31, 1990)] (conversion claim preempted). In American Center for Excellence in Surgical Assisting, Inc. v. Community College District 502, No. 15 C 7290, 2016 WL 3165763, *7 (N.D.Ill. June 7, 2016), the court focused on the recovery sought and whether those claims could stand even if the information that was allegedly taken was not a trade secret: The pertinent question, then, is whether those claims would stand even if the [American Center for Excellence (ACE)] Proprietary Information was not alleged to be a trade secret. See [Hecny Transportation, Inc. v. Chu, 430 F.3d 402, 404 – 405 (7th Cir. 2005)]; [Market Track, LLC v. Efficient Collaborative Retail Marketingg, LLC, No. 14 C 4957, 2015 WL 3637740, *16 (N.D.Ill. June 11, 2015)]; [SBS Worldwide, Inc. v. Potts, No. 13 C 6557, 2014 WL 499001, *7 (N.D.Ill. Feb. 7, 2014)]; [Lumenate Technologies, LP v. Integrated Data Storage, LLC, Case No. 13 C 3767, 2013 WL 5974731, *7 (N.D.Ill. Nov. 11, 2013)]; [Charles Schwab & Co. v. Carter, No. 04 C 7071,
13 — 26
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.12
2005 WL 2369815, *4 (N.D.Ill. Sept. 27, 2005)] (collecting cases). Put another way: are ACE’s common law claims solely “based on misappropriation of a trade secret,” [Spitz v. Proven Winners North America, LLC, 759 F.3d 724, 733 (7th Cir. 2014)], or do they “seek[ ] recovery for wrongs beyond the mere misappropriation,” Charles Schwab, 2005 WL 2369815, at *4 (internal quotation marks omitted)? The court went on to determine that ACE’s unjust enrichment, conversion, and promissory estoppel claims were preempted because they all were directly dependent on the alleged trade secret misappropriation and dismissed those claims, but denied the motion to dismiss the fraud claim because it determined that the fraud claim was not dependent on the information being a trade secret. In short, ACE’s allegation that Defendants induced ACE to provide its knowledge and expertise to help build the College’s own surgical assistance program while representing that it would partner with ACE would state a fraud claim even if ACE had not provided Defendants with its Proprietary Information. See Hecny, 430 F.3d at 404 – 05; [Abanco International, Inc. v. Guestlogix Inc., 486 F.Supp.2d 779, 781 – 782 (N.D.Ill. 2007)] (holding that a complaint alleging that the plaintiff provided the defendant with information “including” trade secrets did “not restrict its claims to the misappropriation of trade secrets,” because it “potentially include[d] other” information as well). It follows that ITSA does not preempt the fraud claim. 2016 WL 3165763 at *8. Prior to the Defend Trade Secrets Act, significant questions of preemption between various federal causes of action and a state law based trade secret misappropriation claim sometimes would arise. Pre-DTSA, when a litigant wanted to litigate in federal court as opposed to state court and there was no diversity jurisdiction, the litigant needed to include another federal cause of action, such as a federal copyright, patent, Lanham Patent Act, or CFAA claim. The general rule is that copyright, patent, and Lanham Patent Act claims do not preempt trade secret misappropriation claims. Goldstein v. State of California, 412 U.S. 546, 37 L.Ed.2d 163, 93 S.Ct. 2303 (1973) (holding that federal copyright law does not preempt state copyright law providing greater protection); Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 40 L.Ed.2d 315, 94 S.Ct. 1879, 1888 (1974) (holding that federal patent law does not preempt state trade secret law protecting unpatentable processes); University of Colorado Foundation, Inc. v. American Cyanamid Co., 342 F.3d 1298 (Fed.Cir. 2003); World Wide Prosthetic Supply, Inc. v. Mikulsky, 251 Wis.2d 45, 640 N.W.2d 764 (2002); Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488 (5th Cir. 1990); Unix System Laboratories, Inc. v. Berkeley Software Design, Inc., 832 F.Supp. 790 (D.N.J. 1993); CNA Financial Corp. v. Local 743 of International Brotherhood of Teamsters, Chauffeurs, Warehousemen & Helpers of America, 515 F.Supp. 942 (N.D.Ill. 1981). With the passage of the DTSA, these types of federal preemption arguments should be rare, although as explained herein, litigants still have the option of bringing their claims solely under an applicable state trade secret law rather than the DTSA in federal court, either as a diversity claim or as a claim related to another federal cause of action, so these issues could still linger. The law is well settled that copyright law generally does not preempt a trade secret misappropriation claim. See United States Trotting Ass’n v. Chicago Downs Ass’n, 665 F.2d 781,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 27
§13.12
INTELLECTUAL PROPERTY LAW
785 n.6 (7th Cir. 1981) (plaintiff’s misappropriation claim “is not preempted by, because it does not fall within the realm of, federal copyright law”); Warrington Associates, Inc. v. Real-Time Engineering Systems, Inc., 522 F.Supp. 367, 368 (N.D.Ill. 1981) (“neither Congress nor the courts have viewed the federal Copyright Act as preempting the common law of trade secret misappropriation”). The rationale that courts apply in finding no preemption is that a trade secret claim includes a breach of a confidential relationship as an additional element that changes the nature of the action so that it qualitatively differs from the rights protected by federal copyright law. This difference was articulated in Warrington Associates, supra: An analysis of the interests secured by Copyright and trade secret law makes plain that the claims are not “equivalent” as intended by the Congress. It is well-settled that copyright protection extends not to an idea itself, but rather to the particular expression used by its author. Sid & Marty Krofft Television Productions, Inc. v. McDonald’s Corporation, 562 F.2d 1157 (9th Cir. 1977); Universal Athletic Sales Co. v. Salkeld, 511 F.2d 904 (3d Cir. 1975). In contrast, the protection provided by the common law of trade secret misappropriation extends to the very ideas of the author, subject, of course, to the requirement that the idea has some originality and is as yet undisclosed or disclosed only on the basis of confidentiality. Ferroline Corp. v. General Aniline & Film Corp., 207 F.2d 912, 921 (7th Cir. 1953); Wesley-Jensen, Inc. v. Reynolds, [182 U.S.P.Q. (BNA) 135, 1974 WL 20197 (N.D.Ill. 1974)]. The practical distinction between the two interests is manifest. While disclosure of the expression does not vitiate rights secured by copyright law, that same disclosure may well strip the underlying idea of its confidentiality, and thus its status as a trade secret. To a certain degree the two respective rights in intellectual property interact. To the extent a work has been copyrighted and published, the chances of unprivileged disclosure may increase. But the mere fact that an expression is copyrighted does not, in and of itself, disclose the trade secret or eliminate its mantle of confidentiality. 522 F.Supp. at 368. The CFAA presents another possibility for a federal cause of action. The CFAA allows civil actions against whoever intentionally accesses a computer without authorization or exceeds authorized access and thereby obtains information contained in a financial record of a financial institution or information from any protected computer if the conduct involved an interstate or foreign communication. A plaintiff may maintain a civil action against a violator if the plaintiff suffers damage or loss by reason of a violation of that section. Charles Schwab & Co. v. Carter, No. 04 C 7071, 2005 WL 351929 (N.D.Ill. Feb. 11, 2005). Under the CFAA, a “protected computer” includes a computer “which is used in or affecting interstate or foreign commerce or communication.” 18 U.S.C. §1030(e)(2)(B). A “damage” is “any impairment to the integrity or availability of data, a program, a system, or information.” 18 U.S.C. §1030(e)(8). A defendant who utilized a computer in the course of trade secret misappropriation would in fact exceed authorized access. See International Airport Centers, L.L.C. v. Citrin, 440 F.3d 418, 420 – 421 (7th Cir. 2006) (reversing dismissal of CFAA claims when employee went into business for himself and used “scrubbing” software to delete all files on company-issued
13 — 28
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.12
computer); EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577, 582 – 584 (1st Cir. 2001) (finding employer likely to prove access in excess of authorization when former employee obtained proprietary information and then provided that information to new employer in violation of confidentiality agreement). For example, in Shurgard Storage Centers, Inc. v. Safeguard Self Storage, Inc., 119 F.Supp.2d 1121 (W.D.Wash. 2000), two companies were direct head-to-head competitors in the self-storage industry. The plaintiff, Shurgard Storage, alleged it held trade secrets in its system of creating market plans, identifying appropriate development sites, and evaluating whether a site would provide a high return on investment. Defendant Safeguard Storage hired Shurguard employees who were privy to confidential information. At least one former Shurguard storage employee, while still employed by Shurguard Storage and without authorization, sent e-mails containing Shurguard Storage trade secrets to Safeguard. The court did not dismiss Shurguard Storage’s claim under the CFAA, finding that even if the Shurguard Storage employee had authorization to access the company’s information, this authorization ended when the employee began working adverse to his employer’s interest. 119 F.Supp.2d at 1124 – 1125. Further, although the employee did not alter or delete the information, the “integrity” of the information was damaged. “[T]he defendant allegedly infiltrated the plaintiff’s computer network . . . and collected and disseminated confidential information. [While] no data was physically changed or erased . . . an impairment of its integrity occurred.” 119 F.Supp.2d at 1127. In United States v. Nosal, 676 F.3d 854 (9th Cir. 2012), the Ninth Circuit declined to interpret the CFAA in the same manner as its sister circuits. Other circuits, as discussed above, have historically interpreted the CFAA as providing a cause of action for computer use violations. See United States v. Rodriguez, 628 F.3d 1258 (11th Cir. 2010); United States v. John, 597 F.3d 263 (5th Cir. 2010); International Airport Centers, L.L.C. v. Citrin, 440 F.3d 418 (7th Cir. 2006). In Nosal, the Ninth Circuit, in an en banc decision, narrowly construed the CFAA to apply only to individuals who hack into computer systems and not to employees who violate a company’s use policy. The facts of the case are briefly as follows. David Nosal worked for an executive search firm, Korn/Ferry. When he left his employment at Korn/Ferry, he convinced some of his former Korn/Ferry colleagues to help him start his own competing business. The employees used their log-ins to access and download lists, names, and contact information from a confidential Korn/Ferry database, and this information was transferred to Nosal. The government indicted Nosal on 20 counts, including, among others, trade secret theft, mail fraud, conspiracy, and violations under the CFAA. 676 F.3d at 856. Nosal filed a motion to dismiss the CFAA counts, arguing that the statute targets only hackers and not individuals who access a computer with authorization but then later misuse the information. While the district court initially rejected Nosal’s argument, in the interim the Ninth Circuit decided LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009), which narrowly construed the phrases “without authorization” and “exceeds authorized access” in the CFAA. Nosal, supra, 676 F.3d at 856. Nosal filed a motion for reconsideration and a second motion to dismiss. The district court then dismissed the CFAA counts for failure to state an offense, and the appeal followed. On appeal, the government argued that the Korn/Ferry computer policy gave employees certain rights, and when the employees violated this policy, they were “exceed[ing] authorized access” under the CFAA. 676 F.3d at 857. The Ninth Circuit determined that the government’s interpretation was too broad. The Ninth Circuit stated that an interpretation of this nature “would
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 29
§13.12
INTELLECTUAL PROPERTY LAW
transform the CFAA from an anti-hacking statute into an expansive misappropriation statute.” Id. While the court recognized in its decision that the government had represented that it would not prosecute “minor violations,” the Ninth Circuit discussed potential repercussions of interpreting the CFAA in this manner, including “minor dalliances” such as sending e-mails to family members and visiting ESPN.com. 676 F.3d at 860 – 862. The court justified its decision by stating that “[t]his narrower interpretation is also [a] more sensible reading of the text and legislative history of a statute whose general purpose is to punish hacking — the circumvention of technological access barriers — not misappropriation of trade secrets — a subject Congress has dealt with elsewhere.” 676 F.3d at 863. In the end, the majority opinion urged its sister circuits to follow in the narrow interpretation of the CFAA. In a dissenting opinion, Judge Silverman, joined by Judge Tallman, recognized that the case before the court had nothing to do with playing computer games or visiting websites in violation of a company’s computer policy and instead that this case “ha[d] everything to do with stealing an employer’s valuable information to set up a competing business with the purloined data, siphoned away from the victim, knowing such access and use were prohibited in the defendants’ employment contracts.” 676 F.3d at 864. The dissent admonished the majority for taking a “plainly written statute and pars[ing] it in a hyper-complicated way that distorts the obvious intent of Congress.” Id. As the dissent pointed out, no other circuit that had considered the CFAA had found the issues the majority did. 676 F.3d at 864 – 865, citing John, supra, 597 F.3d 2 at 271 – 273 (holding employee exceeded her authorized access in violation of CFAA when she accessed confidential customer information in violation of her employer’s computer use restrictions and then used information to commit fraud), United States v. Rodriguez, 628 F.3d 1258, 1263 (11th Cir. 2010) (holding that employee exceeded his authorized access under CFAA when he obtained personal information about former girlfriends and potential companions and used that information to send women flowers and show up at their homes), and United States v. Teague, 646 F.3d 1119, 1121 – 1122 (8th Cir. 2011) (upholding conviction under CFAA when employee of government contractor used his credentials to access government database to obtain student loan records of President Obama). The dissent concluded: The majority’s opinion is driven out of a well meaning but ultimately misguided concern that if employment agreements or internet terms of service violations could subject someone to criminal liability, all internet users will suddenly become criminals overnight. I fail to see how anyone can seriously conclude that reading ESPN.com in contravention of office policy could come within the ambit of 18 U.S.C. §1030(a)(4), a statute explicitly requiring an intent to defraud, the obtaining of something of value by means of that fraud, while doing so “knowingly.” And even if an imaginative judge can conjure up far-fetched hypotheticals producing federal prison terms for accessing word puzzles, jokes, and sports scores while at work, well, . . . that is what an as-applied challenge is for. Meantime, back to this case, 18 U.S.C. §1030(a)(4) clearly is aimed at, and limited to, knowing and intentional fraud. Because the indictment adequately states the elements of a valid crime, the district court erred in dismissing the charges. 676 F.3d at 866 – 867.
13 — 30
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.12
Because a large number of trade secret cases involve an employee misappropriating trade secrets through the use of a computer, this decision has the potential to have dramatic impact on future cases and in particular the ability of litigants to get into federal court by bootstrapping trade secret misappropriation claims to CFAA claims. It also has the potential to limit the government’s ability to use the CFAA as a tool in criminal trade secret cases. It should be noted that the Ninth Circuit’s decision may not be the final word on this case. The Court of Appeals for the Ninth Circuit entered a mandate regarding Nosal, supra, on August 3, 2012. The remaining issues, which included three counts under the CFAA and two counts under the Economic Espionage Act, went to trial in April 2013. On April 24, 2013, the jury returned a verdict of guilty on all counts. (Docket No. 408). Nosal then brought a motion for acquittal and new trial. The court denied both motions. United States v. Nosal, No. CR-08-0237, 2013 WL 4504652 (N.D.Cal. Aug. 15, 2003). The court sentenced Nosal to one year and one day in prison, three years of supervised release, a $60,000 fine, and a $600 special assessment. United States v. Nosal, 828 F.3d 865, 872 (9th Cir. 2016). Further, Nosal was ordered to pay approximately $828,000 in restitution to his former employer. Nosal appealed, but the Ninth Circuit affirmed, except to vacate the restitution award with respect to attorneys’ fees and remanded for consideration of whether the restitution fee was reasonable and whether there was unnecessary duplication of tasks between Korn/Ferry employees and attorneys since the district court awarded a substantial sum to account for time of the employees and whether the outside counsel was duplicating work of the prosecution. Id. The Ninth Circuit was not alone in this narrow interpretation of the CFAA. The U.S. Court of Appeals for the Fourth Circuit applied a similar narrow interpretation in affirming the U.S. District Court for the District of South Carolina’s dismissal of a case alleging, inter alia, that a former employee downloaded proprietary information prior to resigning and then later used the information on behalf of a competitor. WEC Carolina Energy Solutions LLC v. Miller, 687 F.3d 199 (4th Cir. 2012). The plaintiff filed a petition for writ of certiorari with the U.S. Supreme Court; however, the petition was dismissed pursuant to U.S. Supreme Court Rule 46.1. WEC Carolina Energy Solutions LLC v. Miller, ___ U.S. ___, 184 L.Ed2d 645, 133 S.Ct. 831 (2013). As a result, there still remains a circuit split, with the Ninth and Fourth Circuits adopting a narrow interpretation of the CFAA, as discussed above, and the Seventh and Eleventh Circuits adopting a broader interpretation of the CFAA. See, e.g., Citrin, supra; Rodriguez, supra. For example, the Seventh Circuit in Citrin applied the agency theory and held that an employee’s authorization to access an employer’s computer terminates when the employee is no longer using the computer to further the interests of the employer. As such, the employee breached his fiduciary duty to his employer by exceeding his authorized use of the computer. 440 F.3d at 420 – 421. Lane v. Le Brocq, No. 15 C 6177, 2016 WL 1271051 (N.D.Ill. Mar. 28, 2016), is a case arising out of a dispute between two attorneys when one of them decided to leave the firm and allegedly took electronically stored information without permission. In Lane, the court applied Citrin, supra, to explain the CFAA could apply to this situation: District courts in this Circuit have routinely interpreted Citrin to permit a claim under the CFAA against a disloyal employee who uses an employer’s computer for his own purposes. . . . See, e.g., [Dental Health Products, Inc. v. Ringo, No. 08-C-1039, 2011 WL 3793961, *3 (E.D.Wis. Aug. 25, 2011)] (“In short, Citrin makes clear that most employee disloyalty cases can be pled as CFAA cases, because a disloyal
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 31
§13.12
INTELLECTUAL PROPERTY LAW
employee has forfeited his right to access his employer’s computer.”); Motorola. Inc. v. Lemko Corp., 609 F.Supp.2d 760, 767 (N.D.Ill. 2009) (“Allegations that an employee e-mailed and downloaded confidential information for an improper purpose are sufficient to state a claim that the employee exceeded her authorization [under the CFAA].”) [Footnote omitted.] 2016 WL 1271051 at *9. The defendant then went on to challenge whether the claim satisfied the “damage” or “loss” part of the CFAA, and the court stated: “To recover under either Section 1030(a)(2) or 1030(a)(4), either ‘damage’ or ‘loss’ must be proven.” Id. Focusing on the damage prong of the CFAA, the court held that the misappropriation or dissemination of trade secret information does not automatically qualify as “damage” under the CFAA. “Damage” is defined by the CFAA as “any impairment to the integrity or availability of data, a program, a system, or information.” 18 U.S.C. §1030(e)(8). This definition encompasses “destruction, corruption, or deletion of electronic files, the physical destruction of a hard drive, or any diminution in the completeness or usability of the data on a computer system.” [Farmers Insurance Exchange v. Auto Club Group, 823 F.Supp.2d 847, 852 (N.D.Ill. 2011)] (citation and internal quotation marks omitted). Courts have held that merely accessing, copying, or disseminating a company’s trade secrets or other sensitive information does not satisfy the “damage” requirement. [Fidlar Technologies v. LPS Real Estate Data Solutions, Inc., 810 F.3d 1075, 1085 (7th Cir. 2016)] (“[B]y using the word ‘damage,’ . . . Congress intended this provision reach actual disruptions in service, not mere access, even if trespassory.”); Farmers, 823 F.Supp.2d at 852 (“[T]he disclosure of trade secrets misappropriated through unauthorized computer access does not qualify as damage under the CFAA’s definition of the term.”); Landmark Credit Union v. Doberstein, 746 F.Supp.2d 990, 994 (E.D.Wis. 2010) (“There is virtually no support for the proposition that merely accessing and disseminating information from a protected computer suffices to create a cause of action under the CFAA.”); [United States Gypsum Co. v. Lafarge North America, Inc., 670 F.Supp.2d 737, 744 (N.D.Ill. 2009)] (“[T]he CFAA is not intended to expansively apply to all cases where a trade secret has been misappropriated by use of a computer.”). Put simply, the CFAA was meant to punish hackers, not “the disloyal employee who walks off with confidential information.” [Kluber Skahan & Associates, Inc. v. Cordogan, Clark & Assoc., Inc., No. 08-cv-1529, 2009 WL 466812, *8 (N.D.Ill. Feb. 25, 2009)] (citation omitted); see also [Del Monte Fresh Produce, N.A. v. Chiquita Brands International Inc., 616 F.Supp.2d 805, 813 (N.D.Ill. 2009)] (“The CFAA should not be used to prosecute employees who are merely disloyal.”). 2016 WL 1271051 at *10. However, the court then went on to find that, despite failing to meet the damages prong of the CFAA, the alleged conduct did satisfy the loss prong, and, therefore, the CFAA claim was allowed to proceed. The court stated:
13 — 32
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.13
The CFAA defines “loss” as: [A]ny reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service[.] 18 U.S.C. §1030(e)(11). The plaintiff must have suffered a loss in excess of $5,000 within a one-year period. 18 U.S.C. § 1030(c)(4)(A)(i)(I). 2016 WL 1271051 at *11. The court found that investigational costs arising out of the alleged improper activities satisfy the loss prong, explaining: However, more recently, courts in this District have permitted CFAA claims to proceed when the plaintiff has incurred costs due to an investigation, without regard to whether the investigation pertained to an actual disruption of service or impairment to the plaintiff’s data. See [Epic Systems Corp. v. Tata Consultancy Services Ltd., No. 14-cv-748-wmc, 2015 WL 7301245, *6 (W.D.Wis. Nov. 18, 2015)] (denying motion to dismiss where plaintiff alleged “loss” associated with the costs of an investigation even in the absence of actual damage to the computer system); [Pascal Pour Elle, Ltd. v. Jin, 75 F.Supp.3d 782, 791 (N.D.Ill. 2014)] (recognizing “a split within the Circuit” but allowing CFAA claim to proceed where plaintiff alleged that it paid $5,000 in “investigation and security assessment costs associated with the intrusion” notwithstanding a lack of allegations regarding damage or disruption to the system). Id.
VII. [13.13] STRATEGIC CONSIDERATIONS IN TRADE SECRET MISAPPROPRIATION LITIGATION When one suspects that trade secrets have been misappropriated, litigation is quite often the only option. One benefit of a lawsuit is that it can create an immediate chilling effect on the alleged perpetrator’s activities and can sometimes serve as a de facto injunction. Often, a perpetrator will go into hibernation mode to support a defense that the trade secrets have not been used. In some instances, a person accused of trade secret misappropriation will offer to sign an affidavit stating that no trade secrets have been taken or that no trade secrets have been used. One drawback is that such an affidavit begs the question of what constitutes the “trade secrets.” The defendant can define the information that was taken in such a way that it does not constitute trade secrets, thus permitting a “truthful” affidavit to be executed, although the information has in fact been taken and is being used. Thus, it is preferable to use specific and not overly broad definitions that force a defendant to take a position on whether it is using the information believed to be a trade secret. This same issue of definition arises in preliminary and permanent injunctions and in settlements. Again, narrowly tailored definitions that specify the exact information or types of information believed to be most important or most damaging are often more effective than
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 33
§13.13
INTELLECTUAL PROPERTY LAW
broad but ambiguous definitions that let a defendant slip away on a definitional technicality. On the other hand, a too-narrow definition of “trade secrets” is also dangerous, as some important trade secret might be overlooked and allowed to slip through the cracks. This same issue arises even after a successful trade secret case in defining the scope of the injunction. In trade secret litigation, as with other areas of intellectual property, there is a constant struggle over the “it” at issue in the litigation. In other words, what is “it” that the defendant is accused of misappropriating? Who owns it? Did the defendant misappropriate it? See Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714, 723 (7th Cir. 2003) (“As aptly observed by our colleagues on the Fifth Circuit, a trade secret ‘is one of the most elusive and difficult concepts in the law to define.’ ”), quoting Lear Siegler, Inc. v. Ark-Ell Springs, Inc., 569 F.2d 286, 288 (5th Cir. 1978); Forest Laboratories, Inc. v. Pillsbury Co., 452 F.2d 621, 624 (7th Cir. 1971) (“The idea need not be complicated; it may be intrinsically simple and nevertheless qualify as a secret, unless it is in common knowledge and, therefore, within the public domain.”), quoting 2 Rudolf Callmann, THE LAW OF UNFAIR COMPETITION, TRADEMARKS AND MONOPOLIES §52.1 (3d ed. 1968). As a general matter, the “it” definitional battle plays out with the plaintiff fighting to delay identifying the “it” (i.e., defining the property right) until the last possible moment, while the defendant fights to pin the plaintiff down on exactly what its trade secrets are. This fight occurs from the very beginning of the litigation, with a defendant sometimes filing a motion to dismiss for failure to identify the trade secrets at issue or a motion for a more definite statement, and continues throughout discovery with further fights over whether the plaintiff has, in fact, identified what it is that the defendant is accused of taking. See AMP Inc. v. Fleischhacker, 823 F.2d 1199 (7th Cir. 1987) (fatal for plaintiff to fail to identify any particularized trade secrets misappropriated); Imax Corp. v. Cinema Technologies, Inc., 152 F.3d 1161, 1165 – 1167 (9th Cir. 1998) (affirming grant of summary judgment for defendant when plaintiff failed to identify precise numerical dimensions and tolerances it claimed as trade secrets); PostX Corp. v. Secure Data In Motion, Inc., No. C 02-04483 SI, 2004 WL 2663518 (N.D.Cal. Nov. 20, 2004) (granting summary judgment for failure to identify trade secrets with reasonable particularity on plaintiff’s Uniform Trade Secrets Act claim, but finding that summary judgment does not preempt or preclude common-law unfair competition claims in California). To this end, the “it” can sometimes change during litigation to encompass what a plaintiff learns that has in fact been taken by the defendant. As a result, a defendant tries very hard to pin a plaintiff down on its trade secrets before the plaintiff is permitted to take discovery of a defendant or third party. Recognizing this tension, California’s version of the UTSA requires a plaintiff to identify its trade secrets “with reasonable particularity” before commencing discovery. Cal.Civ.Proc. Code §2019.210. See Computer Economics, Inc. v. Gartner Group, Inc., 50 F.Supp.2d 980 (S.D.Cal. 1999) (holding California trade secret-specific discovery procedures applicable in trade secret action brought under California UTSA in federal court based on diversity jurisdiction). This “it” identification game permeates trade secret litigation at all levels — from whether the defendant had notice that appropriated information was a trade secret, to the pleadings, to the final decision on the merits, and finally to the entry of an injunction. Defining the “it” is critical and difficult.
13 — 34
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.13
An additional consideration when accused of trade secret misappropriation is whether the plaintiff has actual standing to bring the action. In other words, does the plaintiff actually own the claimed trade secrets? For instance, in Williamson v. Rexam Beverage Can Co., 497 F.Supp.2d 900 (S.D. Ohio 2007), Williamson and Rexam engaged in a business relationship involving proprietary ultrasonic welding technology. After the relationship did not progress, Williamson filed two patent applications directed to the proprietary ultrasonic welding technology and simultaneously assigned the patents to IP Technologies Holdings, Inc. Two months later, Rexam filed its own patent application disclosing and claiming the proprietary ultrasonic technology. Rexam’s application did not name Williamson as an inventor of the technology. Rexam’s patent application was to remain unpublished for six months. It was Rexam’s patent application that prompted Williamson to bring its complaint alleging misappropriation of trade secrets. Under these circumstances, Williamson had the right to recover damages for only misappropriation occurring prior to the assignment to IP Technologies. The complaint did not make any affirmative allegations of injuries prior to this date. As a result, Williamson was found to not have standing to bring a cause of action for misappropriation of trade secrets for the period after he assigned his patent rights covering this technology to IP Technologies Holdings. There are also circumstances in which a company is not permitted to hold information as a trade secret. For example, when companies join standard setting organizations (SSOs), the companies are required to share certain information. The consequences of maintaining such information as a trade secret is demonstrated in In re Union Oil Company of California, Docket No. 9305 (FTC Aug. 2, 2005) (decision and order), www.ftc.gov/enforcement/casesproceedings/0110214/union-oil-company-california-matter, and In re Chevron Corp., Docket No. C-4144 (FTC Aug. 2, 2005) (decision and order), www.ftc.gov/enforcement/casesproceedings/051-0125/chevron-corporation-unocal-corporation-matter. In these related cases, Union Oil represented to the California Air Resources Board (CARB) that certain gasolinerelated technology, which CARB eventually incorporated into its rulemaking on gasolineemission standards, was not proprietary and was in the public domain. Statement of the Federal Trade Commission, In the Matter of Union Oil Company of California, Docket No. 9305 and In the Matter of Chevron Corporation and Unocal Corporation, File No. 051-0125, Docket No. C-4144, p. 2 (Aug. 2, 2005), www.ftc.gov/system/files/documents/public_statements/568341/ 050802statement.pdf. The complaint alleged that Union Oil made similar misrepresentations to other members of private industry groups that were participating in the CARB rulemaking. However, at the same time, Union Oil obtained patent rights covering this technology. Therefore, Union Oil essentially maintained its IP rights and pending patent applications as trade secrets in violation of its obligations to the SSO. As a result of Union Oil’s patent portfolio, Union Oil was in a position to enforce patent rights and charge royalties to companies producing low-emission gasoline that met the CARB requirements. According to the complaint, the result of these royalties would be increased gasoline prices for consumers. The estimated cost was $500 million per year of additional consumer costs. Id. The FTC brought administrative complaints against Union Oil alleging that Union Oil illegally acquired monopoly power in the technology market for producing certain low-emission gasoline as mandated by CARB and as a result would adversely affect competition. The complaint sought an order requiring Union Oil to cease and desist from any efforts to assert those patent rights against manufacturers, retailers, and distributors in California. The issue was
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 35
§13.13
INTELLECTUAL PROPERTY LAW
resolved by consent orders pertaining to the antitrust allegations. In the consent orders, Union Oil and Chevron agreed not to assert or enforce any of the Relevant U.S. Patents against any Person, to recover any damages or costs for alleged infringements of any of the Relevant U.S. Patents, or to collect any fees, royalties or other payments, in cash or in kind, for the practice of any of the Relevant U.S. Patents, including but not limited to fees, royalties, or other payments, in cash or in kind, to be collected pursuant to any License Agreement, provided, however, that nothing in this Order obligates or requires Respondents to refund any fees, royalties or other payments collected in connection with any of the Relevant U.S. Patents prior to the Merger Effective date. Union Oil, supra, p. 3; Chevron Corp., supra, p. 3. Whether Union Oil’s failure to disclose its patent holdings to CARB was intentional or unintentional, this illustrates what can happen if a company insists on maintaining trade secrets in violation of the obligations it may have to an SSO. There is an increasing concern about trade secret misappropriation by foreign entities. The United States International Trade Commission (USITC) provides another forum for companies that fall victim to misappropriation abroad. Section 337 of the Tariff Act of 1930, ch. 497, 46 Stat. 590, codified at 19 U.S.C. §1337, authorizes the ITC to prevent the importation of articles when it finds unfair methods of competition or unfair acts in the importation of articles. While the unfair acts of §337 explicitly cover statutory intellectual property claims relating to patents, trademarks, copyrights, mask works, and design (19 U.S.C. §§1337(a)(1)(B) – 1337(a)(1)(E)), §337 also has been interpreted to apply to nonstatutory claims — namely, claims that are not brought pursuant to a federal statute. Trade secret misappropriation has been interpreted to fall into this nonstatutory claim category. See, e.g., Certain Processes for Manufacture of Skinless Sausage Casings & Resulting Product, Inv. No. 337-TA-148/169, Pub. 1624 (USITC Dec. 1984), www.usitc.gov/publications/337/pub1624.pdf; Certain Apparatus for Continuous Production of Copper Rod, Inv. No. 337-TA-52, Pub. 1017 (USITC Nov. 1979), www.usitc.gov/publications/ 337/pub1017.pdf. However, it was not until the TianRui investigation and subsequent federal circuit decision that a definitive ruling was made regarding whether the USITC has authority to act when all of the alleged acts of misappropriation take place outside the United States and when the complainant is not exploiting the trade secrets in the United States. TianRui Group Co. v. International Trade Commission, 661 F.3d 1322 (Fed.Cir. 2011), highlights the potential of 19 U.S.C. §1337 to be used as a powerful tool to prevent the exploitation of misappropriated trade secrets embodied in products that are imported into the United States. Lurking just below the surface of the decision remain a number of significant issues of substantive trade secret law. While the court purported to apply a “federal” trade secret standard, in reality at the time there was no federal common law of trade secrets to apply. Since TianRui, there have been other examples of companies seeking to protect trade secret rights through §337 actions. For instance, in December 2012, Fellowes, Inc., and Fellowes Office
13 — 36
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.13
Products Co., Ltd., filed a complaint with the USITC alleging violations of §337 based on the importation and sale of certain paper shredders and processes for manufacturing relating to them. Certain Paper Shredders, Certain Processes for Manufacturing or Relating to Same & Certain Products Containing Same & Certain Parts Thereof, Inv. No. 337-TA-863 (USITC Jan. 22, 2013) (notice of institution of investigation), www.usitc.gov/secretary/fed_reg_notices/ 337/337_863_notice01222013sgl.pdf, noticed in 78 Fed.Reg. 5,496 (Jan. 25, 2013). The complaint alleged New United Co. Group Ltd.; Jiangsu New United Office Equipments Co. Ltd.; Shenzhen Elite Business Office Equipment Co. Ltd.; Elite Business Machines Ltd.; New United Office Equipment USA, Inc.; and Jiangsu Shinri Machinery Co. Ltd. (collectively, “New United”), along with individual respondents Zhou Licheng, Randall Graves, and “Jessica” Wang Chongge, infringed two U.S. design patents and misappropriated trade secrets. Id. However, the case ended with the voluntary withdrawal of the complaint as to the individual respondents and a consent order and settlement as to New United. See Certain Paper Shredders, Certain Processes for Manufacturing or Relating to Same & Certain Products Containing Products Containing Same & Certain Parts Thereof, Inv. No. 337-TA-863 (USITC Dec. 20, 2013) (notice of USITC not to review initial determination of administrative law judge), www.usitc.gov/ secretary/fed_reg_notices/337/337_863_notice12202013sgl1.pdf; Certain Paper Shredders, Certain Processes for Manufacturing or Relating to Same & Certain Products Containing Same & Certain Parts Thereof — Order No. 6: Initial Determination Granting Joint Motion To Terminate Investigation Based on Consent Order & Withdrawal of Complaint as to Certain Respondents, Inv. No. 337-TA-863, 2013 WL 6407624 (USITC ALJ Nov. 20, 2013). Also, in 2012, SI Group, Inc., filed a complaint against Red Avenue Chemical Corp.; Thomas R. Crumlish, Jr.; Precision Measurement International LLC; Sino Legend (Zhangjiagang) Chemical Co., Ltd.; Sino Legend Holding Group, Inc.; Sino Legend Holding Group Ltd.; HongKong Sino Legend Group, Ltd.; Red Avenue Chemical Co. Ltd.; Ning Zhang; Quanhai Yang; and Shanghai Lunsai International Trading Company with the USITC alleging violations of §337 for the importation and sale of certain rubber resins by reason of misappropriation of trade secrets. Certain Rubber Resins & Processes for Manufacturing Same, Inv. No. 337-TA-849, 2014 WL 7497801 (USITC Feb. 26, 2014) (commission opinion). Specifically, the complaint alleged misappropriation of trade secrets in the process for synthesizing resins that can be used to manufacture tires. The respondents argued that there was not an existing trade secret because prior art disclosed a range of values and the complainant’s alleged trade secret was a single value that fell within the range. The complainant pointed the USITC to a Federal Circuit decision, using the Uniform Trade Secrets Act, stating that trade secret protection can be extended to a specific value within a range when there is testimony that the particular value is “very novel” and “very, very unusual.” 2014 WL 7497801 at *5, citing BBA Nonwovens Simpsonville, Inc. v. Superior Nomovens, LLC, 303 F.3d 1332, 1340 (Fed.Cir. 2002). While the USITC affirmed the ALJ’s prior determination that the complainant’s information was protectable as a trade secret, it did take issue with the complainant’s citation to BBA Nonwovens. The USITC stated that BBA Nonwovens did not address the question of whether trade secret protection should be extended to a specific value that is within a previously published range. Rather, the decision indicated that if “there is something special about the specific value . . . then it may be protectable as a trade secret even where a range is known.” 2014 WL 7497801 at *6. In the case of the rubber resins, the USITC found that the evidence did show there was something special about the complainant’s value. The USITC declined to provide trade secret protection to other alleged trade secrets
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 37
§13.13
INTELLECTUAL PROPERTY LAW
because, among other reasons, the respondents showed reverse-engineering of the alleged trade secret, the complainant failed to show independent economic value of the alleged trade secret, and/or the alleged trade secret was found to be disclosed in issued patents belonging to the complainant. Similar to TianRui, the USITC issued a limited exclusion order for a period of ten years prohibiting the unlicensed importation of “rubber resins using any of the SP-1068 Rubber Resin Trade Secrets that are manufactured by, for, or on behalf of” the violating respondents. 2014 WL 7497801 at *42. The time period for the exclusion order was based on testimony and evidence that it would take at least ten years to independently develop the trade secrets. The USITC also ordered a bond based on the price differential between the respondents’ product and the complainant’s competing product. Several of the respondents appealed to the Federal Circuit, and on December 11, 2015, the Federal Circuit issued a Federal Circuit Rule 36 affirmance. Sino Legend (Zhangjiagang) Chemical Co. v. International Trade Commission, 623 Fed.Appx. 1016 (Dec. 11, 2015). With the passage of the Defend Trade Secrets Act, there now is a true federal law of trade secrets to apply, which could have profound implications for future §337 actions. The trade secret laws applied by the various states (and countries) have significant differences, ranging from the definitions of “trade secret” and “misappropriation” to the statute of limitations, that can be outcome determinative. As discussed in §13.11 above, another significant strategic choice is whether to proceed under the DTSA or an equivalent state law trade secret cause of action, with factors such as the statute of limitations, injunction standards, and venue considerations all coming into play. For example, the DTSA has a three-year statute of limitations (18 U.S.C. §1836(d)), but some states, such as Illinois, have adopted a longer (five-year) statute of limitations (see 765 ILCS 1065/7 (“An action for misappropriation must be brought within 5 years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this Act, a continuing misappropriation constitutes a single claim.”)). The court’s decision in TianRui, supra, also largely ignores choice-of-law issues. The court’s de facto choice-of-law analysis applies the law of the place (the United States) where the injury (to a domestic industry) is felt. But other courts have applied the law of the place where the acts of misappropriation occurred. If that law were to apply, then potentially the law of a foreign country would govern the misappropriation analysis. The issue becomes much more complicated when the country where the misappropriation occurs does not consider the alleged acts to be improper. Finally, while the TianRui court spent much time explaining that it was not applying U.S. trade secret law extraterritorially, but rather was merely preventing the importation of goods that are the product of the misappropriation, it may have missed the biggest potential shortcoming of §337 as a tool to prevent trade secret theft. Precisely because §337 does not apply extraterritorially, it cannot prevent the continued use of the trade secrets abroad, only the importation of goods embodying the trade secrets into the United States. Because once trade secrets are generally known they cease to exist as trade secrets, §337 ultimately may fail to prevent the loss of trade secret rights.
13 — 38
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
VIII. [13.14]
§13.14
ELECTRONIC DISCOVERY AND TRADE SECRET MISAPPROPRIATION
In 2006, the Federal Rules of Civil Procedure changed to account for electronically stored information (ESI) and make it even more important to consider how electronic discovery will play into trade secret misappropriation litigation. In 2015, the rules changed again, this time to include a proportionality rule to balance the need for electronically stored information against the cost of attaining that information. In trade secret cases, the electronically stored information includes not just the texts of e-mails and documents, but the metadata, which can demonstrate where a document came from, who created it originally, and when it was originally created irrespective of the date on the face of the document. Fed.R.Civ.P. 26(b)(1) now states: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden of expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable. This is a departure from the previous language used in Rule 26, which stated that discovery should be “reasonably calculated to lead to the discovery of admissible evidence.” Advisory Committee Notes, 2015 Amendment, Fed.R.Civ.P. 26. The Advisory Committee criticized this former language, stating that it was used to define the scope of discovery and that it led to overbroad discovery. Id. Additionally, Fed.R.Civ.P. 37 was amended to impose sanctions for failing to preserve ESI. Under this new standard, a court may sanction a party if ESI should have been preserved or the party failed to take reasonable steps to preserve it and the ESI cannot be restored through additional discovery. If the court finds that an individual did not reasonably preserve ESI, it may order measures necessary to cure any prejudice. If the court finds the party acted with intent, the court, under the revised rules, may presume the information lost was unfavorable to the party, instruct the jury that it may or must presume the information lost was unfavorable to the party, or dismiss the action or enter a default judgment. Fed.R.Civ.P. 37(e) states: Failure to Preserve Electronically Stored Information. If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court: (1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or (2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 39
§13.14
INTELLECTUAL PROPERTY LAW
(A) presume that the lost information was unfavorable to the party; (B) instruct the jury that it may or must presume the information was unfavorable to the party; or (C) dismiss the action or enter a default judgment. Whereas in past years employees were stealing trade secrets by walking out with improperly accessed papers in their briefcases, now employees need only download the information on any of a host of electronic media such as portable disk drives, CDs, and DVDs or e-mail it to their personal accounts. These technological advances have made it increasingly important for electronic discovery to play a role in trade secret cases. David K. Isom, Electronic Discovery Primer for Judges, 2005 Fed.Cts.L.Rev. 1, 1 & n.1 (2005) (stating that 99 percent of all information being created today is stored electronically). Employing the proper electronic discovery techniques allows a company to ascertain if a computer had files improperly accessed, deleted, moved, copied, or e-mailed. Amateur techniques to obscure nefarious activities are discoverable by recovering deleted material and looking at the lack of space on the hard drive and e-mail patterns. The metadata in ESI can also hold valuable information, such as a document’s author, who received it, and what changes were made. The rules impose a duty to consider the production of ESI. The relevant changes in the rules are set forth below. While the previous version of Fed.R.Civ.P. 16 allowed the court to include provisions for the disclosure and discovery of ESI in the initial scheduling order, the 2015 amendments also permit the court to include provisions regarding the preservation of ESI: (b) Scheduling. (1) Scheduling Order. Except in categories of actions exempted by local rule, the district judge — or a magistrate judge when authorized by local rule — must issue a scheduling order: (A) after receiving the parties’ report under Rule 26(f); or (B) after consulting with the parties’ attorneys and any unrepresented parties at a scheduling conference. (2) Time to Issue. The judge must issue the scheduling order as soon as practicable, but unless the judge finds good cause for delay, the judge must issue it within the earlier of 90 days after any defendant has been served with the complaint or 60 days after any defendant has appeared. (3) Contents of the Order.
13 — 40
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.14
(A) Required Contents. The scheduling order must limit the time to join other parties, amend the pleadings, complete discovery, and file motions. (B) Permitted Contents. The scheduling order may: (i) modify the timing of disclosures under Rules 26(a) and 26(e)(1); (ii) modify the extent of discovery; (iii) provide for disclosure, discovery, or preservation of electronically stored information; (iv) include any agreements the parties reach for asserting claims of privilege or of protection as trial-preparation material after information is produced, including agreements reached under Federal Rule of Evidence 502; (v) direct that before moving for an order relating to discovery, the movant must request a conference with the court; (v) set dates for pretrial conferences and for trial; and (vi) include other appropriate matters. (4) Modifying a Schedule. A schedule may be modified only for good cause and with the judge’s consent. [Emphasis added.] Fed.R.Civ.P. 16(b). Other changes to Rule 16 made by the 2015 amendments include a shortened time for the court to issue a scheduling order and language allowing the inclusion of a provision directing a party to request a conference with the court prior to moving for an order relating to discovery. Rule 26(a)(1) still requires that the parties disclose ESI in initial disclosures: (a) Required Disclosures. (1) Initial Disclosure. (A) In General. Except as exempted by Rule 26(a)(1)(B) or as otherwise stipulated or ordered by the court, a party must, without awaiting a discovery request, provide to the other parties: (i) the name and, if known, the address and telephone number of each individual likely to have discoverable information — along with the subjects of that information — that the disclosing party may use to
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 41
§13.14
INTELLECTUAL PROPERTY LAW
support its claims or defenses, unless the use would be solely for impeachment; (ii) a copy — or a description by category and location — of all documents, electrically stored information, and tangible things that the disclosing party has in its possession, custody, or control and may use to support its claims or defenses, unless the use would be solely for impeachment; (iii) a computation of each category of damages claimed by the disclosing party — who must also make available for inspection and copying as under Rule 34 the documents or other evidentiary material, unless privileged or protected from disclosure, on which each computation is based, including materials bearing on the nature and extent of injuries suffered; and (iv) for inspection and copying as under Rule 34, any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment. [Emphasis added.] Fed.R.Civ.P. 26(a)(1). In addition to the requirements imposed by the Federal Rules of Civil Procedure, counsel should be aware of any changes to local rules regarding electronically stored information. For instance, the U.S. District Court for the District of New Jersey requires counsel to “review with the client the client’s information management systems including computer based and other digital systems, in order to understand how information is stored and how it can be retrieved . . . including currently maintained computer files as well as historical, archival, back up and legacy computer files.” D.N.J. Local Civil Rule 26.1(d). New Jersey also requires counsel to “identify a person or persons with knowledge about the client’s information management systems, including computer based and other digital systems, with the ability to facilitate, through counsel, reasonably anticipated discovery.” Id. It is also quite common to place a litigation hold on computer systems or create an immediate archival backup to preserve that information once litigation commences. Practitioners should be aware that there can be tremendous burdens placed on a company — be it small, medium, or large — when electronic discovery becomes an issue. From a cost standpoint alone, preserving and producing huge volumes of electronic data can affect the litigation dynamics. Once received, it can be equally burdensome for a discovering party to process and review the mounds of electronic evidence. Planning is critical in terms of the types of information requested and the form in which it is requested and produced. For instance, it is often desirable to request information in its native format to preserve metadata and other intrinsic characteristics of the documents. In other cases, it is useful to request the data in a searchable format or to process it electronically so that it becomes searchable without resorting to separate review and coding of the data (such as separately creating a database tagging dates, authors, recipients, etc.).
13 — 42
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.14
Fed.R.Civ.P. 34 makes a distinction between paper documents and ESI and provides the default procedures for producing ESI: Producing Documents, Electronically Stored Information, and Tangible Things, or Entering onto Land, for Inspection and Other Purposes (a) In General. A party may serve on any other party a request within the scope of Rule 26(b): (1) to produce and permit the requesting party or its representative to inspect, copy, test, or sample the following items in the responding party’s possession, custody, or control: (A) any designated documents or electronically stored information — including writings, drawings, graphs, charts, photographs, sound recordings, images, and other data or data compilations — stored in any medium from which information can be obtained either directly or, if necessary, after translation by the responding party into a reasonably usable form; or (B) any designated tangible things; or (2) to permit entry onto designated land or other property possessed or controlled by the responding party, so that the requesting party may inspect, measure, survey, photograph, test, or sample the property or any designated object or operation on it. (b) Procedure. (1) Contents of the Request. The request: (A) must describe with reasonable particularity each item or category of items to be inspected; (B) must specify a reasonable time, place, and manner for the inspection and for performing the related acts; and (C) may specify the form or forms in which electronically stored information is to be produced. (2) Responses and Objections. (A) Time to Respond. The party to whom the request is directed must respond in writing within 30 days after being served or — if the request was delivered under Rule 26(d)(2) — within 30 days after the parties’ first Rule
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 43
§13.14
INTELLECTUAL PROPERTY LAW
26(f) conference. A shorter or longer time may be stipulated to under Rule 29 or be ordered by the court. (B) Responding to Each Item. For each item or category, the response must either state that inspection and related activities will be permitted as requested or state with specificity the grounds for objecting to the request, including the reasons. The responding party may state that it will produce copies of documents or of electronically stored information instead of permitting inspection. The production must then be completed no later than the time for inspection specified in the request or another reasonable time specified in the response. (C) Objections. An objection must state whether any responsive materials are being withheld on the basis of that objection. An objection to part of a request must specify the part and permit inspection of the rest. (D) Responding to a Request for Production of Electronically Stored Information. The response may state an objection to a requested form for producing electronically stored information. If the responding party objects to a requested form — or if no form was specified in the request — the party must state the form or forms it intends to use. (E) Producing the Documents or Electronically Stored Information. Unless otherwise stipulated or ordered by the court, these procedures apply to producing documents or electronically stored information: (i) A party must produce documents as they are kept in the usual course of business or must organize and label them to correspond to the categories in the request; (ii) If a request does not specify a form for producing electronically stored information, a party must produce it in a form or forms in which it is ordinarily maintained or in a reasonably usable form or forms; and (iii) A party need not produce the same electronically stored information in more than one form. (c) Nonparties. As provided in Rule 45, a nonparty may be compelled to produce documents and tangible things or to permit an inspection. [Emphasis added.] Fed.R.Civ.P. 34. Although electronic discovery was already an important consideration in trade secret cases, these rules make considering electronic information a necessity. Some important practice tips are as follows:
13 — 44
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.15
a. Know your responsibilities regarding electronically stored information. Become familiar with the responsibilities imposed by the Federal Rules of Civil Procedure as well as any responsibilities imposed by local rules. b. Get to know your client’s IT department. You will need to know the technology setup of the company in order to make informed decisions on the production of ESI. c. Review the company’s document and record retention policies. Important points of concern include whether the employees understand the purpose of the policies, whether the policies are being followed, whether the policies are meeting the organization’s needs, and whether the policies follow the current rules. d. Write a litigation hold memorandum to protect against a spoliation claim. e. Decide in what format to produce ESI (e.g., hard copy, electronic images, native format, PDF, printed, imaged, burned, or metadata). This will be determinative of the cost of producing ESI. f. Make a decision on how to handle privileged documents. Will you provide a claw-back provision? This plan should be developed for the first Fed.R.Civ.P. 26 conference. g. Determine what is and is not reasonably accessible. This will include determining whether backup tapes or only information stored locally on relevant computers should be produced. h. Identify witnesses to testify on the company’s ESI policy and practices.
IX. [13.15] TRADE SECRET MISAPPROPRIATION AS A FEDERAL CRIMINAL OFFENSE The Economic Espionage Act made certain forms of trade secret misappropriation federal criminal offenses punishable by imprisonment for up to 15 years and fines of up to $500,000 for individuals (now $5 million) and $10 million for organizations (now $10 million “or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided”). See 18 U.S.C. §§1831 – 1939. As discussed in §13.2 above, in May 2016, §§1831 – 1839 were amended pursuant to the Defend Trade Secrets Act to create a federal civil cause of action for trade secrets misappropriation. See 18 U.S.C. §1836. Focusing on the criminal side, the EEA is concerned primarily with unauthorized acquisition and disclosure of trade secrets. It also has provisions criminalizing the destruction of trade secrets (e.g., by destroying a hard drive containing a company’s trade secret information). The type of acts constituting trade secret misappropriation under the EEA are broadly defined and include traditional instances of theft involving the physical removal of a trade secret from the owner’s possession. However, the prohibited acts also include copying, duplicating, sketching, drawing,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 45
§13.15
INTELLECTUAL PROPERTY LAW
photographing, downloading, uploading, altering, destroying, photocopying, replicating, transmitting, delivering, sending, mailing, communicating, or conveying. As noted in §VIII.B.2.a of the Department of Justice’s PROSECUTING INTELLECTUAL PROPERTY CRIMES MANUAL (Jan. 2001), “With many of these methods the original property may not necessarily leave the custody or control of the owner.” 18 U.S.C. §1831, which requires that the theft of trade secrets be done to benefit a foreign government, instrumentality, or agent, defines “trade secret misappropriation”: (a) In general. — Whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly — (1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret; (2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret; (3) receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization; (4) attempts to commit any offense described in any of paragraphs (1) through (3); or (5) conspires with one or more other persons to commit any offense described in any of paragraphs (1) through (3), and one or more of such person do any act to effect the object of the conspiracy, shall, except as provided in subsection (b), be fined not more than $5,000,000 or imprisoned not more than 15 years, or both. 18 U.S.C. §1831(a). 18 U.S.C. §1832 makes it a criminal offense to carry out trade secret theft for purely economic or commercial advantage: (a) Whoever, with intent to convert a trade secret, that is related to or included in a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly — (1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information;
13 — 46
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.15
(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information; (3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained, or converted without authorization; (4) attempts to commit any offense described in paragraphs (1) through (3); or (5) conspires with one or more other persons to commit any offense described in paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy, shall, except as provided in subsection (b), be fined under this title or imprisoned not more than 10 years, or both. 18 U.S.C. §1832(a). To establish misappropriation under either of these trade secret misappropriation provisions of the EEA, the government is required to prove beyond a reasonable doubt that (a) the defendant stole or obtained, destroyed, or conveyed information without authorization of the owner, (b) the defendant knew or believed that this information was a trade secret, and (c) the information was in fact a trade secret. In addition to these elements, to establish a violation under 18 U.S.C. §1831(a), the government must also prove that the defendant knew the offense would benefit or was intended to benefit a foreign government, instrumentality, or agent. For economic-based trade secret theft under 18 U.S.C. §1832(a), in addition to these elements, the government also must prove (a) that the defendant intended to convert the trade secret to the economic benefit of anyone other than the owner, (b) that the defendant knew or intended that the owner of the trade secret would be injured, and (c) that the trade secret was related to or included in a product that was produced or placed in interstate or foreign commerce. While many of these cases involve an international component, with the theft being for the benefit of a foreign government, that is not a requirement, and there have been several cases involving more typical theft for personal gain. For example, in United States v. Zeng, No. H-0845 (S.D.Tex. May 16, 2008), a formulation chemist was indicted for allegedly stealing trade secrets relating to epoxy-based fireproof coating technologies and using those trade secrets to start his own company. The accused allegedly downloaded the trade secret formula from the company’s database and concealed the formula in a box under the insulation in the attic of his residence. The indictment also alleged that the accused formed his own business for purposes of marketing the fireproof coating product. However, in April 2012, the Second Circuit limited the use of the EEA by narrowly construing the “product that is produced for or placed in interstate or foreign commerce” language of 18 U.S.C. §1832. United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012). Briefly, the facts of the case are as follows. Sergey Aleynikov was a computer programmer employed by
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 47
§13.15
INTELLECTUAL PROPERTY LAW
Goldman Sachs from May 2007 through June 2009. His responsibilities included developing source code for the company’s proprietary high-frequency trading (HFT) system. Aleynikov’s work focused on developing code for the infrastructure programs that facilitate the flow of information throughout the trading system and the system’s performance. Goldman had confidentiality policies that required Aleynikov to keep all proprietary information confidential, including any intellectual property created by Aleynikov. In April 2009, Aleynikov accepted an offer to become an executive vice president at a Chicago-based startup, Teza Technologies LLC. On his last day at Goldman, Aleynikov encrypted and uploaded to a server in Germany more than a half million lines of source code for Goldman’s HFT system. Aleynikov then deleted the encryption program from his Goldman computer. When Aleynikov was at his home, he downloaded the source code from the server in Germany to his home computer. He then flew to Chicago for meetings at Teza and brought with him a flash drive and a laptop containing portions of the Goldman source code. The following day Aleynikov flew back home and was arrested by the FBI. He was indicted for, among other things, violating the EEA by downloading a trade secret “that is related to or included in a product that is produced for or placed in interstate or foreign commerce” with the intent to convert such trade secret and injure its owner, to the economic benefit of anyone other than the owner. 676 F.3d at 74. The district court concluded that [1] the stolen source code is a trade secret; [2] the HFT system constitutes a “product” to which the source code relates because the system was developed and modified through the labor of Goldman’s computer programmers; and [3] the HFT system was “produced for” interstate commerce because it facilitates the rapid execution of trades on financial markets such as the New York Stock Exchange and NASDAQ. 676 F.3d at 75. The jury convicted Aleynikov, and he was sentenced to 97 months in prison. Aleynikov appealed, and on appeal the Second Circuit found that the allegations of the indictment with respect to the EEA were insufficient because Aleynikov did not convert a trade secret that was “produced for” or “placed in” interstate or foreign commerce as required by the EEA. In making this determination, the Second Circuit said Goldman’s HFT system was neither “produced for” nor “placed in” interstate or foreign commerce. Goldman had no intention of selling its HFT system or licensing it to anyone. . . . It went to great lengths to maintain the secrecy of its system. The enormous profits the system yielded for Goldman depended on no one else having it. Because the Goldman HFT system was not designed to enter or pass in commerce, or to make something that does, Aleynikov’s theft of source code relating to that system was not an offense under the EEA. [Citation omitted.] 676 F.3d at 82. The DTSA has replaced “produced for” and “placed in” interstate or foreign commerce with “used in or intended for use in interstate or foreign commerce.” It remains to be seen how courts will interpret this language. Prior to the amendment, as seen above, the Aleynikov court certainly took a narrow interpretation of the prior statutory language. Despite the replacement of the “produced for” and “placed in” language, there are still aspects of the Aleynikov decision that remain instructive. Specifically, the court’s decision in Aleynikov was largely based on how the
13 — 48
WWW.IICLE.COM
MISAPPROPRIATION OF TRADE SECRETS
§13.15
court defined “product.” The amended 18 U.S.C. §1832 still requires only that the misappropriated trade secret be “related to” a “product that is used in or intended for use in interstate or foreign commerce.” The amended statute does not require the trade secret be embodied in the product that is in interstate commerce. Furthermore, the Aleynikov court used the new standard of “used in or intended for use in interstate or foreign commerce” to determine if the product qualified as a product “produced for” or “placed in” interstate commerce within the meaning of the former §1832 statutory language. For example, the Aleynikov court determined that because the Goldman Sachs HFT system itself was not intended to be sold, it did not constitute a “product” that was “produced for” or “placed in” interstate commerce within the meaning of §1832. However, as the Aleynikov concurrence pointed out, the EEA seems to have been designed to encompass the types of acts of which Aleynikov was accused: While the legislative history can be read to create some ambiguity as to how broad a reach the EEA was designed to have, it is hard for me to conclude that Congress, in this law, actually meant to exempt the kind of behavior in which Aleynikov engaged. 676 F.3d at 83 (Calabresi, J., concurring). See H.R.Conf.Rep. No. 104-788, 104th Cong., 2d Sess. 6 (1996), reprinted in 1996 U.S.C.C.A.N. 4021, 4024 – 4025 (citing United States v. Brown, 925 F.2d 1301 (10th Cir. 1991)). One possible way to overcome the Second Circuit’s narrow reading of the statute and seemingly anomalous result would be to define “product” differently. Goldman Sachs arguably did provide a “product” in the form of financial services in interstate commerce that relied on and thus was “related to” the trade secret containing HFT system. If the government had defined “product” as the financial services rather than the system used to provide those services, it is possible that the outcome would have been different. While a more detailed discussion of the EEA is beyond the scope of this chapter, interested practitioners should access the U.S. Department of Justice’s website at www.justice.gov for the most current information and guidelines for enforcement of the Act.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
13 — 49
14
Trade Secret Remedies and the Inevitable Disclosure Doctrine
LINDA K. STEVENS Schiff Hardin LLP Chicago
The author thanks and acknowledges her associate, Christina Jacobson, for her excellent help in updating this chapter and finalizing it for publication.
®
©COPYRIGHT 2017 BY IICLE .
14 — 1
INTELLECTUAL PROPERTY LAW
I. [14.1] Introduction II. [14.2] Interlocutory Remedies A. B. C. D.
[14.3] Temporary Restraining Orders [14.4] Preliminary Injunctions [14.5] Issues Relating to Interlocutory Injunctive Relief Other Possible Interlocutory Remedies and Orders 1. [14.6] Orders To Preserve Evidence 2. [14.7] Expedited Discovery 3. [14.8] Seizure a. [14.9] Federal Law Seizures b. [14.10] State Law Seizures 4. [14.11] Protective Orders
III. [14.12] Posttrial and “Permanent” Relief A. [14.13] Compensatory Damages 1. [14.14] Plaintiff’s Actual Loss 2. [14.15] Defendant’s Unjust Enrichment 3. [14.16] Reasonable Royalty B. [14.17] Exemplary or Punitive Damages C. [14.18] Attorneys’ Fees and Costs D. [14.19] Prejudgment Interest E. Scope and Duration of Posttrial Injunctive Relief 1. [14.20] When a Request for Injunctive Relief Is Proper 2. [14.21] Need for the Order To Be Specific 3. [14.22] Against Whom the Injunction Is Enforceable 4. [14.23] How Long an Injunction Will Last 5. [14.24] Breadth of Available Relief IV. [14.25] Problems with After-the-Fact Relief and Nonuse Injunctions — The Inevitable Disclosure Doctrine A. [14.26] What the Inevitable Disclosure Doctrine Is B. [14.27] PepsiCo, Inc. v. Redmond C. [14.28] Limits to the Inevitable Disclosure Doctrine
14 — 2
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
V. [14.29] Additional Statutory Claims: The Computer Fraud and Abuse Act A. [14.30] Prohibited Offenses B. [14.31] Damage/Loss Requirement C. [14.32] Available Remedies and Application to Trade Secret Misappropriation VI. [14.33] Criminal Actions for Trade Secret Misappropriation VII. [14.34] Blocking Importation of Goods Manufactured with Misappropriated Trade Secrets — International Trade Commission Investigations
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 3
§14.1
INTELLECTUAL PROPERTY LAW
I. [14.1] INTRODUCTION A trade secret plaintiff has a wide array of remedies from which to choose. In Illinois, those remedies usually will be governed by statute. The Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1, et seq., Illinois’ version of the Uniform Trade Secrets Act, preempts all noncontractual civil remedies that are based on the misappropriation of a trade secret. 765 ILCS 1065/8; American Center for Excellence in Surgical Assisting Inc. v. Community College District 502, No. 15 C 7290, 2016 WL 3165763, *6 (N.D.Ill. June 7, 2016); Spitz v. Proven Winners North America, LLC, 759 F.3d 724, 729 (7th Cir. 2014). The remedies available under the ITSA are listed at 765 ILCS 1065/3 – 1065/5. In May 2016, President Obama signed federal trade secrets legislation (the Defend Trade Secrets Act of 2016 (DTSA), Pub.L. No. 114-153, 130 Stat. 376), which amended the federal Economic Espionage Act of 1996 (EEA), Pub.L. 104-294, 110 Stat. 3488, to provide — for the first time — a federal civil cause of action for trade secret misappropriation. The EEA addresses available civil remedies at 18 U.S.C. §§1835 and 1836. While the amended EEA provides federal subject-matter jurisdiction for trade secret claims, that jurisdiction is not exclusive, and state courts can hear claims brought under the EEA. The EEA also expressly states that it does not preempt any state or federal law. A trade secret plaintiff, therefore, can choose among different claims and different fora in which to bring suit. Regardless of which statute is invoked and in which courthouse the papers are filed, the question of available remedies usually dominates a trade secrets case from the outset. In most trade secret cases, circumstances will dictate asking for a temporary restraining order (TRO), preliminary injunction, and/or other prophylactic relief at the start of the case, in addition to whatever damages and permanent injunctive relief the plaintiff intends to seek at trial. In other cases, strategic and legal considerations may make a request for such early relief unnecessary or undesirable. Identifying the most appropriate remedies and choosing the best stages of the case in which to request them involve some of the most important — and most difficult — strategic and legal choices that a trade secret plaintiff will make. This chapter discusses the various types of remedies available to a plaintiff at the beginning and end of the case and also explores the circumstances under which a trade secret injunction can act like a noncompete covenant and prohibit competitive activity under the doctrine of “inevitable disclosure” of trade secrets.
II. [14.2] INTERLOCUTORY REMEDIES Requests for emergency prejudgment relief often play a major role in trade secret cases. This is due to the nature of trade secrets: once a trade secret has been disclosed, its value can be lost forever. The need for interlocutory relief in trade secrets cases also arises from the speed with which information can be taken and transmitted in the digital age. With one click of a mouse, massive amounts of confidential files and data can be downloaded onto a disk or portable drive, uploaded to a cloud storage site, or transmitted via e-mail across the globe. If left unchecked, a defendant’s conduct during the months (or perhaps years) before trial could destroy the very thing that the plaintiff’s suit is seeking to protect. For these reasons, if a trade secret owner believes that its trade secret is being, or will be, misappropriated, waiting for trial and counting on a final judgment to prevent or stop the misappropriation is unlikely to result in effective protection in most cases. Trade secret plaintiffs, therefore, often seek emergency injunctive relief prior to trial.
14 — 4
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.3
The most common types of interlocutory injunctive relief are temporary restraining orders and preliminary injunctions. While both TROs and preliminary injunctions are emergency remedies intended to preserve the status quo pending trial, they are treated differently by the courts and require different preparation and presentations by counsel. As discussed in more detail in §14.4 below, preliminary injunctions are issued in order to preserve the status quo pending trial, which might be months (or even years) in the future. Preliminary injunctions are generally based on an evidentiary hearing much like a trial, which usually occurs on an expedited basis. A TRO is a shorter-term injunction intended to maintain the last uncontested status quo for a much shorter time period (e.g., while the parties are preparing for a preliminary injunction hearing). There may be substantive and procedural ramifications for a plaintiff who fails to seek interlocutory relief. Because of the pretrial risk of trade secret disclosure and dissemination, failure to act quickly may moot or jeopardize the plaintiff’s chance of securing injunctive relief at a later stage in the proceedings. While each case is unique and the exigencies will vary from one situation to another, a victim of trade secrets misappropriation who fails to seek a TRO should be prepared to explain to the court his or her reasons for that decision when asking for a preliminary injunction, and a plaintiff who fails to seek any type of interlocutory relief will need to explain that failure at the trial stage if seeking a permanent injunction. At the very least, such answers usually will be necessary to address how and why the trade secret derives value from its secrecy and how the trade secrets owner took the required “reasonable measures” to maintain secrecy. A. [14.3] Temporary Restraining Orders If a trade secret is in immediate danger, plaintiff’s counsel should consider seeking a temporary restraining order at the earliest possible time, keeping in mind the following: 1. Article XI of the Code of Civil Procedure, 735 ILCS 5/1-101, et seq., which governs requests for TROs in the state court system (see 735 ILCS 5/11-101, et seq.); 2. Federal Rule of Civil Procedure 65(b), which provides the framework for obtaining a TRO in the federal courts; and 3. §3(a) of the Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1, et seq., which provides for the issuance of injunctive relief to prevent the actual or threatened misappropriation of a trade secret. Generally speaking, a TRO is very short-term emergency relief, providing protection against irreparable harm until an evidentiary hearing (usually a preliminary injunction hearing) can be held. A plaintiff is entitled to a TRO if it can establish (1) an ascertainable right or interest in need of protection, (2) irreparable harm if the injunction is not issued, (3) no adequate remedy at law, and (4) a likelihood of success on the merits of its claim. See Right Field Rooftops, LLC v. Chicago Baseball Holdings, LLC, 80 F.Supp.3d 829, 836 (N.D.Ill. 2015); Murges v. Bowman, 275 Ill.App.3d 153, 655 N.E.2d 918, 922, 211 Ill.Dec. 535 (1st Dist. 1995); A-Tech Computer Services, Inc. v. Soo Hoo, 254 Ill.App.3d 392, 627 N.E.2d 21, 26, 193 Ill.Dec. 862 (1st Dist. 1993).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 5
§14.3
INTELLECTUAL PROPERTY LAW
The oft-stated purpose of interlocutory relief — both TROs and preliminary injunctions — is to allow “the trial court to preserve the status quo until it can hold a hearing to determine whether it should grant a preliminary injunction.” Asset Guaranty Reinsurance Co. v. American National Bank & Trust Company of Chicago, 254 Ill.App.3d 713, 627 N.E.2d 179, 184, 194 Ill.Dec 63 (1st Dist. 1993); Chicago United Industries, Ltd. v. City of Chicago, 445 F.3d 940, 944 (7th Cir. 2006) (“common formula” is that TROs are intended to preserve status quo only for as long as is needed to hold hearing); Stocker Hinge Manufacturing Co. v. Darnel Industries, Inc., 94 Ill.2d 535, 447 N.E.2d 288, 291, 69 Ill.Dec. 71 (1983). However, some courts have paid less attention to the status quo, urging that that the primary purpose of any interlocutory relief should be to prevent irreparable harm, regardless of the status quo. Chicago United, supra, 445 F.3d at 944 [Citations omitted.] (“Preliminary relief is properly sought only to avert irreparable harm to the moving party. . . . Whether and in what sense the grant of relief would change or preserve some previous state of affairs is neither here nor there.”) When status quo is considered, it is appropriate to look at the last “uncontested” status that preceded the controversy. See Westinghouse Electric Corp. v. Free Sewing Machine Co., 256 F.2d 806, 808 (7th Cir. 1958); Schweickart v. Powers, 245 Ill.App.3d 281, 613 N.E.2d 403, 411, 184 Ill.Dec. 376 (2d Dist. 1993). A request for a TRO usually is made by motion at or near the time that the complaint is filed and is supported by a recitation of the facts establishing: (1) the nature of the trade secret, (2) the actual or threatened misappropriation, (3) the status quo and the harm that will befall the plaintiff if a TRO is not issued and the status quo not maintained, and (4) the irreparable nature of this harm. These facts should be attested to by someone having personal knowledge of them, either by having a witness verify the complaint pursuant to 735 ILCS 5/2-605(a) and/or by submitting affidavits in support of the TRO motion.
PRACTICE POINTER
When seeking a TRO, plaintiff’s counsel should file the TRO papers (see the checklist below) when counsel files the complaint and, after having been assigned a judge, learn the following two things as quickly as possible: (1) the procedures followed by that particular judge for the disposition of TRO motions; and (2) the earliest time that the judge can hear the motion.
Because TRO practice can vary dramatically from one judge to another, it is important to learn as quickly as possible which judge has been assigned to the case and how this judge approaches and resolves TRO motions. It is also important to learn how soon the judge will be available for a TRO hearing. Judicial calendars are sometimes so full that a particular judge is not available for several days or even weeks. If a plaintiff cannot wait that long, counsel should consider seeking a hearing before the currently designated “emergency judge” or even taking a change from the assigned judge pursuant to 735 ILCS 5/2-1001(a)(2) if the case has been filed in state court. If a trade secret claim has been filed in federal court, however, the option of a routine change of judge is not available. A plaintiff seeking a TRO has the option of dispensing with notice to the other side and seeking the TRO on an “ex parte” basis (i.e., without notice to or participation by the opposing
14 — 6
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.3
party). An ex parte TRO is more difficult to get than one obtained with notice, and there are special requirements for ex parte applications. See 735 ILCS 5/11-101; Fed.R.Civ.P. 65(b). For example, a plaintiff seeking an ex parte TRO motion is required to show, via a sworn affidavit or verified allegations, that providing notice to the opposing party would result in immediate and irreparable injury. 735 ILCS 5/11-101; Fed.R.Civ.P. 65(b)(1)(A). Moreover, many judges resist hearing TRO motions ex parte and will urge the plaintiff to give notice to the defense so that both parties can be present and be heard. Ex parte TROs might also be less desirable, depending on the exigencies of the particular situation. For example, a state-court ex parte TRO may last only 10 days (with the possibility of one court-ordered 10-day extension or extension by agreement), whereas a TRO granted after notice and a hearing is not so limited. 735 ILCS 5/11-101; Diamond Savings & Loan Co. v. Royal Glen Condominium Ass’n, 173 Ill.App.3d 431, 526 N.E.2d 372, 374, 122 Ill.Dec. 113 (2d Dist. 1988) (“If a temporary restraining order is granted after notice has been given to the adverse party, there is no time limit on the order.”). Similarly, ex parte TROs granted by federal courts are limited to 14 days, with the possibility of one court-ordered 14-day extension or extension by agreement. Fed.R.Civ.P. 65(b)(2). The rules also invite a motion to dissolve ex parte interlocutory injunctions. 735 ILCS 5/11-101; Fed.R.Civ.P. 65(b)(4). Additionally, the court is required to set the “earliest possible” preliminary injunction hearing date in cases in which a TRO has been issued ex parte. 735 ILCS 5/11-101; Fed.R.Civ.P. 65(b)(3). This expedited mandate, however, may still fall short of protecting the plaintiff in every instance. It is possible that the court’s schedule may not allow for a quick evidentiary hearing, presenting the plaintiff with the possibility that its ex parte TRO will expire before the preliminary injunction hearing can be held. And because a plaintiff rarely wants to rush to the preliminary injunction hearing after it has obtained a satisfactory TRO (e.g., because of a desire to take discovery prior to an evidentiary hearing), careful consideration of the benefits and challenges of proceeding ex parte is advised. If the plaintiff decides not to proceed ex parte and instead will provide the defense with notice of the TRO hearing, the court generally will expect notice to be given as far in advance of the hearing as circumstances permit. Actual notice is often valued more highly than adherence to formal service rules. H-D Michigan, LLC v. Hellenic Duty Free Shops S.A., 694 F.3d 827, 842 (7th Cir. 2012). Consequently, depending on the degree of urgency in the situation, telephone and fax notice may be considered sufficient by the court for a TRO hearing. Regardless of the means of providing actual notice of the TRO hearing, the plaintiff should make arrangements for the speediest possible formal service of the complaint and TRO papers on the defendants. If suit is filed in state court in a county of sufficient size to require that service be made through the sheriff’s office, requesting the appointment of a special process server may be the best way to effect service quickly. Motions for a TRO usually are decided without an evidentiary hearing. TRO hearings normally consist of the attorneys’ descriptions of the pertinent facts (based on the pleadings, which are often verified, and on whatever affidavits have been submitted) and oral arguments regarding each party’s view of the result dictated by applying the substantive law and the TRO standard to these facts. Live testimony usually is not taken in a TRO hearing. See, e.g., Hon. Thomas J. O’Brien and Richard A. Jurczyk, TRO Petitions: Is an Evidentiary Hearing Required?, 81 Ill.B.J. 572 (1993).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 7
§14.3
INTELLECTUAL PROPERTY LAW
However, some judges will hold an evidentiary hearing on a TRO motion, and even if the judge has not indicated that the hearing will be an evidentiary proceeding, it is not at all uncommon for a judge to indicate at the last minute — sometimes in the middle of the proceedings — that testimony from one or more witnesses would be helpful, particularly if those witnesses are present in the courtroom. It is more than routinely important for counsel to know the judge and his or her particular practices and procedures when seeking a TRO.
PRACTICE POINTER
While it may not always be possible to coordinate the filing of a TRO motion with the availability of key witnesses, an ability to provide brief yet effective testimony if the court indicates an interest in hearing this testimony might well dictate a party’s success in obtaining or opposing a TRO. Similarly, do not bring a client representative or other potential witness to a TRO hearing unless you are comfortable either presenting the client’s testimony at the hearing (if asked) or declining the court’s request to hear it.
A TRO is not a final and appealable order. Geneva Assurance Syndicate, Inc. v. Medical Emergency Services Associates (MESA) S.C., 964 F.2d 599, 600 (7th Cir. 1992). However, if a TRO extends beyond the limitations provided in the relevant statute or regulation, a court might consider the TRO to be a preliminary injunction order (which is appealable) for purposes of appeal. Compare Geneva Assurance Syndicate, supra, 964 F.2d at 600 (ex parte TRO is not appealable even though extended beyond allowable time limit), with Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Salvano, 999 F.2d 211, 213 n.2 (7th Cir. 1993) (“After 20 days an unappealable TRO becomes an appealable preliminary injunction.”).
PRACTICE POINTER
The following checklist can assist counsel seeking a TRO: 1. summons; 2. complaint (should be verified for several reasons); 3. affidavits (may not be necessary if complaint is verified); 4. motion for TRO; 5. supporting brief; 6. motion for expedited discovery; 7. proposed order describing the prohibited (and/or affirmatively required) conduct in accordance with 735 ILCS 5/11-101 or Fed.R.Civ.P. 65, listing the due dates and deadlines for expedited discovery and requiring the preservation of evidence;
14 — 8
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.4
8. injunction bond (if required); 9. motion (and proposed order) for the appointment of a special process server (if applicable); 10. notices of deposition, discovery requests, and requests to admit (if applicable); and 11. proposed protective order (if applicable).
B. [14.4] Preliminary Injunctions The purpose of a preliminary injunction is to preserve the status quo pending a trial on the merits. Federal Trade Commission v. Lifewatch Inc., No. 15 C 5781, 2016 WL 1315063, *2, (N.D.Ill. Mar. 31, 2016) (appeal docketed 16-2310); Fraternal Order of Police, Chicago Lodge No. 7 v. City of Chicago, 2016 IL App (1st) 143884, ¶25, 59 N.E.3d 96, 405 Ill.Dec. 803 (1st Dist. 2016), citing Beahringer v. Page, 204 Ill.2d 363, 789 N.E.2d 1216, 1227, 273 Ill.Dec. 784 (2003). The standard for obtaining a preliminary injunction is similar to that for seeking a (non-ex parte) temporary restraining order. See Capgemini Financial Services USA Inc. v. Infosys Ltd., No. 14 C 464, 2014 WL 340206, *1 (N.D.Ill. Jan. 30, 2014) (“The standard governing temporary restraining orders is the same as that for preliminary injunctions.”), citing Lee v. Orr, No. 13-cv8719, 2013 WL 6490577, *2 (N.D.Ill. Dec. 10, 2013); Instant Technology, LLC v. DeFazio, No. 12 C 491, 2012 WL 357031, *3 (N.D.Ill. Feb. 1, 2012). A party seeking preliminary injunctive relief in a federal court pursuant to Fed.R.Civ.P. 65(a) generally must establish that (1) it has a better than negligible likelihood of prevailing on the merits, (2) it has no adequate remedy at law, (3) it will suffer irreparable harm if the injunction is not issued, (4) the irreparable harm it will suffer if the injunction is not granted is greater than the irreparable harm the defendant will suffer if the injunction is granted, and (5) an injunction will not harm the public interest. See Meridian Mutual Insurance Co. v. Meridian Insurance Group, Inc., 128 F.3d 1111, 1114 – 1115 (7th Cir. 1997). The federal courts apply this standard in two stages, initially assessing the first three criteria, and, once those are met, then balancing the harm each party faces and assessing the impact of the requested injunction on the public interest. See Turnell v. CentiMark Corp., 796 F.3d 656, 662 (7th Cir. 2015); Traffic Tech, Inc. v. Kreiter, No. 14-cv-7528, 2015 WL 9259544, *16, (N.D.Ill. Dec. 18, 2015); Edgebrook Bank v. Federal Deposit Insurance Corp., No. 15 C 2759, 2015 WL 1918978, *4 (N.D.Ill. Apr. 28, 2015). Courts in the Seventh Circuit use a “sliding scale” when weighing harm, relative to the merits of the case. Traffic Tech, supra, 2015 WL 9259544 at *16. “The more likely it is that [the moving party] will win its case on the merits, the less the balance of harms need weigh in its favor.” Planned Parenthood of Indiana, Inc. v. Commissioner of Indiana State Department of Health, 699 F.3d 962, 972 (7th Cir. 2012), quoting Girl Scouts of Manitou Council, Inc. v. Girl Scouts of U.S. of America, Inc., 549 F.3d 1079, 1100 (7th Cir. 2008). To obtain preliminary injunctive relief in the Illinois state courts, a plaintiff must establish that (1) there is a clearly ascertainable right in need of protection, (2) there is a reasonable
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 9
§14.4
INTELLECTUAL PROPERTY LAW
likelihood of success on the merits, (3) there is no adequate remedy at law, (4) there will be irreparable harm if the injunction is not granted, and (5) the benefits of granting the injunction outweigh the burdens. Travelport, LP v. American Airlines, Inc., 2011 IL App (1st) 111761, ¶33, 958 N.E.2d 1075, 354 Ill.Dec. 879, citing Save the Prairie Society v. Greene Development Group, Inc., 323 Ill.App.3d 862, 752 N.E.2d 523, 528, 256 Ill.Dec. 643 (1st Dist. 2001); Granberg v. Didrickson, 279 Ill.App.3d 886, 665 N.E.2d 398, 400, 216 Ill.Dec. 338 (1st Dist. 1996); Forest Preserve District of Cook County v. Mount Greenwood Bank Land Trust 5-0899, 219 Ill.App.3d 524, 579 N.E.2d 1066, 1069, 162 Ill.Dec. 252 (1st Dist. 1991). The standard of proof applied to each of these elements is that the plaintiff must establish a “fair question” as to each of the elements in order to secure interim injunctive relief. Smith v. Department of Natural Resources, 2015 IL App (5th) 140583, ¶21, 35 N.E.3d 1281, 394 Ill.Dec. 312. See Travelport, LP, supra, 2011 IL App (1st) 111761 at ¶33, citing Clinton Landfill, Inc. v. Mahomet Valley Water Authority, 406 Ill.App.3d 374, 943 N.E.2d 725, 729, 348 Ill.Dec. 117 (4th Dist. 2010); Buzz Barton & Associates, Inc. v. Giannone, 108 Ill.2d 373, 483 N.E.2d 1271, 1275, 91 Ill.Dec. 636 (1985). Generally speaking, however, although the standards for the two types of injunctions look very much alike, the procedures used to obtain a TRO and a preliminary injunction have some important differences. For example, unlike TROs, preliminary injunctions may not be granted ex parte. 735 ILCS 5/11-102; Fed.R.Civ.P. 65(a)(1). Notice to the opposing party therefore must be given. This is consistent with the fundamental difference in the nature of the two proceedings: while a TRO is short-term emergency relief usually granted without an evidentiary hearing, a preliminary injunction generally will last until trial and usually is granted only after an evidentiary proceeding that is often very much like a trial. However, the same rule of thumb applies to preliminary injunctions as to TROs: know your judge. Some judges will prefer to decide a motion for preliminary injunction on the basis of written submissions and deposition testimony, forgoing a live hearing. The most common practice, however, is to hold a hearing at which live witness testimony and documentary evidence are presented for the court’s consideration. At least in state court, an evidentiary hearing on a motion for preliminary injunction is required if fact issues have been joined (i.e., if a verified answer has been filed denying the material allegations of the complaint). See, e.g., Rosario D. Salerno’s Sons, Inc. v. Butta, 263 Ill.App.3d 42, 635 N.E.2d 1339, 1342, 200 Ill.Dec. 756 (1st Dist. 1994); Peoples Gas Light & Coke Co. v. City of Chicago, 117 Ill.App.3d 353, 453 N.E.2d 740, 742, 72 Ill.Dec. 865 (1st Dist. 1983). Therefore, defense counsel would be wise to file a verified answer prior to disposition of a preliminary injunction motion in order to secure the opportunity to present evidence in opposition to the motion. Meeting the requirements for emergency injunctive relief in trade secret cases might be easier than with other types of claims if a bona fide trade secret truly is in danger. There is support for the proposition that, when injunctive relief is requested pursuant to a statute that explicitly authorizes such relief, there is a rebuttable presumption of irreparable harm, and some courts have applied that rule to trade secrets cases. See, e.g., Intertek USA Inc. v. AmSpec, LLCI, No. 14 CV 6160, 2014 WL 4477933, *6 (N.D.Ill. Sept. 11, 2014) (“There is a [rebuttable] presumption of
14 — 10
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.4
irreparable harm to the plaintiff in cases of trade secret misappropriation.”), citing Computer Associates International v. Quest Software, Inc., 333 F.Supp.2d 688, 700 (N.D.Ill. 2004). This presumption is sometimes based on the ephemeral and fragile nature of trade secrets and the difficulty in quantifying the harm arising from misappropriation (Intertek USA, supra, 2014 WL 4477933 at *6) and is sometimes based on the statutory nature of trade secret claims (Lucini Italia Co. v. Grappolini, No. 01 C 6405, 2003 WL 1989605, *18 (N.D.Ill. Apr. 28, 2003) (“[W]here a statute expressly authorizes injunctive relief, a plaintiff need only show defendant’s violation of the Act and that plaintiff has standing to pursue the cause. . . . The general rules of equity requiring a showing of irreparable injury and a lack of an adequate remedy at law need not be shown,” citing Illinois Bell Telephone Co. v. Lake County Grading Company of Libertyville, Inc., 313 Ill.App.3d 184, 728 N.E.2d 1178, 1181, 245 Ill.Dec. 821 (2d Dist. 2000) (interpreting Illinois Underground Utility Facilities Damage Prevention Act); PepsiCo, Inc. v. Redmond, No. 94 C 6838, 1996 WL 3965 (N.D.Ill. Jan. 2, 1996) (and cases cited therein)). But see Bedrossian v. Northwestern Memorial Hospital, 409 F.3d 840, 843 (7th Cir. 2005) (when statutory injunctive relief is permissive rather than mandatory, plaintiff must show irreparable harm); International Profit Associates, Inc. v. Paisola, 461 F.Supp.2d 672 (N.D.Ill. 2006) (even when irreparable harm is presumed, plaintiff still must show inadequacy of legal remedy). However, a 2006 U.S. Supreme Court decision is often invoked to question whether trade secret plaintiffs can continue to rely on the presumption of irreparable harm. In eBay Inc. v. MercExchange LLC, 547 U.S. 388, 394, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006), the Supreme Court held, in the context of considering permanent injunctive relief under the Patent and Copyright Acts, that a trial court should not “presume” irreparable harm from continuing acts of infringement. Instead, the patent or copyright owner must satisfy the requirements set in Fed.R.Civ.P. 65 for injunctive relief and must establish, not simply allege or presume, irreparable harm. Application of this ruling to the trademark and trade secret context raises serious questions. For example, unlike in the patent and copyright realm, the entire property interest in a trade secret can be extinguished by disclosure of the secret. Nonetheless, some courts have deemed the eBay holding to apply to “intellectual property cases” generally and have invoked eBay to bar application of the traditional presumption of irreparable harm in trade secret cases. See, e.g., Southeast X-Ray, Inc. v. Spears, 929 F.Supp.2d 867, 872 (W.D.Ark. 2013) (deeming eBay applicable, and presumption of irreparable harm no longer available, in “intellectual property disputes” and declining to presume irreparable harm based on allegations of trademark and trade secrets misappropriation); Faiveley Transport Mamlo Ab v. Wabtec Corp., 559 F.3d 110, 118 (2d Cir. 2009) (same). Even without a waiver of the traditional equitable requirements, however, the “irreparable harm” and “inadequate remedy at law” prongs of the injunction standard usually can be met without difficulty in trade secret cases since courts readily find that this type of injury is imminent upon a showing that a trade secret is in danger of being taken or disclosed. See, e.g., OptionMonster Holdings, Inc. v. Tavant Technologies, Inc., No. 10 C 2792, 2010 WL 2639809 (N.D.Ill. June 29, 2010); Ultraviolet Devices, Inc. v. Kubitz, No. 09-cv-5697, 2009 WL 3824724 (N.D.Ill. Nov. 13, 2009); IDS Financial Services, Inc. v. Smithson, 843 F.Supp. 415, 418 – 419 (N.D.Ill. 1994); Prentice Medical Corp. v. Todd, 145 Ill.App.3d 692, 495 N.E.2d 1044, 1051, 99 Ill.Dec. 309 (1st Dist. 1986) (irreparable harm flows from transgression of continuing nature, such as ongoing damage to goodwill or loss of competitive position).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 11
§14.5
INTELLECTUAL PROPERTY LAW
If and when a preliminary injunction issues, the order must be in writing and must comply with the numerous and specific requirements for injunctive relief generally. 735 ILCS 5/11-101 through 11-110; Fed.R.Civ.P. 65. The party seeking to enforce a preliminary injunction also must comply with the rules regarding service of the injunction on those to be bound. C. [14.5] Issues Relating to Interlocutory Injunctive Relief One step a trade secrets owner can take to better his or her chances of obtaining interlocutory relief is to contractually provide for such relief. Agreements with employees and/or business partners can include a provision specifying the appropriateness and availability of a temporary restraining order and preliminary injunctive relief. While such provisions do not routinely dictate the result in trade secret cases, some courts have noted their existence — or absence — in determining what relief to award the plaintiff. See Traffic Tech, Inc. v. Kreiter, No. 14-cv-7528, 2015 WL 9259544, *8 (N.D.Ill. Dec. 18, 2015) (“Defendant Kreiter’s employment agreement does not discuss the permissible remedies for breaches of that agreement, and thus the remedies available for this claim are governed by Illinois law.”); OptionsCity Software, Inc. v. Baumann, No. 15 C 5019, 2015 WL 3855622, *5 (N.D.Ill. June 19, 2015) (“Based upon the entire record, the Court finds that OptionsCity has demonstrated that it will suffer irreparable harm in the absence of temporary injunctive relief. First, the Employment Agreement specifically provides that a breach of the restrictive covenant is acknowledged to cause irreparable harm.”). One of the most important aspects of obtaining effective injunctive relief is making sure that the injunction is binding on all of the parties who might be in a position to disclose, use without authorization, or otherwise impair the plaintiff’s trade secret. Service of the injunction order is the key to enforcement. 735 ILCS 5/11-101 provides that all injunctions (including TROs and preliminary injunctions) are “binding only upon the parties to the action, their officers, agents, employees, and attorneys, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise.” Fed.R.Civ.P. 65(d)(2) contains a similar provision. Therefore, it is usually not necessary to name as a defendant every person or entity who has participated in the misappropriation. Indeed, strategic considerations often cause a plaintiff to consider not suing all possible defendants. In such cases, these other persons and entities in active concert or participation with the defendants will be bound by the injunction as long as they have actual notice of it. While the rules do not require personal service in order for someone to have “actual notice” of the injunction, it is the surest way to ensure and prove notice, and personal service should be effected whenever possible on those who have participated or who might participate in the conduct of the defendants. TROs and preliminary injunctions are often contingent on the posting of a bond. The purpose of a bond is to guaranty the availability of funds with which to compensate the defendant if the interlocutory injunction turns out to have been improvidently granted. Therefore, the amount of the bond is dictated by the costs and other damages that a defendant can be expected to incur as a result of complying with the injunction, with the idea that these costs can be paid to the defendant should the injunction later be found to have been wrongfully issued. Damages for an improvidently granted injunction are generally limited to the amount of the bond. See Mead
14 — 12
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.5
Johnson & Co. v. Abbott Laboratories, 209 F.3d 1032, 1033 (7th Cir. 2000) (“compensation for harm caused by the injunction cannot exceed the amount of the bond”), and A.J. Canfield Co. v. Vess Beverages, Inc., 796 F.2d 903, 909 (7th Cir. 1986), both citing Coyne-Delany Co. v. Capital Development Board of State of Illinois, 717 F.2d 385 (7th Cir. 1983). See also United Mail Order, Warehouse & Retail Employees Union, Local 20 v. Montgomery Ward & Co., 9 Ill.2d 101, 137 N.E.2d 47, 52 (1956). The Federal Rule of Civil Procedure relating to the posting of a bond in interlocutory situations is worded so as to make bond mandatory: The court may issue a preliminary injunction or a temporary restraining order only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained. The United States, its officers, and its agencies are not required to give security. Fed.R.Civ.P. 65(c). See also A.J. Canfield, supra, 796 F.2d at 909; John Nuveen & Co. v. New York City Housing Development Corp., No. 86 C 2583, 1986 WL 5780 (N.D.Ill. May 9, 1986). Under Illinois law, however, requiring a bond for an interlocutory injunction is left to the court’s discretion. See 735 ILCS 5/11-103; Save the Prairie Society v. Greene Development Group, Inc., 338 Ill.App.3d 800, 789 N.E.2d 389, 392, 273 Ill.Dec. 489 (1st Dist. 2003) (status as not-for-profit serving public interest or plaintiffs limited financial resources may warrant waiver of bond requirement). Nonetheless, plaintiffs should still assume that a bond is likely to be required in state court, as well, and should prepare to address the rules relating to the issuance of a bond in §§11-103 through 11-105 of the Code of Civil Procedure, 735 ILCS 5/11-103 through 5/11-105. A plaintiff seeking interlocutory injunctive relief should make the necessary arrangements for a bond in advance of the hearing (e.g., through its insurance company or through a bonding agency). When days (or even hours) are of critical importance, a plaintiff who has successfully obtained a TRO or a preliminary injunction will not want to delay the enforcement of the order while making the necessary arrangements to post a bond. Each party should be prepared to address at the injunction hearing the bond amount that it believes is most appropriate. However, a plaintiff often will wait for the defendant to raise the issue. As with most issues relating to equitable relief, views regarding the amount of an appropriate bond can vary widely from one judge to the next and will depend on the circumstances of each case. See Save the Prairie, supra, 789 N.E.2d at 393. Some legal research and investigation regarding a judge’s approach to the determination of a bond amount, therefore, is often very helpful.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 13
§14.6
INTELLECTUAL PROPERTY LAW
PRACTICE POINTER
At the hearing regarding the interlocutory injunction, be prepared to address the amount of an appropriate bond, regardless of which side you are on. A party that does not prepare on this point risks leaving the judge without a well-reasoned alternative to the opposing party’s offer or demand.
Finally, as a legal matter, disposition of a motion for TRO or preliminary injunction is not a final disposition on the merits. Spencer v. Community Hospital of Evanston, 30 Ill.App.3d 285, 332 N.E.2d 525, 526 (1st Dist. 1975) (“The finding of the trial court denying the preliminary injunction is not dispositive of the merits of the case, and plaintiff is not foreclosed from a full and complete hearing on all the issues contained in the complaint.”), overruled by Reliable Fire Equiptment Co. v. Arredondo, 2011 IL 111871, ¶43, 965 N.E.2d 393, 358 Ill.Dec. 322. See also Pampered Chef v. Alexanian, No. 10 C 1399, 2011 WL 4738329, *2 (N.D.Ill. Oct. 7, 2011) (ruling on “preliminary injunction is preliminary, and involves ‘significantly different’ inquiries than resolution of a case on the merits . . . the findings of fact and conclusions of law made by a court granting or denying a preliminary injunction are not binding at a trial on the merits”). This makes sense; interlocutory injunction proceedings should address “the likelihood of success” rather than decide the case. Arthur J. Gallagher & Co. v. Roi, 2015 IL App (1st) 140786-U, ¶27. Nonetheless, as a practical matter, disposition of a motion for interlocutory injunction generally communicates the judge’s view of the case in a way that tends to facilitate settlement. D. Other Possible Interlocutory Remedies and Orders 1. [14.6] Orders To Preserve Evidence In trade secret cases, the defendant rarely admits to taking or using the information at issue, and proof of misappropriation often is accomplished by means of circumstantial evidence. See, e.g., RKI, Inc. v. Grimes, 177 F.Supp.2d. 859, 876 – 877 (N.D.Ill. 2001) (and cases cited therein). Moreover, evidence of misappropriation very often resides in the defendant’s sole possession and control. Sokol Crystal Products, Inc. v. DSC Communications Corp., 15 F.3d 1427, 1432 (7th Cir. 1994). This evidence may be in danger of dissipation or spoliation as soon as a plaintiff makes public its misappropriation claim. This is especially true with the proliferation of the use of computers and the Internet as a means for misappropriation — whatever electronic evidence that may exist regarding the downloading, e-mailing, or copying of an electronic file can easily be destroyed by pressing a few buttons on a keyboard and likely will be “written over” with the passage of time and the addition of new data to the hardware on which the evidence resides. A plaintiff may better ensure its access to this evidence by obtaining an order for preservation of the evidence at the outset of the case. This type of order may be obtained under the rules for temporary restraining orders and the authority of the Illinois Trade Secrets Act, which provides: “In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by a court order.” 765 ILCS 1065/3(c).
14 — 14
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.6
While a judge may be reluctant to issue a TRO ex parte, judges usually are more amenable to issuing preservation orders on an ex parte basis since the court has an obvious interest in preserving evidence relevant to the dispute that it will be deciding, and the defendant usually has no legitimate interest in destroying documents and other tangible evidence pertaining to the plaintiff’s allegations. Filing such a motion can serve multiple purposes; it can protect and preserve crucial evidence, and it gives the plaintiff a chance to tell its story to the court, usually on an ex parte basis. If successful, a preservation motion also allows the plaintiff to start the case with a victory that might provide useful momentum. In order to obtain a preservation order, the moving party will need to describe clearly what records and information are in peril and make a case for why these items are in danger of being lost or destroyed. In today’s electronic age, it is often easy to show that electronic data is in peril, due to the constant (and automatic) destruction of electronic records pursuant to the normal document retention and destruction procedures in place at most companies. See, e.g., Wiginton v. Ellis, No. 02 C 6832, 2003 WL 22439865, *7 (N.D.Ill. Oct. 27, 2003) (once party is on notice that files or documents in its possession are relevant to pending litigation, failure to prevent destruction of relevant documents crosses line between negligence and bad faith, even though documents are destroyed according to routine document retention policy); In re Kmart Corp., 371 B.R. 823, 849 (Bankr. N.D.Ill. 2007) (full sanctions not warranted when debtor delayed review of its electronic files and, as result, debtor’s document retention/destruction policy could have resulted in systematic destruction of electronic information because much of data may have been recoverable, and plaintiff failed to prove “bad faith or willful misconduct”). This showing is also helped by the way computers work (i.e., as a computer is used, information and data contained on its hard drive are automatically written over and replaced by fresh data). See, e.g., Antioch Co. v. Scrapbook Borders, Inc., 210 F.R.D. 645, 652 (D.Minn. 2002) (when defendants’ computer equipment may have had relevant information that was being lost through normal use of computer, defendants were ordered to allow plaintiff’s computer expert to make mirror image of defendants’ hard drives). Moreover, if certain electronic files are accessed — or even, in some cases, if a computer is turned on — the information on the computer regarding these files, called “metadata,” may be forever altered. See, e.g., Inventory Locator Service, LLC v. PartsBase, Inc., No. 02-2695-MaV, 2005 WL 6062855, *7 (W.D.Tenn. Oct. 19, 2005) (metadata changes every time media is “touched” either manually or automatically). The content of e-mail, social media, and cloud storage accounts also may be altered over time. Therefore, if electronic files are at issue in the case, it may be important to preserve, as soon as possible, these files and the hardware and/or accounts in which the files reside.
PRACTICE POINTER
If the defendant has stored or accessed the alleged trade secrets on a computer, this computer may contain useful information about these electronic files, such as the date on which the files were last accessed, as well as evidence regarding the transfer of the files. If the computer remains in the defendant’s possession, the plaintiff will want to gain access to (or at least preserve) the hardware, as soon as possible, in order to obtain the information residing in it. If the hardware is in the plaintiff’s possession and the defendant believes that the metadata and other information on the hardware will show the defendant’s innocence, defense counsel should consider requesting preservation of the evidence.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 15
§14.7
INTELLECTUAL PROPERTY LAW
At the very least, counsel should consider sending a letter at the outset of the litigation demanding that relevant evidence be preserved. In making such a demand, however, a party should bear in mind the old rule about “sauce for the gander” and be prepared to preserve and produce whatever similar or comparable evidence it might possess. 2. [14.7] Expedited Discovery For many reasons, a trade secret plaintiff usually needs expedited discovery. First, a plaintiff who believes that its trade secrets are in peril generally would be expected to push for the earliest possible resolution of its claims, and expedited discovery is the usual method of putting a case on the fast track to resolution and uncovering the evidence that will be presented at the preliminary injunction hearing. Of course, a plaintiff who has received a satisfactory temporary restraining order with an unlimited duration may be under little pressure to proceed to an evidentiary hearing, but in such a case the defendant or the court usually will push for such a hearing, especially if the TRO is significantly hampering the defendant’s activities. Second, the substantial cost and inconvenience posed by expedited discovery might well put sufficient pressure on the defendant to result in an offer of settlement. Consequently, a plaintiff often seeks expedited discovery at the outset of the case, filing a motion for expedited discovery together with the complaint and preliminary injunction motion. Indeed, a plaintiff seeking a TRO often includes provisions and deadlines for expedited discovery in the proposed TRO. 3. [14.8] Seizure Closely related to the remedies of expedited discovery and the preservation of evidence are the remedies of seizure and forfeiture. There are a number of circumstances in which a trade secret plaintiff might wish to obtain possession of documents or information prior to trial. For example, as discussed in §14.6 above, a computer might contain crucial evidence or the trade secrets themselves and, therefore, present the risk of disclosure or spoliation. Due to the enactment of the Defend Trade Secrets Act, which amended the Economic Espionage Act, there is now a divergence in the treatment of such relief under state and federal law. (a)
[14.9] Federal Law Seizures
With the May 2016 amendments to the Economic Espionage Act, trade secrets plaintiffs enjoy both the option of a federal civil cause of action as well as a more expansive array of immediate remedies, including emergency ex parte seizure orders to address exigent situations. Expressly limited to “extraordinary circumstances,” civil ex parte seizure orders are available under the EEA when normal procedures and relief — such as temporary restraining orders and preservation orders discussed in §§14.3 – 14.6 above — are not adequate to prevent “the propagation or dissemination of the trade secret.” 18 U.S.C. §1836(b)(2)(A). Such circumstances must be proven by affidavit or verified complaint. Id. The amendments to §1836 of the EEA allow issuance of a civil ex parte seizure only when the court has made the traditional findings required for the entry of interlocutory relief, together with additional findings supporting the inability to provide notice without endangering the material to be seized. Specifically, the court must determine that “it clearly appears from specific facts” that
14 — 16
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.9
(I) an order issued pursuant to Rule 65 of the Federal Rules of Civil Procedure or another form of equitable relief would be inadequate to achieve the purpose of this paragraph because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order; (II) an immediate and irreparable injury will occur if such seizure is not ordered; (III) the harm to the applicant of denying the application outweighs the harm to the legitimate interests of the person against whom seizure would be ordered of granting the application and substantially outweighs the harm to any third parties who may be harmed by such seizure; (IV) the applicant is likely to succeed in showing that — (aa) the information is a trade secret; and (bb) the person against whom seizure would be ordered — (AA) misappropriated the trade secret of the applicant by improper means; or (BB) conspired to use improper means to misappropriate the trade secret of the applicant; (V) the person against whom seizure would be ordered has actual possession of — (aa) the trade secret; and (bb) any property to be seized; (VI) the application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, identifies the location where the matter is to be seized; (VII) the person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person; and (VIII) the applicant has not publicized the requested seizure. 18 U.S.C. §1836(b)(2)(A)(ii). In addition to making this substantial showing, a plaintiff seeking an ex parte seizure order must take care that the resulting order satisfies the rigorous requirements of §1836(b)(2)(B). For example, such orders must (1) contain findings of fact and conclusions of law, (2) provide for the narrowest seizure necessary to protect against destruction of evidence and dissemination of trade
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 17
§14.9
INTELLECTUAL PROPERTY LAW
secrets, and (3) direct that the seizure be conducted in a manner that minimizes the interruption of the business operations of third parties and, to the extent possible, the legitimate business operations of the accused. 18 U.S.C. §§1836(b)(2)(B)(i), 1836(b)(2)(B)(ii). Ex parte seizure orders also must be accompanied by appropriate provisions assuring protection of the seized property, including by prohibiting or limiting access to the property. 18 U.S.C. §1836(b)(2)(B)(iii). Finally, all ex parte seizure orders must require posting of an appropriate bond and must set a date for a seizure hearing — to occur not less than seven days after entry of the seizure order — when the movant will be required to prove the facts supporting issuance of the seizure order. 18 U.S.C. §§1836(b)(2)(B)(v), 1836(b)(2)(B)(vi), 1836(b)(2)(F). Once issued, the ex parte seizure order must be served and effectuated by a federal law enforcement officer. 18 U.S.C. §1836(b)(2)(E). That officer may request the assistance of an independent technical expert who may, subject to an appropriate nondisclosure undertaking, participate in and assist with the seizure. Id. All seized materials will be taken into the custody of the court, where they are to be protected from physical and electronic access, including by preventing connection of seized equipment to any network or Internet. 18 U.S.C. §1836(b)(2)(D). A party or any person claiming to have an interest in the seized materials may move (either with notice or ex parte) for encryption of those materials. 18 U.S.C. §1836(b)(2)(H). Presumably, the owner of the seized materials will demand return of seized equipment and other materials after location and removal of relevant documents and files, and the EEA allows the court to appoint a special master to facilitate that effort. 18 U.S.C. §1836(b)(2)(D)(iv). A seizure hearing must occur within seven days of the seizure unless the party to whom the order is directed — and anyone else who is harmed by the order — consents to a longer time. 18 U.S.C. §1836(b)(2)(B)(v). At the hearing, the party who obtained the order will have the burden to prove all facts supporting the order. Failure to successfully carry that burden will result in dissolution or modification of the order. 18 U.S.C. §1836(b)(2)(F)(ii). Challenges to the order need not await the hearing, however. The party against whom the order was issued — or anyone else harmed by the order — may seek dissolution or modification at any time, with notice. 18 U.S.C. §1836(b)(2)(F)(iii). Discovery, too, can occur at any time; the amended EEA allows the court to modify the normal time limits for discovery as needed to facilitate the purpose of the expedited hearing. 18 U.S.C. §1836(b)(2)(F)(iv). Plaintiffs are cautioned to exercise care and restraint in considering the ex parte seizure option, as making a mistake can result in substantial negative repercussions. Any person who suffers damage due to a wrongful or excessive seizure has a cause of action against the movant and is entitled to “such relief as may be appropriate, including damages for lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney’s fee. The court in its discretion may award prejudgment interest.” 15 U.S.C. §1116(d)(11). See also 18 U.S.C. §1836(b)(3)(D). The amount of damages for wrongful or excessive seizure is not limited by the amount of the bond entered by the court. 18 U.S.C. §1836(b)(2)(G).
14 — 18
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.9
PRACTICE POINTER
The following checklist can assist counsel seeking an ex parte seizure order. Items to be contained or addressed within the seizure order: 1. findings of fact and conclusions of law, including on the following points (18 U.S.C. §1836(b)(2)(B)(i)): a. the trade secret at issue is related to a product or service used in, or intended for use in, interstate or foreign commerce (18 U.S.C. §1836(b)(1)); b. extraordinary circumstances (18 U.S.C. §1836(b)(2)(A)(i)); c. seizure is necessary to prevent the propagation or dissemination of the trade secret; d. a Fed.R.Civ.P. 65 order and other equitable relief would not be complied with (18 U.S.C. §1836(b)(2)(A)(ii)); e. all traditional requirements for interlocutory injunctive relief, including immediate and irreparable harm, that the balance of harms favors the movant, and likelihood of success (18 U.S.C. §§1836(b)(2)(A)(ii)(II), 1836(b)(2)(A)(ii)(III), 1836(b)(2)(A)(ii)(IV)); f.
the person to whom seizure is requested has actual possession of the trade secret and property to be seized (18 U.S.C. §1836(b)(2)(A)(ii)(V));
g. the person against whom seizure is requested (or those acting in concert with him) would destroy, move, hide, or otherwise make the matter to be seized inaccessible to the court, if notice were provided (18 U.S.C. §1836(b)(2)(A)(ii)(VII)); and h. the applicant has not §1836(b)(2)(A)(ii)(VIII)).
publicized
the
requested
seizure
(18
U.S.C.
2. the matter to be seized and its location are described with reasonable particularity (18 U.S.C. §1836(b)(2)(A)(ii)(VI)); 3. narrowest seizure necessary (18 U.S.C. §1836(b)(2)(B)(ii)); 4. direction that the seizure be conducted in a manner that minimizes disruption of the defendants’ legitimate business operations and the operations of third parties (id.); 5. protection of the seized items from copying and disclosure, e.g., by prohibiting access by others (18 U.S.C. §1836(b)(2)(B)(iii));
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 19
§14.10
INTELLECTUAL PROPERTY LAW
6. guidance to law enforcement regarding use of force to access locked areas and hours during which seizure order may be executed (18 U.S.C. §1836(b)(2)(B)(iv)); and 7. a date for a seizure hearing to occur no later than seven days after issuance of the order (18 U.S.C. §1836(b)(2)(B)(v)). Additional items to be addressed by the court, either in seizure order or elsewhere, include 1. action shall be taken to protect the person against whom the order is directed from movant-caused publicity about the order (18 U.S.C. §1836(b)(2)(C)); 2. service and implementation of seizure order shall be carried out by federal law enforcement (assistance by state or local law enforcement may be allowed by the court) (18 U.S.C. §1836(b)(2)(E)); 3. seized materials are to be taken into the custody of the court, where they will be secured from physical and electronic access (18 U.S.C. §1836(b)(2)(D)(i)); 4. seized electronic storage media shall not be connected to a network or the Internet without both parties’ consent (18 U.S.C. §1836(b)(2)(D)(ii)); 5. appropriate measures to protect the confidentiality and security of the seized materials shall be taken, including seized materials that are unrelated to the trade secret (18 U.S.C. §1836(b)(2)(D)(iii)); 6. an independent technical expert may participate in the seizure, and/or a special master may be appointed, but he or she must be subject to a nondisclosure agreement (18 U.S.C. §§1836(b)(2)(D)(iv), 1836(b)(2)(E)); and 7. anyone claiming to have an interest in that material may make a motion to encrypt seized material (18 U.S.C. §1836(b)(2)(H)).
(b)
[14.10] State Law Seizures
While there is little published caselaw addressing the remedies of seizure and forfeiture in state court civil trade secret cases, the Illinois Trade Secrets Act provides that “[i]n appropriate circumstances, affirmative acts to protect a trade secret may be compelled by a court order.” 765 ILCS 1065/3(c). Such acts presumably could include an order requiring that evidence or other items be turned over to the plaintiff, to the court, or to some neutral party, whether for inspection, for safekeeping pending either a preliminary injunction or trial, or as a permanent remedy for misappropriation that has been proved at trial.
14 — 20
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.11
4. [14.11] Protective Orders Filing a lawsuit necessarily involves participation in the court system (a public institution) under procedural rules that, generally, favor free public access to the courts and to court records. The legal process poses a danger of disclosure to trade secrets in two ways. First, allowing the parties to obtain and plumb the alleged trade secrets in the discovery process necessarily puts this information at risk of disclosure beyond the confines of the lawsuit and its parties. Second, even if disclosure of the trade secrets is limited to the parties and their experts, such limited disclosure can put the information at risk — especially when the parties are competitors, as is often the case. For these reasons, parties to a trade secret case usually seek a protective order providing for the treatment and handling of confidential information during the discovery process. See Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc., 784 F.2d 1325, 1346 (7th Cir. 1986) (“Confidential information is customarily made available, if at all, under a protective order.”). Indeed, both the Illinois Trade Secrets Act and the Economic Espionage Act make this protection mandatory, providing that the courts shall take reasonable action to preserve the secrecy of an alleged trade secret by reasonable means. 765 ILCS 1065/6; 18 U.S.C. §1835(a). The EEA specifies that appropriate measures may include “orders,” and the ITSA elaborates further that reasonable means “may include granting protective orders in connection with discovery proceedings, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.” 765 ILCS 1065/6. Protective orders are available during the discovery stage, prior to any determination regarding the merits of the case, including a determination as to whether the relevant information does, in fact, constitute a trade secret. The EEA expressly provides for, and requires, appropriate orders governing the protection of materials taken into custody via ex parte seizure order. 18 U.S.C. §§1836(b)(2)(B)(iii), 1836(b)(2)(D). And as the Uniform Trade Secrets Act makes clear, pretrial measures, including protective orders, are available to safeguard “an alleged trade secret” before any binding determination on the merits. 18 U.S.C. §§1836(b)(2)(B)(iii), 1836(b)(2)(D). However, some jurisdictions — including most clearly and notably federal district courts within the Seventh Circuit — are becoming increasingly strict about the need to establish good cause for designating materials as confidential under a protective order. Harrisonville Telephone Co. v. Illinois Commerce Commission, 472 F.Supp.2d 1071, 1078 (S.D.Ill. 2006) (“courts have insisted on a particular and specific demonstration of fact, as distinguished from stereotyped and conclusory statements, in order to establish good cause”), citing Charles Alan Wright, et. al, Federal Practice and Procedure §2035 (3d ed. 2010) (collecting cases); Lemmermann v. Blue Cross Blue Shield of Wisconsin, No. 08-CV-779, 2008 WL 4999264, *2 (E.D.Wis. Nov. 21, 2008) (rejecting proposed protective order; parties must “show good cause” for order and explain what will be designated confidential); Oliver v. Tyson Foods, Inc., No. 1:11-CV-120, 2012 WL 370265, *2 (N.D.Ind. Feb. 3, 2012) (“Furthermore, the proposed order fails to adequately explain why the material it seeks to protect is confidential. ‘[M]erely asserting that a disclosure of the information ‘could’ harm a litigant’s competitive position is insufficient; the motion must explain how.’ ”), quoting Shepard v. Humke, IP 01-11-3-C-H/K, 2003 WL 1702256, *1 (S.D.Ind. Mar. 28, 2003).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 21
§14.11
INTELLECTUAL PROPERTY LAW
At the discovery stage, courts often enter protective orders to which the parties have stipulated. See Acuna v. Rudzinski, No. 00 C 5635, 2001 WL 1467529, *3 (N.D.Ill. Nov. 16, 2001) (“Most protective orders are prepared by the parties and submitted by agreement. There are better uses of a judge’s time than to review every line of an agreed protective order.”). These orders generally provide for the designation of certain materials (e.g., documents and deposition testimony) as “restricted information” or “confidential information” if these materials contain information that is claimed to be confidential. They also provide for the treatment of those materials by the litigants (e.g., requiring that designated materials must be stamped or marked with a particular legend prior to production and limiting their dissemination and use). In some cases, a party may wish to shield certain materials not only from dissemination to the public but also from disclosure to the other party. A protective order can be drafted to allow the designation of certain materials as for “attorneys’ eyes only” and can restrict the dissemination and disclosure of those materials to attorneys and outside experts only, prohibiting the business people within the opposing party from having access to the information. In re Zimmer Nexgen Knee Implant Products Liability Litigation, No. 11 C 5468, 2013 WL 6490343, *6 (N.D.Ill. Dec. 10, 2013). These orders are usually sought when the parties are competitors and there is a concern that the information disclosed in discovery might be used (either intentionally or inadvertently) in the business arena. The same rationale is sometimes used to bar in-house counsel from viewing confidential information revealed in discovery when the in-house lawyer is involved in the company’s business decisions. In this case, the protective order would provide for a designation along the lines of “outside experts’/attorneys’ eyes only” for certain categories of information. See, e.g., Matsushita Electric Industrial Co. v. United States, 929 F.2d 1577, 1580 (Fed.Cir. 1991); U.S. Steel Corp. v. United States, 730 F.2d 1465 (Fed.Cir. 1984); Thomas & Betts Corp. v. Panduit Corp., No. 93 C 4017, 1997 WL 603880 (N.D.Ill. Sept. 23, 1997). Indeed, when outside counsel for a party is involved in making business decisions for the party, even this outside counsel might also be prohibited from viewing the confidential and competitively sensitive information of the opposing party. Ball Memorial, supra. See also Brown Bag Software v. Symantec Corp., 960 F.2d 1465 (9th Cir.), cert. denied, 113 S.Ct. 198 (1992); Interactive Coupon Marketing Group, Inc. v. H.O.T! Coupons, LLC, No. 98 C 7408, 1999 WL 618969 (N.D.Ill. Aug. 9, 1999); In re Sibia Neurosciences, Inc., 132 F.3d 50 (Fed.Cir. 1997). If such a restriction is sought, however, it should be addressed at the outset, as after-the-fact limitations of this kind are difficult to obtain. See Methodist Health Services Corp. v. OSF Healthcare System, No. 14 CV 7748, 2014 WL 5465401, *2 (N.D.Ill. Oct. 27, 2014) (protective order made designated documents off-limits to inside counsel; court denied request to also prohibit outside lawyers with access to information from advising regarding certain business dealings). Caution must be exercised when drafting stipulated protective orders and submitting them to the judge for approval, especially in federal court. Several cases decided by the federal courts have criticized the practice of over-designating materials under stipulated protective orders and have scrutinized protective orders to make sure that the parties — and the trial court — are exercising some judgment regarding what may be designated as confidential. Jepson, Inc. v. Makita Electric Works, Ltd., 30 F.3d 854 (7th Cir. 1994); Citizens First National Bank of Princeton v. Cincinnati Insurance Co., 178 F.3d 943, 944 (7th Cir. 1999); Baxter International, Inc. v. Abbott Laboratories, 297 F.3d 544 (7th Cir. 2002). These decisions make it clear that the trial court may not act merely as a rubber stamp for the parties’ over-inclusive categorization and designation of discovery materials as confidential.
14 — 22
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.11
As a practical matter, it often is easier to obtain a protective order with respect to the discovery phase of the proceedings than it is to convince the court to limit access to the trial proceedings. There is a presumption in favor of open courtrooms and public access to court proceedings (Seattle Times Co. v. Rhinehart, 467 U.S. 20, 81 L.Ed.2d 17, 104 S.Ct. 2199, 2210 (1984) (Brennan, J., concurring)), and while many courts have ruled that restricting the public’s access to discovery proceedings and materials does not raise constitutional concerns (see, e.g., id.; Cipollone v. Liggett Group, Inc., 785 F.2d 1108, 1119 (3d Cir. 1986); Kamyr AB v. Kamyr, Inc., No. 91-CV-0453, 1992 WL 317529, **9 – 10 (N.D.N.Y. Oct. 30, 1992)), restrictions on the public’s access to trial proceedings are another matter (Seattle Times, supra, 104 S.Ct. at 2209 n.22; Baxter International, supra; In re Continental Illinois Securities Litigation, 732 F.2d 1302 (7th Cir. 1984); McLin v. City of Chicago, 133 F.R.D. 527 (N.D.Ill. 1990)). A court that was willing to restrict the public’s access to discovery proceedings and materials therefore may be less willing to continue those restrictions as the case moves into the trial phase. While §6 of the ITSA commands that the courts “shall preserve the secrecy of an alleged trade secret by reasonable means,” the parties and the court may disagree as to what measures are “reasonable,” especially when an impending trial increases the tension between trade secret preservation and free access to the courts. 765 ILCS 1065/6. Counsel for both parties should be prepared to revisit and address the issue of secrecy measures as part of their pretrial preparation. It is unreasonable, however, to expect these measures to eliminate all risk of unauthorized disclosure. Not even a well-drafted protective order will adequately protect the plaintiff’s claimed trade secrets in all cases. Specialty Chemicals & Services, Inc. v. Chandler, No. CIV.A.1:87CV-2338MHS, 1988 WL 618583 (N.D.Ga. Sept. 29, 1988); Litton Industries, Inc. v. Chesapeake & Ohio Ry., 129 F.R.D. 528 (E.D.Wis. 1990); Medical Billing Consultants, Inc. v. Intelligent Medical Objects, Inc., No. 01 C 9148, 2003 WL 1809465, *2 (N.D.Ill. Apr. 4, 2003). Protective orders entered in the discovery phase are not always extended to cover materials filed with the trial court, and materials accepted under seal at the trial stage can be unsealed on appeal. See, e.g., Baxter International, Inc. v. Abbott Laboratories, 297 F.3d 544, 545 (7th Cir. 2002) (motion to maintain documents under seal denied, stating “[i]nformation transmitted to the court of appeals is presumptively public because the appellate record normally is vital to the case’s outcome”); Newman v. Graddick, 696 F.2d 796, 801 (11th Cir. 1983) (trial court’s order receiving certain materials under seal reversed). Finally, even when the parties are allowed to file designated materials under seal, mistakes do happen, and confidential material can be made public through human error. See In re City of New York, 607 F.3d 923, 937 – 939 (2d Cir. 2010) (noting “how often there are all-too-human lapses with material filed ‘under seal,’ ” and listing numerous instances in which sealed materials were inadvertently made available to public). Due to the presumption in favor of open trial proceedings and to the risks inherent in attempting to limit disclosure of sensitive information — even when the court and the parties attempt in good faith to do so — litigation, therefore, will always pose at least some risk to the secrecy of an alleged trade secret. See, e.g., Computer Teaching Corp. v. Courseware Applications, Inc., 199 Ill.App.3d 154, 556 N.E.2d 816, 818, 145 Ill.Dec. 198 (4th Dist. 1990) (noting that Illinois Supreme Court rules require that trade secret, if relevant, must be disclosed in litigation under appropriate protective order); Coca-Cola Bottling Company of Shreveport, Inc. v. Coca-Cola Co., 107 F.R.D. 288 (D.Del. 1985) (ordering Coca-Cola to disclose formula in litigation).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 23
§14.12
INTELLECTUAL PROPERTY LAW
III. [14.12] POSTTRIAL AND “PERMANENT” RELIEF As a practical matter, most trade secret cases are won or lost with the issuance or denial of interlocutory injunctive relief. A plaintiff who is told that its case does not appear to be sufficiently strong to succeed on the merits or a defendant against whom an interlocutory injunction is entered often has strong incentive to settle the case without expending further resources or time on litigation. Moreover, a plaintiff who has succeeded in obtaining satisfactory interlocutory injunctive relief may find this relief — and the settlement opportunity that usually follows — to be an adequate remedy for the threat to its trade secrets and choose not to make the additional investment necessary to take the matter through a trial. For the plaintiffs who do proceed to trial, a wide array of possible remedies is available. The Illinois Trade Secrets Act provides for posttrial injunctive relief, compensatory damages, the payment of a reasonable royalty, punitive damages, and attorneys’ fees. The RESTATEMENTs of both torts and unfair competition address the remedies available in trade secret cases and may provide guidance to the extent that they are not inconsistent with the ITSA. See RESTATEMENT OF TORTS §757 (1939); RESTATEMENT (THIRD) OF UNFAIR COMPETITION §45 (1995). This full array of remedies is available under federal law as well, with the amended version of the Economic Espionage Act providing for injunctive relief, compensatory damages, exemplary damages of not more than double the compensatory award, and attorneys’ fees. 18 U.S.C. §1836(b)(3). A. [14.13] Compensatory Damages Both federal and Illinois law provide the trade secret plaintiff with several possible measures of compensatory damages. Specifically, a plaintiff can recover both its actual loss caused by the misappropriation and the unjust enrichment gained by the defendant to the extent that this unjust enrichment is not taken into account in computing actual loss. 765 ILCS 1065/4(a); 18 U.S.C. §1836(3)(B). If the plaintiff does not prove either actual loss or unjust enrichment “by a preponderance of the evidence,” the court is authorized to award “a reasonable royalty” as payment for the defendant’s “unauthorized disclosure or use of a trade secret.” 765 ILCS 1065/4(a). Each of these possible measures of damages is discussed in more detail in §§14.14 – 14.16 below. 1. [14.14] Plaintiff’s Actual Loss There are many ways in which a trade secret plaintiff might be harmed by the unauthorized use or disclosure of its trade secret, and, therefore, there are many ways for such a plaintiff to show its “actual loss.” As one trade secret opinion has explained: “[E]very case requires a flexible and imaginative approach to the problem of damages [and] the cases reveal that most courts adjust the measure of damages to accord with the commercial setting of the injury, the likely future consequences of the misappropriation, and the nature and extent of the use the defendant put the trade secret to after misappropriation.” University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 538, reh’g denied, 505 F.2d 1304 (5th Cir. 1974). As noted by the drafters of the RESTATEMENT (THIRD) OF UNFAIR COMPETITION, “The general rules relating to
14 — 24
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.14
the recovery of compensatory damages in tort actions apply in actions for the appropriation of trade secrets.” RESTATEMENT (THIRD) OF UNFAIR COMPETITION §45, cmt. a (1995). See also RESTATEMENT (SECOND) OF TORTS §§902 – 903 (1979) (defining “damages” and “compensatory damages” for tort claims in general). A trade secret plaintiff often is damaged through the loss of profits that the plaintiff would have earned but for the misappropriation. These lost profits usually take the form of the profits on sales that the plaintiff would have made but for the misappropriation. See Roton Barrier, Inc. v. Stanley Works, 79 F.3d 1112 (Fed.Cir. 1996). Lost profit damages are determined based on net numbers — revenues remaining after the deduction of expenses incurred in acquiring the profits — rather than gross revenues. Hemken v. First National Bank of Litchfield, 76 Ill.App.3d 23, 394 N.E.2d 868, 872, 31 Ill.Dec. 666 (4th Dist. 1979). Moreover, although it is helpful for a plaintiff to submit prior profit history, it is not essential. Hemken, supra. Actual loss damages might also be sought based on “price erosion,” or the amount that the plaintiff was compelled to reduce its prices as a result of the misappropriation, as well as loss of market share. See Roton Barrier, supra, 79 F.3d at 1120; Mangren Research & Development Corp. v. National Chemical Co., 87 F.3d 937 (7th Cir. 1996); RESTATEMENT (THIRD) OF UNFAIR COMPETITION §45, cmt. E (1995). Another measure of actual loss might be based on the plaintiff’s lost sales caused by the defendant’s distribution of defective products that incorporate the trade secrets. See Micro Data Base Systems, Inc. v. Dharma Systems, Inc., 148 F.3d 649 (7th Cir. 1998). If the trade secret has been “lost,” that is, if its secrecy has been destroyed, the plaintiff may be entitled to receive compensation for the loss of the secret itself. Some courts have measured this by adding up the plaintiff’s investment in the trade secret. Smith v. Dravo Corp., 208 F.2d 388, 392 – 393 (7th Cir. 1953) (measuring damages by amount of plaintiff’s capital investment in trade secret). The trade secret plaintiff bears the burden of proving its loss, including the amount of the loss and the cause of the loss. However, a trade secret plaintiff need not pinpoint the exact amount of damages with absolute certainty. Rather, the plaintiff generally “is required to prove the amount of such loss with only as much certainty as is reasonable under the circumstances.” RESTATEMENT (THIRD) OF UNFAIR COMPETITION §45, cmt. b. See also RESTATEMENT (SECOND) OF TORTS §912 (1979) (discussing requirement of “certainty” in calculating damages). This flexibility accorded to a trade secret plaintiff is grounded in the notion that a wrongdoer should not benefit from the plaintiff’s inability to prove the precise amount of damages. However, while damages need not be proven with “mathematical precision,” they “cannot be based upon conjecture or sheer speculation,” and it is “necessary that the evidence afford a reasonable basis for the computation of damages.” Midland Hotel Corp. v. Reuben H. Donnelley Corp., 118 Ill.2d 306, 515 N.E.2d 61, 66, 113 Ill.Dec. 252 (1987). See also Hemken v. First National Bank of Litchfield, 76 Ill.App.3d 23, 394 N.E.2d 868, 872, 31 Ill.Dec. 666 (4th Dist. 1979).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 25
§14.15
INTELLECTUAL PROPERTY LAW
2. [14.15] Defendant’s Unjust Enrichment A trade secret plaintiff also may recover the profits earned by the defendant as a result of its misappropriation of the trade secret (i.e., the defendant’s “unjust enrichment”). Under the Illinois Trade Secrets Act and the Economic Espionage Act, a plaintiff is entitled to recover both its own actual loss and the defendant’s unjust enrichment to the extent that the defendant’s gain is not taken into account when calculating actual loss. 765 ILCS 1065/4(a); 18 U.S.C. §1836(3)(B)(i)(II). This rationale for recovery is based on the premise that a wrongdoer should not derive a benefit from its wrongdoing. “Unjust enrichment” measures exactly that — the amount by which a defendant has been unjustly enriched. The appropriate amount of unjust enrichment damages is the amount by which the defendant actually benefited. See, e.g., County of Champaign v. Hanks, 41 Ill.App.3d 679, 353 N.E.2d 405, 409 (4th Dist. 1976) (noting appropriate measure for unjust enrichment damages is value of actual benefit received by defendant); Creative Demos, Inc. v. Wal-Mart Stores, Inc., 142 F.3d 367, 371 – 373 (7th Cir. 1998) (vacating and remanding unjust enrichment damages award because not based on actual benefit received by defendant). Consequently, a successful plaintiff may be entitled to recover only the net profits derived by the defendant from the misappropriation, not all revenues obtained by the wrongdoer. See RESTATEMENT (THIRD) OF UNFAIR COMPETITION §45, cmt. f (1995). Most courts, however, require the plaintiff to prove only the defendant’s gross sales, while the defendant must establish the amount of costs and expenses to be deducted from the gross sales numbers in order to reach net profits. Id. When calculating the plaintiff’s damages based on the defendant’s unjust enrichment, the damages must be based on the defendant’s actual financial performance, not on projected profits. The Federal Circuit has reversed a trial court decision allowing the plaintiff in a trade secret case to base its claim for unjust enrichment on the projected profits anticipated in an early business plan authored by the defendant rather than on evidence of what the defendant actually gained. See Litton Systems, Inc. v. Ssangyong Cement Industrial Co., 107 F.3d 30 (Fed.Cir. 1997). The Litton Systems court explained, “The district court’s theory of unjust enrichment as encompassing unrealized expected gain . . . is unsupported in the law of unfair competition and cannot serve as a valid basis for an award of damages.” [Emphasis added.] 1997 WL 59360 at *8. Another measure of the defendant’s unjust enrichment could be the savings that it achieved as a result of the misappropriation. See Web Communications Group, Inc. v. Gateway 2000, Inc., No. 93 C 6821, 1995 WL 23535, *2 (N.D.Ill. Jan. 17, 1995). 3. [14.16] Reasonable Royalty Both federal and state law offer an alternative remedy to the trade secret plaintiff: a “reasonable royalty.” Specifically, §3 of the Illinois Uniform Trade Secrets Act allows the use of a reasonable royalty as a remedy for future use of the trade secret, in lieu of an injunction, in certain circumstances:
14 — 26
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.16
If the court determines that it would be unreasonable to prohibit future use due to an overriding public interest, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time the use could have been prohibited. 765 ILCS 1065/3(b). This provision allows the court to assess a reasonable royalty against the defendant for his or her future use (for a limited period of time) of the trade secret as an alternative to posttrial injunctive relief prohibiting the defendant from using the trade secret, but only if an overriding public interest makes such an injunction unreasonable. The EEA contains a similar provision that states: “[I]n exceptional circumstances that render an injunction inequitable, [a court may grant an injunction] that conditions future use of the trade secret upon payment of a reasonable royalty for no longer than the period of time for which such use could have been prohibited.” 18 U.S.C. §1836(3)(A)(iii). A reasonable royalty may also be assessed as a remedy for past injury, if no other means of measuring damages is used. Section 4(a) of the ITSA states that such a royalty can remedy past misappropriation: If neither damages nor unjust enrichment . . . are [sic] proved by a preponderance of the evidence, the court may award damages caused by misappropriation measured in terms of a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret. 765 ILCS 1065/4(a). The EEA contains a similar provision. 18 U.S.C. §1836(3)(B)(ii). Thus, if the plaintiff cannot prove either its loss or the defendant’s gain by a preponderance of the evidence, damages may be premised on a reasonable royalty to be assessed against the defendant for its improper past use or disclosure of the trade secret. The concept probably derives from patent law, in which a reasonable royalty is the minimum damage award for patent infringement. See 35 U.S.C. §284. The law requires the royalty to be “reasonable.” There is little guidance regarding what this means under Illinois law, but the most common approach used in the federal courts is to ask what a willing buyer or licensee would have agreed to pay a willing seller or licensor for the trade secret in question. See, e.g., Forest Laboratories, Inc. v. Pillsbury Co., 452 F.2d 621 (7th Cir. 1971); RKI, Inc. v. Grimes, 200 F.Supp.2d 916, 926 (N.D.Ill. 2002). The calculation of a reasonable royalty is sometimes referred to as a “hypothetical negotiation” because the fact-finder is asked to imagine what amount the plaintiff and defendant would have arrived at as a mutually agreeable royalty to be paid by the defendant for its use of the information at issue had the parties negotiated such a royalty before the defendant commenced using the secret. See Sloan Valve Co. v. Zurn Indus., Inc., 33 F.Supp.3d 984, 990 (N.D.Ill. 2014); Forest Laboratories, supra; Miller UK Ltd. v. Caterpillar, Inc., No. 10-cv-03770, 2015 WL 10818831, *13 (N.D.Ill. Nov. 1, 2015). In conducting this hypothetical negotiation analysis, courts may consider how often the licensed invention will be later used, how many elements of a multi-component product are “infringing” (i.e., make use of the trade secret), and whether the infringing features create the basis for customer demand. See, e.g., Sloan Valve, supra, 33 F.Supp. 3d at 990. At least one federal district court has calculated a reasonable royalty based on the cost incurred by the plaintiff in developing the trade secret as well as the value of that secret during the period of the defendant’s use. RKI,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 27
§14.16
INTELLECTUAL PROPERTY LAW
supra, 200 F.Supp. at 926 – 927. Another federal court opinion identified various other approaches, including the “analytical method,” which focuses on the infringer’s projections of profit for the “infringing product” as well as an analysis of established royalties, if any. Sloan Valve, supra, 33 F.Supp. 3d at 990. Thus, in most jurisdictions, a reasonable royalty is calculated by analyzing a range of considerations based on evidence regarding such questions as the royalty practices and amounts in the pertinent industry, the licensing practices of the parties, and the value of the information at issue. Courts attempting to calculate a reasonable royalty often consider a long list of factors when determining what a reasonable royalty would be in a particular case, including a. “the prices past purchasers or licensees may have paid”; b. “[t]he royalties received by the plaintiff for the licensing of the trade secrets to others, which may prove an established royalty”; c. “[t]he rates paid by the defendant for the use of other trade secrets comparable to the trade secret in suit”; d. “[t]he portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the trade secret or analogous trade secrets”; e. “[t]he portion of the realizable profit that should be credited to the invention as distinguished from non-trade secret elements, the manufacturing process, business risks, or significant features or improvements added by the defendant”; f.
“the resulting and foreseeable changes in the parties’ competitive posture”;
g. “[t]he commercial relationship between the plaintiff and defendant, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter”; h. “[t]he plaintiff’s established policy and marketing program to maintain its trade secret by not licensing others to use the invention or by granting licenses under special conditions designed to preserve the trade secret”; i.
“the total value of the secret to the plaintiff, including plaintiff’s development costs and the importance of the secret to the plaintiff’s business”;
j.
“the nature and extent of the use the defendant intended for the secret”;
k. “whatever other unique factors in the particular case might have affected the parties’ agreement, such as the ready availability of alternative processes”;
14 — 28
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
l.
§14.16
“[t]he nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold”;
m. “[t]he effect of selling the trade secret product in promoting sales of other products of the defendant; the existing value of the trade secret to the plaintiff as a generator of sales of its non-trade secret items; and the extent of such derivative or connected or conveyed sales”; n. “[t]he duration of the trade secret and the term of the license”; o. “[t]he established profitability of the product made with the trade secret; its commercial success; and its current popularity”; p. “[t]he utility and advantages of the trade secret over the old modes or devices, if any, that had been used for working out similar results”; q. “[t]he nature of the trade secret; the character of the commercial embodiment of it as owned or produced by the plaintiff; and the benefits to those who have used the trade secret”; r.
“[t]he extent to which the defendant has made use of the trade secret; and any evidence probative of the value of that use”;
s. “[t]he opinion testimony of qualified experts”; and t.
“[t]he amount that the plaintiff and the defendant would have agreed upon (at the time the misappropriation began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee — who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the trade secret — would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable to a prudent licensor who was willing to grant a license.” LinkCo, Inc. v. Fujitsu Ltd., 232 F.Supp.2d 182, 187 n.7 (S.D.N.Y. 2002), citing Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y. 1970) (Georgia-Pacific II).
See also RESTATEMENT (THIRD) OF UNFAIR COMPETITION §45, cmt. g (1995). These factors are meant to provide “a reasoned economic framework” for the hypothetical negotiation. Sloan Valve, supra, 33 F.Supp.3d at 991. The evaluation of these factors can be a complicated exercise, often assisted by the use of expert testimony. See Miller UK Ltd., supra. The finder of fact must “be conservative in fixing the amount [of the reasonable royalty] because of the ‘inevitable uncertainty of the computation.’ ” Faulkner v. Gibbs, 199 F.2d 635, 639 – 640 (9th Cir. 1952), quoting Consolidated Rubber Tire Co. v. Diamond Rubber Co. of New York, 226 F. 455, 462 – 463 (S.D.N.Y. 1915). Moreover, because the “reasonable royalty” exercise attempts to determine the amount that would have been agreeable to both parties and
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 29
§14.16
INTELLECTUAL PROPERTY LAW
what amount would be “reasonable” in light of the factors set forth above, a “reasonable royalty” may not be so onerous that the defendant would not have made a profit — else the defendant would not have entered into the hypothetical agreement. In a series of opinions involving Georgia-Pacific, considered to be the seminal caselaw regarding the calculation of reasonable royalties in patent cases, the court stated: As pointed out in an earlier decision herein by this Court [Georgia-Pacific Corp. v. United States Plywood Corp., 243 F.Supp. 500, 539 (S.D.N.Y. 1965) (Georgia-Pacific I)], the very definition of a reasonable royalty assumes that, after payment, “the infringer will be left with a profit.” It is necessary to consider, as an element in determining the amount of the reasonable royalty, the fact that [the alleged infringer] would be willing hypothetically to pay a royalty which would produce a “reasonable profit.” Georgia-Pacific II, supra, 318 F.Supp. at 1122, quoting Faulkner, supra, 199 F.2d at 639. See also Zegers v. Zegers, Inc., 458 F.2d 726, 728 n.8 (7th Cir.), cert. denied, 93 S.Ct. 131 (1972), citing Georgia-Pacific Corp. v. U.S. Plywood-Champion Papers Inc., 446 F.2d 295 (2d Cir. 1971), and Georgia-Pacific I, supra; Alcatel USA, Inc. v. Cisco Systems, Inc., 239 F.Supp.2d 660, 671 n.9 (E.D.Tex. 2002), quoting Georgia-Pacific II, supra, 318 F.Supp. at 1122. A plaintiff must make some evidentiary showing as to what a reasonable royalty would be under the Georgia-Pacific factors and why; it cannot simply ask the jury members to speculate and to figure out for themselves what amount of royalty would be reasonable: Before asking for a reasonable royalty, [plaintiff] will have to make a record showing what a reasonable royalty would be. We will not allow either side in this case to go to the jury with a blank request: “We are asking you for damages in the form of a reasonable royalty. We are not going to tell you anything about how a reasonable royalty might be calculated or how much it might be. That is for you, as jurors, to figure out on your own from your own minds. You guess what royalties typically are in this industry, or on comparable patents, and how much a negotiated royalty between these parties would have been in this case.” National Presto Industries, Inc. v. Black & Decker (U.S.) Inc., 760 F.Supp. 699, 701 (N.D.Ill. 1991). See also Nilssen v. Motorola, Inc., No. 93 C 6333, 1998 WL 851493 (N.D.Ill. Dec. 1, 1998). While the EEA and ITSA seem to relegate the reasonable royalty remedy to the position of a posttrial consolation prize to be awarded by the court only after the plaintiff has failed to meet its burden of proof on its main theory of damages, a plaintiff runs a serious risk if it ignores the reasonable royalty and waits until the trial or the end of trial to quantify its reasonable royalty request and provide a cogent rationale for this request. For example, in Nilssen, supra, the plaintiff was seeking a reasonable royalty, but its expert witness on damages had not indicated that he had analyzed the pertinent reasonable royalty factors. The plaintiff’s lawyers tried to argue later that although the expert’s report did not explicitly mention any of the factors, the expert had considered the factors in performing his analysis, that the expert’s work arguably relied on one or two factors, and that the expert’s report had encompassed the pertinent factors. The Nilssen court rejected this after-the-fact attempt to put the necessary spin on the expert’s report:
14 — 30
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.17
[The plaintiff’s brief] attempts to save the 4% royalty figure by arguing that [the expert] considered the factors identified in University Computing Co. v. LykesYoungstown Corp., 504 F.2d 518, 538 – 39 (5th Cir. 1974) when assessing the rate. But that is simply a post-hoc rationalization, for [the expert] himself did not identify his having based the royalty rate on those factors. To the contrary, his discussion of the royalty never referred to those factors either explicitly or implicitly. 1998 WL 851493 at *2. A reasonable royalty can be assessed in the form of a percentage of sales or, in certain cases, as a lump-sum payment. See, e.g., Unisplay, S.A. v. American Electronic Sign Co., 69 F.3d 512, 519 (Fed.Cir. 1995) (lump-sum royalty award is proper only when these awards are common industry practice). The focus of the analysis is on what type and amount of royalty is “reasonable” in the industry at issue for the technology at issue. Finally, while the other measures of damages may be put to a jury under the ITSA, the ITSA clearly states that a reasonable royalty may be awarded by “the court,” arguably removing this remedy from the purview of the jury. 765 ILCS 1065/4(a). See De Lage Landen Operational Services, LLC v. Third Pillar Systems, LLC, No. 09-2439, 2011 WL 1627899, *2 (E.D.Pa. Apr. 28, 2011) (analyzing California’s version of Uniform Trade Secrets Act, finding “[t]he plain language of the statute states that the issue of reasonable royalties is to be decided by the court”). Interestingly, the EEA presents the full list of civil remedies that describes what “a court may” award. 18 U.S.C.A. §1836(b)(3) It is unclear at the time of this writing whether this language will be deemed to put any of the EEA’s civil remedies out of the jury’s hands. B. [14.17] Exemplary or Punitive Damages Both the Economic Espionage Act and the Illinois Trade Secrets Act allow the court to award “exemplary damages” if “willful and malicious” misappropriation is found. 18 U.S.C. §1836(b)(3)(C); 765 ILCS 1065/4(b). There is little caselaw from Illinois state courts explaining when misappropriation is willful and malicious for purposes of assessing exemplary damages. Miller UK Ltd., v. Caterpillar, Inc., No. 10-cv-03770, 2015 WL 6407223, *5 (N.D.Ill. Oct. 21, 2015) (noting “the absence of Illinois authority construing the term”). Federal courts have assessed exemplary damages when the act of misappropriation (i.e., the use or the disclosure of trade secrets) was intentional or committed with conscious disregard of the rights of another. Id., citing Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714, 730 (7th Cir. 2003). See also Mangren Research & Development Corp. v. National Chemical Co., 87 F.3d 937 (7th Cir. 1996); RKI, Inc. v. Grimes, 200 F.Supp.2d 916 (N.D.Ill. 2002). At least one decision issued from the Northern District of Illinois has applied a more relaxed standard, holding that a defendant’s liability for exemplary damages is controlled by what the defendant “should have known.” Chemetall GmbH v. ZR Energy, Inc., No. 99 C 4334, 2001 WL 1104604, **9 – 10 (N.D.Ill. Sept. 18, 2001). At the other end of the spectrum is the Federal Circuit’s decision in Roton Barrier, Inc. v. Stanley Works, 79 F.3d 1112 (Fed.Cir. 1996), which interpreted the ITSA to say that misappropriation motivated by malice justified an award of punitive damages while misappropriation motivated by competition did not.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 31
§14.18
INTELLECTUAL PROPERTY LAW
However, the statutes make two things clear. First, exemplary damages are limited to twice the amount of compensatory and restitutionary damages, at most. 18 U.S.C. §1836(b)(3)(C); 765 ILCS 1065/4(b). Second, both statutes state that the court may award exemplary damages, indicating both that these damages are discretionary and that the decision to award them is to be made by the judge, not a jury. 18 U.S.C. §1836(b)(3)(C); 765 ILCS 1065/4(b). Trade secrets plaintiffs face an additional restriction on their ability to recover exemplary damages under federal law. The 2016 amendments to the EEA provide that an employer-plaintiff is prohibited from obtaining exemplary damages against an employee under that statute if it failed to provide that employee with the required notice of the immunity extended under the EEA (e.g., for whistleblower claims). 18 U.S.C. §1833(b)(3).
PRACTICE POINTER
A trade secret plaintiff should consider other tort-based causes of action that may be applicable to the defendant’s conduct and that do not have any cap on the amount of punitive damages that may be awarded (e.g., breach of fiduciary duty). However, these claims must be based on something other than the unauthorized use or disclosure of trade secrets, which claims all have been preempted pursuant to 765 ILCS 1065/8. See Spitz v. Proven Winners North America, LLC, 759 F.3d 724, 733 (7th Cir. 2014); Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1265 (7th Cir. 1992).
C. [14.18] Attorneys’ Fees and Costs The court may also award attorneys’ fees to the prevailing party in a trade secret action under both federal and state law. The Illinois Trade Secrets Act provides: If (i) a claim of misappropriation is made in bad faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists, the court may award reasonable attorney’s fees to the prevailing party. 765 ILCS 1065/5. The Economic Espionage Act contains a similar provision. 18 U.S.C. §1836(b)(3)(D). The standard for entitlement to attorneys’ fees, therefore, appears to be similar to that applied to requests for exemplary damages. See RKI, Inc. v. Grimes, 200 F.Supp.2d 916, 928 (N.D.Ill. 2002) (“malicious” and “willful” conduct merits award of fees). See also 4 Roger M. Milgrim, MILGRIM ON TRADE SECRETS §15.02[3][k], p. 15-214 n.162 (2004), citing cases in which courts awarded attorneys’ fees under the Uniform Trade Secrets Act and other state law theories. Under both the EEA and the ITSA, attorneys’ fees are available to either party, under certain circumstances. Either the plaintiff or the defendant may be the “prevailing party” under §5 of the ITSA, and a defendant, therefore, may obtain its attorneys’ fees when it successfully defends the case and shows that the claim of misappropriation was brought — or maintained — in bad faith or without substantial basis. Tradesman International, Inc. v. Black, 724 F.3d 1004, 1016 (7th Cir. 2013) (“[W]e conclude that ‘made in bad faith’ is correctly interpreted as either bringing or
14 — 32
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.20
maintaining a suit in bad faith.”); Clark Consulting Inc. v. Richardson, No. 07 C 7231, 2009 WL 424541, *2 (N.D.Ill. Feb. 19, 2009) (plaintiff’s claims were false, and plaintiff knew they were false, either at outset or as case progressed); Jackson v. Hammer, 274 Ill.App.3d 59, 653 N.E.2d 809, 818, 210 Ill.Dec. 614 (4th Dist. 1995) (request for fees denied; record did not support finding that claim was brought in bad faith). The prevailing party also may be entitled to its attorneys’ fees under contract law without regard to the existence of malice or bad faith if the parties executed an agreement containing a clause to this effect. Confidentiality covenants can lurk in unexpected places (e.g., stock option agreements and other employee benefits agreements), and counsel for both parties should make sure that they are aware of all contractual provisions relating to the treatment and disclosure of confidential information. As with exemplary damages, attorneys fees’ and costs are not available under the EEA to any plaintiff employer against an employee who was not provided with the required notice of the immunity extended under that statute. 18 U.S.C. §1833(b)(3). D. [14.19] Prejudgment Interest Neither the Economic Espionage Act nor the Illinois Trade Secrets Act specifically provide for the award of prejudgment interest on damage awards, and there is no binding precedent from the Illinois Supreme Court or the Seventh Circuit Court of Appeals as to whether the ITSA requires prejudgment interest. Chemetall GmbH v. ZR Energy, Inc., No. 99 C 4334, 2001 WL 1104604, **14 – 15 (N.D.Ill. Sept. 18, 2001). One could read “unjust enrichment” and “actual loss” to include the concept of prejudgment interest, but then every statute allowing for these remedies would include prejudgment interest, and Illinois courts traditionally have been reluctant to read such a requirement into a statute when it has not been made explicit. 2001 WL 1104604 at *14. In any event, the plaintiff can request prejudgment interest based on the court’s inherent equitable powers, which are broad enough to support such an award should the court believe that justice requires it. See id. (and cases cited therein). The EEA does provide that a court may exercise its discretion to award prejudgment interest on damages awarded for improper or excessive ex parte seizures. 18 U.S.C. §1836(b)(2)(G); 15 U.S.C. §1116(d)(11). E. Scope and Duration of Posttrial Injunctive Relief 1. [14.20] When a Request for Injunctive Relief Is Proper Generally speaking, at both the interlocutory and posttrial stages, the court need not wait for trade secret misappropriation to occur. If the evidence supports it, §3(a) of the Illinois Trade Secrets Act allows a court to enjoin either “[a]ctual or threatened misappropriation” of the secret. 765 ILCS 1065/3(a). The Economic Espionage Act contains a similar provision. 18 U.S.C. §1836(b)(3)(A)(i). This mandate to act before a trade secret is misappropriated arises from, and reflects, the special nature of this unique form of intellectual property: once disclosed, the value of a trade secret can be lost forever. If the court is to effectively protect trade secrets, it often must act before the wrongful conduct occurs.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 33
§14.21
INTELLECTUAL PROPERTY LAW
One type of “threatened misappropriation” can occur when a defendant has taken a job with a competitor that is so similar to the defendant’s former job for the plaintiff that he or she will inevitably use or disclose the plaintiff’s trade secrets in the course of fulfilling his or her job duties for the new employer. Strata Marketing, Inc. v. Murphy, 317 Ill.App.3d 1054, 740 N.E.2d 1166, 251 Ill.Dec. 595 (1st Dist. 2000); PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). This “inevitable disclosure” concept, which is discussed in more detail in §§14.25 – 14.28 below, has received substantial attention and sparked significant controversy. 2. [14.21] Need for the Order To Be Specific Both Fed.R.Civ.P. 65(d) and §11-101 of the Code of Civil Procedure require that “[e]very order granting an injunction and every restraining order shall set forth the reasons for its [issuance or] entry; shall be specific in terms; [and] shall describe in reasonable detail, and not by reference to the complaint or other document, the act or acts sought to be restrained.” 735 ILCS 5/11-101. Therefore, if the court is disposed to enter an injunction (whether a temporary restraining order, a preliminary injunction, or a posttrial injunction), it must enter a written order, and this order must clearly and specifically describe what conduct is either required or prohibited. See also Roton Barrier, Inc. v. Stanley Works, 79 F.3d 1112 (Fed.Cir. 1996); Streif v. Bovinette, 88 Ill.App.3d 1079, 411 N.E.2d 341, 44 Ill.Dec. 372 (5th Dist. 1980); Paschen Contractors, Inc. v. Burrell, 14 Ill.App.3d 748, 303 N.E.2d 246 (1st Dist. 1973). Rule 65(d)’s specificity requirement extends to an injunction’s description of the off-limits trade secrets. Patriot Homes, Inc. v. Forest River Housing, Inc., 512 F.3d 412 (7th Cir. 2008). However, there is an inherent tension between including sufficient detail to satisfy the procedural rules requiring specificity and not disclosing so much detail that the trade secret is revealed. Plaintiffs, therefore, often find it difficult to draft the operative language of a restraining order in a way that both satisfies the rules and protects the information at issue. See, e.g., PepsiCo, Inc. v. Redmond, 46 F.3d 29, 31 (7th Cir. 1995) (to avoid disclosure of trade secrets in litigation, district court should draft its opinion to refer to trade secrets indirectly, without disclosing these secrets, in order to avoid having to place entire opinion under seal). One possible approach is to draft an injunction that refers, very specifically, to the type of information at issue without actually disclosing the details of the information itself. For example, an injunction might describe trade secrets in the following ways: The process by which plaintiff ACME creates a smooth cutting edge on the blade of its Model A widget The design and supplier of the specific machine used by ACME to attach the blade to its Model B widget The identification, amount, and source of the sweetener ingredient that ACME uses in the manufacture of its Elixir® brand fruit beverage product ACME’s 2002 and 2003 sales forecasts for its Elixir® brand fruit beverage product and its 2002 and 2003 actual sales results for that product Using this approach, it is usually possible to describe in detail the nature of the alleged trade secret without disclosing the secret itself.
14 — 34
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.23
3. [14.22] Against Whom the Injunction Is Enforceable As discussed in §14.5 above, both Fed.R.Civ.P. 65(d) and §11-101 of the Code of Civil Procedure provide that injunctions are binding “only upon the parties to the action, their officers, agents [and servants], employees, and attorneys, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise,” and this rule would apply to posttrial injunctions. 735 ILCS 5/11-101. 4. [14.23] How Long an Injunction Will Last One of the common methods of determining the duration of an injunction was to measure the time in which the defendant could have developed the trade secret legitimately and independently. Brunswick Corp. v. Outboard Marine Corp., 79 Ill.2d 475, 404 N.E.2d 205, 38 Ill.Dec. 781 (1980); Schulenburg v. Signatrol, Inc., 33 Ill.2d 379, 212 N.E.2d 865, 869 – 870 (1965); Syntex Ophthalmics, Inc. v. Novicky, 745 F.2d 1423, 1435 (Fed.Cir. 1984) (and cases cited therein at 1435 n.23), vacated on other grounds, 105 S.Ct. 1740 (1985). However, this method has an obvious flaw since it assumes that the trade secret could have and would have been developed independently. In fact, a trade secret might elude development and last forever. There is no specific time limit or requirement for injunctions issued pursuant to the Illinois Trade Secrets Act. The nature of trade secrets, which theoretically can last forever, and the language of the ITSA seem to support the issuance of an open-ended permanent injunction that lasts until it is terminated, pursuant to 765 ILCS 1065/3(a). Indeed, the Illinois legislature modified the language of the Uniform Trade Secrets Act to make it easier for courts to extend the time period of injunctions issued under the Illinois Act. The Uniform Act requires that injunctions must terminate when the information ceases to be a trade secret, with the addition of extra time to compensate for a wrongfully gained commercial advantage. Uniform Trade Secrets Act with 1985 Amendments §2(a), 14 U.L.A. 433, 449 (1985). This concept of a “head start” is discussed in Sokol Crystal Products, Inc. v. DSC Communications Corp., 15 F.3d 1427 (7th Cir. 1994). The Illinois legislature embraced this concept but also provided the courts with additional flexibility to extend the length of injunctions for a variety of reasons. Section 3(a) of the ITSA provides: Upon application to the court, an injunction may be terminated when the trade secret has ceased to exist, provided that the injunction may be continued for an additional reasonable period of time in appropriate circumstances for reasons including, but not limited to an elimination of the commercial advantage that otherwise would be derived from the misappropriation, deterrence of willful and malicious misappropriation, or where the trade secret ceases to exist due to the fault of the enjoined party or others by improper means. 765 ILCS 1065/3(a). See also Intertek USA Inc. v. AmSpec, LLC, No 14 CV 6160, 2014 WL 4477933, *7 (N.D.Ill. Sept. 11, 2014) (“[T]he court finds that enjoining AmSpec from opening its Chicago lab for some period of time is necessary to eliminate the unfair advantage that AmSpec gained by using Intertek’s trade secrets.”). An injunction, therefore, may last at least as long as the information at issue remains a trade secret and often may last longer. How much longer is a question left in large measure to the discretion of the trial court. Section 3(a) of the ITSA provides that the court must
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 35
§14.24
INTELLECTUAL PROPERTY LAW
have a reason for continuing an injunction beyond the time when the information is no longer a trade secret and itself provides examples of several such reasons, explicitly noting that the list is not exhaustive. 765 ILCS 1065/3(a). The Economic Espionage Act does not address the duration of injunctions, other than to anticipate the filing of motions to terminate. 18 U.S.C. §1836(b)(3)(D). 5. [14.24] Breadth of Available Relief The scope of injunctive relief available under the Illinois Trade Secrets Act is very broad. For example, as discussed §14.9 above, a court issuing an injunction under the Act is not limited to negative edicts prohibiting specified conduct. Rather, should circumstances warrant, the court can order a defendant to take affirmative action in order to protect a trade secret (e.g., ordering that certain documents and materials be turned over to the plaintiff). The scope of injunctive relief awarded to protect trade secrets varies greatly with the situation. In some cases, the plaintiff’s hard-won award of injunctive relief consists of nothing more than a prohibition against use or disclosure of the trade secrets. In light of the serious concerns that most plaintiffs have regarding the trustworthiness of the defendant and the difficulties of monitoring compliance with such an order, a plaintiff is unlikely to view an order of this type as an adequate safeguard for the trade secrets it has asked the court to protect. Therefore, as discussed in §14.25 below, plaintiffs have sought and received injunctions prohibiting the competitive activity with respect to which the defendant had been using the trade secret.
IV. [14.25] PROBLEMS WITH AFTER-THE-FACT RELIEF AND NONUSE INJUNCTIONS — THE INEVITABLE DISCLOSURE DOCTRINE A common remedy granted to the successful trade secret plaintiff is an injunction prohibiting use and disclosure of the trade secrets at issue. All too often, this relief is not enough. Once the trade secrets have been taken and used, and once a competitor has received the benefit of the trade secrets, prohibitions on further use simply miss the point. Moreover, damages can be hard to prove. So what is a plaintiff to do? Some courts have been willing to address this problem by issuing injunctions prohibiting competition, even in the absence of a noncompete covenant, when trade secret misappropriation has been shown. For example, if a defendant misappropriates drawings or technology regarding a particular product, courts have enjoined the defendant not only from further use of the trade secrets but from making or selling the product altogether, regardless of whether the defendant thereafter makes the product using the misappropriated trade secrets. Spindelfabrik SuessenSchurr v. Schubert & Salzer Maschinenfabrik Aktiengesellschaft, 903 F.2d 1568, 1577 (Fed.Cir. 1990) (affirming injunction prohibiting defendant not only from using or disclosing trade secrets at issue but also from manufacturing certain goods altogether); Colony Corporation of America v. Crown Glass Corp., 102 Ill.App.3d 647, 430 N.E.2d 225, 227, 58 Ill.Dec. 283 (1st Dist. 1981) (“sale of the products may be enjoined in order to protect the secret despite the fact that the products are not themselves trade secrets but are only the fruits of the use of a trade secret”); ILG
14 — 36
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.26
Industries, Inc. v. Scott, 49 Ill.2d 88, 273 N.E.2d 393, 397 (1971) (affirming trial court that “enjoined not only the use of the particular drawings it found to be trade secrets” but also making or selling any goods of type depicted in drawings); Schulenburg v. Signatrol, Inc., 33 Ill.2d 379, 212 N.E.2d 865 (1965) (noting secrecy of blueprints that could not be duplicated absent timeconsuming and expensive analyses of products in public domain could be protected by enjoining sale of products). One rationale for enjoining competitive activity for some period of time is the “head-start” principal — the need to strip the defendant of the competitive gain reaped through his or her misappropriation. Another rationale behind these decisions is that compliance with a nonuse injunction would be too hard to police, especially with respect to a defendant that has shown itself to be untrustworthy, and that the courts view the burden posed by a broadened injunction as appropriately borne by the wrongdoer. See Additive Controls & Measurement Systems, Inc. v. Flowdata, Inc., No. H-90-1554, 1994 WL 749595, *13 (S.D.Tex. July 12, 1994) (noting that injunction’s stringent provisions illustrate adage that “those caught violating the law must expect some fencing in”), quoting Spindelfabrik, supra, 903 F.2d at 1577. Moreover, courts are not enthusiastic about the prospect of monitoring the business of the defendant in order to parse the lawful competition from the unlawful. For example, in MPCT Solutions Corp. v. Methe, No. 99 C 3736, 1999 WL 495115 (N.D.Ill. July 2, 1999), the defendant had been enjoined from selling competing products to certain customers. After the defendant violated an evidence preservation order issued by the court, the court broadened the injunction to prohibit him from contacting or servicing these clients altogether. The court stated, “The expansion is justified . . . by the seriousness of the violation of this Court’s Order and the difficulty in sorting out which . . . products and services are competitive.” 1999 WL 495115 at *2. Technical information is not the only type of trade secret that has been protected by this type of judicially created noncompete covenant. Courts also have protected customer information by prohibiting competitive activity. See Burt Dickens & Co. v. Bodi, 144 Ill.App.3d 875, 494 N.E.2d 817, 98 Ill.Dec. 695 (1st Dist. 1986), in which the court affirmed an injunction prohibiting the defendant from soliciting any of the plaintiff’s customers, even using sources other than the plaintiff’s misappropriated customer list. The Burt Dickens court stated, “Since the court would have no way of knowing if defendant was using the expiration lists to solicit [the plaintiff’s] accounts, it is not difficult to justify the blanket prohibition of such solicitation even if carried out with the aid of sources other than the lists.” 494 N.E.2d at 823. A. [14.26] What the Inevitable Disclosure Doctrine Is The idea of granting an injunction against competition in response to trade secret misappropriation has been receiving attention in both the courts and the media. As a tightening job market encourages companies to become more aggressive about recruiting and hiring talent from the competition, employee mobility continues to increase. Additionally, competition has expanded into what is an increasingly global marketplace. These heightened business pressures result in more frequent trade secret disputes. Consequently, more lawyers (in both litigation and corporate practice areas) are addressing the doctrine of “inevitable disclosure” of trade secrets. While the cases discussed in §14.25 above support prohibiting competitive conduct in response to proven trade secret misappropriation, the inevitable disclosure doctrine supports competitive prohibitions even absent evidence of actual misappropriation.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 37
§14.27
INTELLECTUAL PROPERTY LAW
The inevitable disclosure doctrine recognizes that trade secrets can exist in someone’s mind and memory (see, e.g., Schulenburg v. Signatrol, Inc., 33 Ill.2d 379, 212 N.E.2d 865, 869 (1965); Stampede Tool Warehouse, Inc. v. May, 272 Ill.App.3d 580, 651 N.E.2d 209, 209 Ill.Dec. 281 (1st Dist. 1995); Televation Telecommunication Systems, Inc. v. Saindon, 169 Ill.App.3d 8, 522 N.E.2d 1359, 119 Ill.Dec. 500 (2d Dist. 1988)) and that there are circumstances in which those trade secrets inevitably will be used or disclosed — even if the defendant credibly vows an intention to keep the information confidential. Courts applying the doctrine have differed over its reach and the circumstances required for its application, but generally speaking, the doctrine applies when a defendant has had access to trade secrets and then defects to the trade secret owner’s competition to perform duties so similar that the court believes that these duties cannot be performed without making use of trade secrets relating to the previous affiliation. The law regarding the inevitable disclosure doctrine has developed in employment-related cases; however, trade secret issues also arise in contract termination and other business disputes, to which the doctrine may be equally applicable. But see Destiny Health, Inc. v. Connecticut General Life Insurance Co., 2015 IL App (1st) 142530, ¶¶38 – 42, 39 N.E.3d 275, 395 Ill.Dec. 808 (declining to find genuine issue regarding “inevitable disclosure” in dispute between two would-be parties to failed transaction). The doctrine of inevitable disclosure is not a recent invention. Decisions in departing employee cases decades ago recognized that trade secret information necessary for the performance of an employee’s job would necessarily be in peril of improper use or disclosure if that employee were to perform the same job for a competitor. See, e.g., Fountain v. Hudson CushN-Foam Corp., 122 So.2d 232, 234 (Fla.App. 1960); FMC Corp. v. Varco International, Inc., 677 F.2d 500, 504 – 505 (5th Cir. 1982); Allis-Chalmers Manufacturing Co. v. Continental Aviation & Engineering Corp., 255 F.Supp. 645, 654 (E.D.Mich. 1966). As noted in §14.20 above, §3(a) of the Illinois Trade Secrets Act generalizes and codifies this concept and expressly provides relief from “threatened” disclosure of trade secrets. “Misappropriation” is defined by the ITSA to include not only disclosure of trade secrets but also “use” of these trade secrets. 765 ILCS 1065/2(b)(2). Accordingly, the ITSA contemplates injunctions against the threatened use of trade secrets. Courts applying the inevitable disclosure doctrine after the adoption of the ITSA have often cited its prohibition of threatened use as support for the doctrine. See Teradyne, Inc. v. Clear Communications Corp., 707 F.Supp. 353, 356 – 357 (N.D.Ill. 1989). B. [14.27] PepsiCo, Inc. v. Redmond The inevitable disclosure doctrine found the spotlight with the Seventh Circuit’s decision in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir.), aff’g PepsiCo, Inc. v. Redmond, No. 94 C 6838, 1995 U.S.Dist. LEXIS 19437 (N.D.Ill. Jan. 26, 1995). The defendant, William Redmond, had been one of PepsiCo’s high-level managers, in charge of the California business unit that was responsible for 20 percent of PepsiCo North America’s U.S. profits. His senior position had given Redmond access to a large volume of competitively sensitive information, including overall strategic plans for marketing, manufacturing, production, packaging and distribution; promotional
14 — 38
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.27
event calendars and plans; operational plans and strategies; and pricing architecture. PepsiCo and Quaker Oats had been engaged in fierce competition with respect to their sports drinks (i.e., PepsiCo’s All Sport vs. Quaker Oats’ Gatorade) and “new age” drinks (i.e., PepsiCo’s Lipton tea and Ocean Spray drinks vs. Quaker Oats’ Snapple beverages). Redmond had worked for PepsiCo for ten years when he was wooed away by Quaker Oats to become the Vice President of Field Operations for its Gatorade division. Less than a week after Redmond told PepsiCo that he was leaving to join Quaker Oats, PepsiCo filed a suit seeking temporary, preliminary, and permanent injunctive relief prohibiting Redmond from disclosing PepsiCo’s trade secrets, as well as a temporary injunction prohibiting him from assuming his duties at Quaker Oats. Judge Lindberg of the Northern District of Illinois initially issued a temporary restraining order but later dissolved it sua sponte and then held a preliminary injunction hearing within days after suit was filed. After hearing the evidence of PepsiCo’s trade secrets, Redmond’s access to and familiarity with these secrets, the similarity between his duties for PepsiCo and his duties for Quaker Oats, and Redmond’s lack of candor, the court ruled that it was inevitable that Redmond would use or disclose PepsiCo’s trade secrets, and it preliminarily enjoined Redmond from assuming his proposed position at Quaker Oats for six months and from using or disclosing any PepsiCo trade secrets or confidential information. In reaching his decision, Judge Lindberg emphasized Redmond’s lack of forthrightness, both in his dealings with PepsiCo and in his testimony before the court. The Seventh Circuit affirmed, confirming that inevitable disclosure was a valid justification for the issuance of such injunctive relief. The court devoted most of its attention to the question of what constitutes inevitable disclosure; that is, under what circumstances will misappropriation of trade secrets be deemed inevitable so as to justify the imposition of an injunction prohibiting competitive employment? Writing for a unanimous panel, Judge Flaum concluded that (1) PepsiCo had protectable trade secrets that were pertinent to Redmond’s new duties for Quaker Oats such that even the defendants had conceded that Redmond might be asked to formulate strategy for Quaker Oats that could be influenced by his knowledge of PepsiCo’s confidential information, and (2) although Redmond had signed a confidentiality agreement, the trial court found that both he and his Quaker Oats contact had shown themselves to be untrustworthy and willing to misuse PepsiCo’s trade secrets, and the Seventh Circuit could not term the district court’s finding an abuse of discretion. The court’s finding of untruthfulness was based on conduct both before and during the litigation. As noted above, the district court initially granted PepsiCo a temporary restraining order. The defendants then quickly filed declarations of Redmond and Donald Uzzi, who had left PepsiCo months earlier to become the head of Quaker Oats’ Gatorade division and had courted Redmond for Quaker Oats. In these affidavits, Uzzi and Redmond both stated that Redmond’s primary initial duties would be to integrate the Gatorade and Snapple distribution systems according to an already existing plan and that Redmond’s new job would entail different responsibilities from his job at PepsiCo. Based on the statements made in these declarations, the district court dissolved the TRO.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 39
§14.27
INTELLECTUAL PROPERTY LAW
These statements, however, were seriously undermined by evidence elicited at the preliminary injunction hearing that showed that there was no finalized plan to integrate the Quaker and Snapple distribution systems. Moreover, Redmond’s job description had not been finalized, and he was likely to have many of the same responsibilities that he had at PepsiCo. PepsiCo highlighted the discrepancies between the declarations and the evidence and argued that the trial judge had been snookered by the defendants into dissolving the TRO with the false declarations. PepsiCo argued that if the defendants could not even tell the truth to the court, how could they be trusted to honor PepsiCo’s trade secrets? Judge Flaum found that “Redmond’s lack of forthrightness on some occasions, and out and out lies on others . . . leads the court to conclude that defendant Redmond could not be trusted to act with the necessary sensitivity and good faith under the circumstances.” 54 F.3d at 1270, quoting 1995 U.S.Dist. LEXIS 19437 at *90. Indeed, Judge Lindberg had referred in his opinion to the discrepancies between the defendants’ declarations and the evidence and specifically found that these discrepancies undermined the defendants’ credibility. The district court’s findings regarding Redmond’s and Quaker’s lack of candor, coupled with the circuit court’s other findings regarding Redmond’s inability to segregate PepsiCo’s trade secrets in his mind, formed the dual bases for the ruling that, under the circumstances, improper use and disclosure of PepsiCo’s trade secrets were inevitable. The dual bases for the Seventh Circuit’s decision in PepsiCo have raised some questions about the elements of inevitable disclosure. Some courts seem to have construed the PepsiCo holding to require evidence of bad-faith conduct on the part of the defendant. See, e.g., Lumex, Inc. v. Highsmith, 919 F.Supp. 624, 633 (E.D.N.Y. 1996) (“Seventh Circuit emphasized that the district court found a ‘lack of forthrightness’ and ‘out and out lies’ by the former employee, and that he could not be trusted to act with the necessary good faith.”), quoting PepsiCo, supra, 54 F.3d at 1270. Other courts have viewed the bad-faith finding in PepsiCo to be merely additional support for the trial court’s ruling and have treated bad faith not as a requirement for a finding of inevitable disclosure but as an aggravating factor, or one of the many possible circumstances that would give rise to and support a finding of inevitable disclosure. See, e.g., Cacique, Inc. v. V&V Supremo Foods, Inc., No. 03 C 4230, 2004 WL 2222270 (N.D.Ill. Sept. 30, 2004); Maxxim Medical, Inc. v. Michelson, 51 F.Supp.2d 773, 785 – 787 (S.D.Tex.), rev’d, 182 F.3d 915 (5th Cir. 1999). The latter line of cases would appear to hold more closely to the original rationale for the doctrine of inevitable disclosure: that a defendant could be expected to use or disclose the plaintiff’s trade secrets regardless of his or her intentions and even if he or she were to act in the utmost good faith. It is broadly accepted that human beings, whatever their intentions might be, are simply unable to compartmentalize their brains to separate knowledge that they are permitted to use from that which they should not use. Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102, 107 n.4 (3d Cir. 2010) (“We are quite uncertain as to how an individual can block out information from his head for a human mind does not function like a computer from which, through an electronic process, materials may be deleted.”); Federal Trade Commission v. Exxon Corp., 636 F.2d 1336, 1350 (D.C.Cir. 1980) (“[I]t is very difficult for the human mind to compartmentalize and selectively suppress information once learned, no matter how well-intentioned the effort may be to do so.”). See also Sullivan Marketing, Inc. v. Valassis Communications, Inc., No. 93 Civ.
14 — 40
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.28
6350 (PKL), 1994 WL 177795, *3 (S.D.N.Y. May 5, 1994) (it is “nigh impossible” for person having knowledge of competitor’s business information, when called on to act on behalf of his or her own company, to compartmentalize his or her knowledge). The inevitable disclosure doctrine was intended to protect trade secrets from such unintended disclosure. See, e.g., FMC Corp. v. Varco International, Inc., 677 F.2d 500, 504 (5th Cir. 1982) (“Even assuming the best of good faith, [the defendant] will have difficulty preventing his knowledge of FMC’s ‘Longsweep’ manufacturing techniques from infiltrating his work.”); Weseley Software Development Corp. v. Burdette, 977 F.Supp. 137, 147 (D.Conn. 1997) (“Simply put, ‘the harm to the plaintiff cannot be avoided simply by the former employee’s intention not to disclose confidential information, or even by his scrupulous efforts to avoid disclosure.’ ”), quoting Marcam Corp. v. Orchard, 885 F.Supp. 294, 297 (D.Mass. 1995); Lumex, supra, 919 F.Supp. at 631 (“notwithstanding Highsmith’s good intentions, there not only is a high risk, but it is inevitable that he will disclose important Cybex trade secrets . . . in his efforts to . . . aid his new employer and his own future”). Nonetheless, a plaintiff asserting inevitable disclosure is in a much stronger position if it can provide additional facts indicating a threat to the trade secret, such as bad faith on the defendant’s part. Indeed, many courts have emphasized the bad faith of the defendant in finding threatened misappropriation of trade secrets under the inevitable disclosure doctrine. See, e.g., Maxxim Medical, supra, 51 F.Supp.2d at 787 (emphasizing that defendant employee’s “lack of forthrightness” and “out and out lies” supported finding that employee would inevitably disclose plaintiff’s trade secrets); Novell, Inc. v. Timpanogos Research Group Inc., 46 U.S.P.Q.2d (BNA) 1197, 1215 – 1217 (D. Utah 1998) (emphasizing that “cavalier attitude of the defendants [employees] toward their former employer” supported finding that defendant employees would inevitably disclose plaintiff’s trade secrets). PepsiCo, supra, offers a vivid illustration of how important evidence of the defendant’s bad faith can be. It is impossible to know whether the trial judge would have ruled in PepsiCo’s favor, and whether the appellate court would have affirmed such a ruling, absent the apparent misstatements in the defendants’ declarations. Nonetheless, the lesson for both plaintiffs and defendants in inevitable disclosure cases is clear. Plaintiffs should always introduce evidence of bad faith by the defendants whenever it exists, whether that bad faith occurred before suit was filed or during prosecution of the case, and defendants should strive to be forthright and honest to a fault, both during their disaffiliation with the plaintiff and during the case. The inevitable disclosure doctrine as articulated by the circuit court in PepsiCo has been embraced and adopted by at least one Illinois appellate court. Strata Marketing, Inc. v. Murphy, 317 Ill.App.3d 1054, 740 N.E.2d 1166, 1178, 251 Ill.Dec. 595 (1st Dist. 2000) (“We believe PepsiCo correctly interprets Illinois law and agree that inevitable disclosure is a theory upon which a plaintiff in Illinois can proceed under the [Illinois Trade Secrets] Act.”). C. [14.28] Limits to the Inevitable Disclosure Doctrine It is important for trade secret owners to keep in mind the limits of the inevitable disclosure doctrine. First, the doctrine has not been embraced in all jurisdictions (see, e.g., Invesco Institutional (N.A.), Inc. v. Johnson, 500 F.Supp.2d 701, 710 (W.D.Ky. 2007) (“The doctrine of inevitable disclosure has not been approved by any Kentucky court or the Sixth Circuit. . . . Here,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 41
§14.28
INTELLECTUAL PROPERTY LAW
there is no indication from the Kentucky legislature that such a doctrine would be [approved]. Therefore, this Court finds that INVESCO does not have a strong likelihood of succeeding.”)), and it has been severely criticized and/or flatly rejected in others (see, e.g., LeJeune v. Coin Acceptors, Inc., 381 Md. 288, 849 A.2d 451 (App. 2004); Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443, 125 Cal.Rptr.2d 277 (2002); Del Monte Fresh Produce Co. v. Dole Food Co., 148 F.Supp.2d 1326, 1337 (S.D.Fla. 2001)). Consequently, practitioners must evaluate carefully which state’s law is likely to apply to an inevitable disclosure dispute. Second, even in situations and jurisdictions in which the doctrine of inevitable disclosure applies, a plaintiff generally must plead and prove true inevitability. Courts have been very clear that suspected misappropriation is insufficient to invoke the doctrine. Allegations that a defendant knows the plaintiff’s trade secrets and that it has joined forces with a competitor are not enough. See, e.g., AMP Inc. v. Fleischhacker, 823 F.2d 1199, 1207 (7th Cir. 1987) (“lame protestations” that employee possessed plaintiff’s trade secrets and was assuming similar job at new company did not, without more, make it “inevitable that he will use or disclose [plaintiff’s] trade secret information” so as to demonstrate irreparable injury), superseded by statute as stated in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995) (765 ILCS 1065/8(b)(1)); Magellan International Corp. v. Salzgitter Handel GmbH, 76 F.Supp.2d 919, 927 (N.D.Ill. 1999) (plaintiff’s claims that defendant could misuse plaintiff’s trade secrets and plaintiff’s fears that defendant would were insufficient to state claim for inevitable disclosure; “even when a defendant is in possession of secret information, disclosure or use of that information is not inevitable”); Abbott Laboratories v. Chiron Corp., 43 U.S.P.Q.2d (BNA) 1695, 1997 WL 208369, *3 (N.D.Ill. 1997) (“Even when the position assumed by a former employee with a competitor is similar to his or her previous position, disclosure of trade secret information is not inevitable.”); Teradyne, Inc. v. Clear Communications Corp., 707 F.Supp. 353, 357 (N.D.Ill. 1989) (“The defendants’ claimed acts, working for [plaintiff], knowing its business, leaving its business, hiring employees from [plaintiff] and entering the same field . . . do not state a claim of threatened misappropriation.”). In order “to invoke this doctrine the complaint must do more than make conclusory allegations that the employees will necessarily use trade secrets in their new position.” Covenant Aviation Security, LLC v. Berry, 15 F.Supp. 3d 813, 819 (N.D.Ill. 2014). Some courts have been more lenient at the pleading stage in determining motions to dismiss. See Airgas USA, LLC v. Adams, No. 15 C 50316, 2016 WL 3536788, *3 (N.D.Ill. June 27, 2016) (court declined to dismiss, stating “The complaint alleges defendant is currently employed by a direct competitor in a position identical to the one he held at plaintiff and that he will inevitably disclose these trade secrets through his current employment. [U]nder a theory of inevitable disclosure, a plaintiff need not point to concrete evidence of misappropriation.”); Allied Waste Services of North America, LLC v. Tibble, No. 16 C 1660, 2016 WL 1441449, *7 (N.D.Ill. Apr. 7, 2016) (“[U]nder a theory of inevitable disclosure, a plaintiff need not point to concrete evidence of misappropriation. He must merely allege that the employee ‘cannot operate without inevitably disclosing the confidential information.’. . . Allied has done at least this much. Therefore, the Court declines to dismiss Allied’s ITSA claim.”), quoting Complete Business Solutions, Inc. v. Mauro, No. 01 C 0336, 2011 WL 290196, *6 (N.D.Ill. Mar. 16, 2001). At some point, however, usually when the plaintiff seeks injunctive relief, he or she must make some showing as to why disclosure is inevitable, such as, for example, that a particular bid
14 — 42
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.30
is outstanding or a new product launch is imminent or that the employee engaged in dishonest or inequitable conduct and should not be trusted. There is no set formula for pleading and proving an inevitable disclosure case, but the court must be convinced that there is a basis for the conclusion the employee cannot perform the new job without making reference to or disclosing the plaintiff’s trade secrets. The 2016 amendments to the Economic Espionage Act expressly make this point. In the “Remedies” section, the statute states that injunctions may not “prevent a person from entering into an employment relationship” and requires that any “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” 18 U.S.C. §1836(b)(3)(A)(i)(I). The amendments codify within the new federal trade secrets law the requirement that it is not enough to show only that the defendant knows trade secrets and the plaintiff is afraid that he or she will use them; facts indicating a true “threatened disclosure” must be alleged (at the pleading stage) and shown to succeed on the merits. Moreover, EEA injunctions may not contain competitive restrictions if the applicable state law bans them. The EEA expressly states that injunctions may note conflict with applicable state laws regarding the enforceability of noncompetes and other restrictive covenants. Id. Application of the inevitable disclosure doctrine outside the employment context is unclear. At least one court has declined to extend the doctrine to a corporate defendant that learned the plaintiff’s alleged trade secrets through due diligence for a failed corporate transaction. See Destiny Health, Inc. v. Connecticut General Life Insurance Co., 2015 IL App (1st) 142530, ¶¶41 – 42, 39 N.E.3d 275, 395 Ill.Dec. 808.
V. [14.29] ADDITIONAL STATUTORY CLAIMS: THE COMPUTER FRAUD AND ABUSE ACT The most common means of trade secret misappropriation today is electronic transmission. Large amounts of information can be easily downloaded from a computer hard drive or network onto a portable storage device (such as a disc or a “thumb” drive) and carried out of the trade secret owner’s facility in a pocket or purse, or it can be e-mailed out of the company with the push of a button. Victims of this type of computer-assisted misappropriation — whether the information at issue rises to the level of a “trade secret” — may find relief under the Counterfeit Access Device and Computer Fraud and Abuse Act of 1984 (CFAA), Pub.L. No. 98-473, Title II, ch. XXI, 98 Stat. 2190, commonly known as the Computer Fraud and Abuse Act. A. [14.30] Prohibited Offenses The Computer Fraud and Abuse Act creates a private cause of action when an individual engages, inter alia, in the following conduct: 1. intentionally accessing a computer without authorization or exceeding authorized access and thereby obtaining information from any protected computer (18 U.S.C. §1030(a)(2)(C));
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 43
§14.31
INTELLECTUAL PROPERTY LAW
2. knowingly and with intent to defraud accessing a protected computer without authorization, or exceeding authorized access, and, by means of such conduct, furthering the intended fraud and obtaining anything of value, unless the object of the fraud and the thing obtained consist only of the use of the computer and the value of such use is not more than $5,000 in any one-year period (18 U.S.C. §1030(a)(4)); 3. knowingly causing the transmission of a program, information, code, or command and, as a result of such conduct, intentionally causing damage without authorization to a protected computer (18 U.S.C. §1030(a)(5)(A)); 4. intentionally accessing a protected computer without authorization and, as a result of such conduct, recklessly causing damage (18 U.S.C. §1030(a)(5)(B)); or 5. intentionally accessing a protected computer without authorization and, as a result of such conduct, causing damage and loss (18 U.S.C. §1030(a)(5)(C)). B. [14.31] Damage/Loss Requirement Civil plaintiffs seeking relief under the Computer Fraud and Abuse Act must plead and prove either “damage” (defined as “any impairment to the integrity or availability of data, a program, a system, or information”) or “loss” (defined as “any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service”). 10 U.S.C. §§1030(e)(8), 1030(e)(11), 1030(g). Moreover, civil plaintiffs are required to plead and prove one of the §1030(c)(4)(A) factors, the most commonly invoked of which will be “loss” of at least $5,000. 10 U.S.C. §1030(g). Certain claims under the CFAA also require “damage” as an element. See, e.g., 18 U.S.C. §§1030(a)(5)(A), 1030(a)(5)(B), 1030(a)(5)(C). C. [14.32] Available Remedies and Application to Trade Secret Misappropriation Civil plaintiffs who can plead and prove whatever “damage” and/or “loss” is required under the applicable section(s) of the Computer Fraud and Abuse Act may seek an array of civil and equitable remedies, including compensatory damages and injunctive relief. 18 U.S.C. §1030(g). Compensatory damages are limited to “economic damages” for civil claims brought under §1030(a)(4)(A)(i)(I). Id. Punitive damages are not available under the CFAA. Whether the CFAA makes such remedies available to trade secret owners who fall victim to misappropriation is not yet fully settled. For example, at least one federal district judge in the Seventh Circuit has held that trade secret misappropriation alone — without destruction of data — is not actionable under the CFAA. In Garelli Wong & Associates, Inc. v. Nichols, 551 F.Supp.2d 704, 710 – 711 (N.D.Ill. 2008), the court ruled that trade secret misappropriation alone does not constitute “damage” or “loss” as those terms are defined by the CFAA because copying or e-mailing the information at issue does not damage it or impact its availability to the plaintiff. See also Fidlar Technologies v. LPS Real Estate Data Solutions, Inc., 82 F.Supp.3d 844, 859 (C.D.Ill. 2015); In re Mud King Products, Inc., 514 B.R. 496, 516 (Bankr. S.D.Tex. 2014).
14 — 44
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.32
Other federal district courts — including another court in the Northern District of Illinois — have reached a different result, allowing plaintiffs to proceed with their CFAA claims based on the copying of confidential information. See, e.g., Lane v. Brocq, No. 15 C 6177, 2016 WL 1271051, **10 – 11 (N.D.Ill. Mar. 28, 2016); LKQ Corp. v. Thrasher, 785 F.Supp.2d 737, 745 – 746 (N.D.Ill. 2011); Teksystems, Inc. v. Modis, Inc., No. 08 C 5476, 2008 WL 5155720, *5 (N.D.Ill. Dec. 5, 2008); HUB Group, Inc. v. Clancy, No. Civ.A. 05-2046, 2006 WL 208684 (E.D.Pa. Jan. 25, 2006) (and cases cited therein); C.H. Robinson Worldwide, Inc. v. Command Transportation, LLC, No. 05 C 3401, 2005 WL 3077998 (N.D.Ill. Nov. 16, 2005) (and cases cited therein). This more expansive reading is supported by the view that the value of confidential information is damaged by its unauthorized dissemination and use, regardless of whether the computer files themselves are damaged or removed. Further support may arise from the fact that at least two sections of the CFAA appear to have been drafted specifically to address the theft of information and data, 18 U.S.C. §§1030(a)(2) and 1030(a)(4). Nonetheless, views about the statute’s application to the unauthorized access, copying, dissemination, and use (but not destruction) of confidential information are by no means unanimous at the time of this writing. Moreover, the CFAA was initially adopted to deter and punish computer hacking by outsiders and, at the time of this writing, there is a split of authority regarding whether amendments to the statute have created a means to redress computer malfeasance by “insiders,” such as employees. Compare, e.g., United States v. John, 597 F.3d 263 (5th Cir. 2010), International Airport Centers, L.L.C. v. Citrin, 440 F.3d 418, 419 – 420 (7th Cir. 2006), LKQ Corp. v. Thrasher, 785 F.Supp.2d 737 (N.D.Ill. 2011); Forge Industrial Staffing, Inc. v. De La Fuente, No 06 C 3848, 2006 WL 2982139 (N.D.Ill. Oct. 16, 2006), with WEC Carolina Energy Solutions LLC v. Miller, 687 F.3d 199 (4th Cir. 2012), United States v. Nosal, 676 F.3d 854, 857 (9th Cir. 2012); Farmers Insurance Exchange v. Auto Club Group, 823 F.Supp.2d 847 (N.D.Ill. 2011); Brett Senior & Associates, P.C. v. Fitzgerald, No. 06-1412, 2007 WL 2043377 (E.D.Pa. July 13, 2007), Lockheed Martin Corp. v. Speed, 81 U.S.P.Q.2d (BNA) 1669, 2006 WL 2683058 (M.D.Fla. 2006), and B & B Microscopes v. Armogida, 532 F.Supp.2d 744, 758 (W.D.Pa. 2007). The divergence of opinion is driven by the CFAA’s prohibition against accessing a computer “without authorization” or exceeding such authorization. 18 U.S.C. §1030(a). Under the CFAA, “exceeds authorized access” means “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” 18 U.S.C. §1030(e)(6). Congress did not define the phrase “without authorization.” Courts disagree regarding whether an employee’s computer malfeasance constitutes “unauthorized access” or “access in excess of authorization.” When an employee leaves his or her place of employment and later tries to access the former employer’s computer system, it is fairly clear that the employee is accessing that system “without authorization,” much like an outside hacker. The line blurs when an employee is planning to leave his or her job and, while still employed and still authorized to use the employer’s computer system, uses that system for purposes adverse to the employer’s interest. The employee technically has authorization to access the system but clearly lacks authorization to use the computer to engage in the particular conduct at issue — for example, to gather and/or disseminate the employer’s confidential information for competitive purposes and then run “scrubbing” software to cover his or her tracks. Some courts have addressed this situation by treating such unauthorized conduct as “exceed[ing] authorized access” under the CFAA (see, e.g., Nilfisk-Advance, Inc. v. Mitchell, No Civ. 05-5179, 2006 WL
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 45
§14.33
INTELLECTUAL PROPERTY LAW
827073, *1 (W.D.Ark. Mar. 28, 2006)), while others have ruled that an employee’s authorization to access the employer’s computer system ends when the employee acts against the employer’s interest, thereby rendering his or her conduct “without authorization” (see, e.g., Citrin, supra), and still others have concluded that employee malfeasance of this type, generally, is beyond the reach of the Act (see, e.g., Lockheed Martin, supra).
VI. [14.33] CRIMINAL ACTIONS FOR TRADE SECRET MISAPPROPRIATION Trade secret misappropriation can be a crime. On the federal level, the Economic Espionage Act criminalizes the misappropriation of trade secrets, both domestic and foreign. However, a trade secret owner faces several challenges in attempting to use the criminal justice system to respond to misappropriation. As an initial matter, it might be difficult to interest federal or state criminal authorities in domestic trade secret situations, given their primary commitment to addressing terrorism, drugs, gang activity, and other organized crime. Moreover, evidence in trade secret misappropriation cases is very often circumstantial, and the heightened burden of proof in a criminal case, as well as the criminal law mens rea requirement, can make trade secret misappropriation very difficult subject matter for the criminal authorities to tackle. In cases of egregious and very clear-cut trade secret misappropriation, however, the victim might consider contacting the state or federal authorities to explore their interest in undertaking an investigation. If efforts to involve the criminal authorities are successful, however, it is unlikely that both civil and criminal proceedings would be allowed to proceed on parallel tracks. Although the EEA explicitly states that it does not preempt or displace any other remedies (18 U.S.C. §1838), prosecutors usually are unwilling to take action when a civil suit is pending or planned unless the plaintiff is willing to stay the civil action, pending resolution of criminal charges. Pursuing a criminal referral, therefore, usually means deferral of the civil case. Perhaps most importantly, the criminal justice system usually cannot compensate the victim of trade secret misappropriation for its loss. Like most criminal statutes, the EEA does not provide for compensation to victims. Although the EEA does contain a provision allowing prosecutors to initiate a civil proceeding seeking injunctive relief prohibiting continuing misappropriation (18 U.S.C. §1836), and although a criminal conviction is likely to halt the perpetrator’s use and dissemination of the trade secret going forward, such a conviction usually does little to redress the past harm that a trade secret owner has suffered as a result of misappropriation. While the imposition of fines and jail time may bring emotional satisfaction to the victim, they do not replace the lost value or profits resulting from trade secret misappropriation. For this reason, most victims of trade secret theft seek redress through a civil lawsuit. In the rare instance in which trade secret misappropriation is severe enough and clear enough to interest the criminal authorities and the trade secret owner is willing to defer its civil remedy while the criminal authorities prosecute, the trade secret owner must be prepared to relinquish
14 — 46
WWW.IICLE.COM
TRADE SECRET REMEDIES AND THE INEVITABLE DISCLOSURE DOCTRINE
§14.34
control over the matter — and, to a large extent, relinquish control over the trade secrets themselves. Once criminal charges have been brought, the victim of the crime has little say in the management of the criminal case. Evidence will be investigated and discovered by government agents. Decisions about the case, witness testimony, and other evidence all will be made by the prosecutors. Communications between the victim and the prosecution are not protected by the attorney-client privilege and are, therefore, subject to discovery. Moreover, the trade secret owner must rely on the prosecution to take the steps necessary to ensure protection of the trade secrets themselves during the discovery process, through trial, and during whatever appellate proceedings follow. Even the most diligent prosecutor with the highest commitment to protecting the trade secrets will face hurdles in protecting that information during criminal proceedings. While civil trade secret litigation routinely includes the entry of protective orders limiting a defendant’s access to certain information regarding the trade secrets, those limitations are less likely in the criminal context, where the defendant has the right to see the evidence against him or her. So when will it make sense for the victim of trade secret misappropriation to seek the help of criminal authorities? When the case is one likely to interest those authorities (e.g., when there is involvement by a foreign government or foreign nationals and clear evidence of misappropriation and the information at issue clearly constitutes a valuable trade secret), when civil remedies are likely to be unattainable or ineffective, when the victim’s resources are limited, and/or when control over the trade secret is not important (e.g., when the defendant already has publicly disclosed it).
VII. [14.34] BLOCKING IMPORTATION OF GOODS MANUFACTURED WITH MISAPPROPRIATED TRADE SECRETS — INTERNATIONAL TRADE COMMISSION INVESTIGATIONS If a trade secret owner discovers that its trade secrets have been improperly used — anywhere in the world — to manufacture products for import to the United States, one possible course of action and path to redress is to seek initiation of an “unfair practices” investigation at the U.S. International Trade Commission (ITC). The ITC’s governing statute is §337 of the Tariff Act of 1930, 19 U.S.C. §1337, which authorizes the ITC to exclude from entry into the United States goods that were produced through “unfair methods of competition” or “unfair acts.” The ITC has jurisdiction over all actions involving importation of a violating article and injury (or threat of injury) to a U.S. industry. The ITC does not need personal jurisdiction over the violator; it can exercise “in rem” jurisdiction over the matter and issue an order directed to the imported articles themselves. Sealed Air Corp. v. U.S. International Trade Commission, 645 F.2d 976, 986 (C.C.P.A 1981). Another advantage to ITC proceedings is their relatively quick pace; they usually conclude within one to two years. While the vast majority of such investigations at the ITC involve claims of patent, trademark, or copyright infringement, a few opinions by the U.S. Court of Appeals for the Federal Circuit indicate that trade secret misappropriation, too, is “unfair competition” under §337 that might provide grounds for excluding offending products from import to the United States. In TianRui Group Co. v. International Trade Commission, 661 F.3d 1322 (Fed.Cir. 2011), the Federal
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
14 — 47
§14.34
INTELLECTUAL PROPERTY LAW
Circuit confirmed that the ITC has the authority to investigate trade secret misappropriation occurring anywhere in the world and to exclude from importation into the United States goods manufactured through such misappropriation. The court made clear that U.S. federal “common law,” rather than the law of any particular state (or the foreign country at issue), will apply to such claims and looked primarily to the Uniform Trade Secrets Act to provide guidance. In 2015, the Federal Circuit again confirmed that the ITC can block the importation of products resulting from trade secret misappropriation — even if that misappropriation occurred entirely outside the United States. Sino Legend (Zhangjiangang) Chemical Co. v. International Trade Commission, 623 Fed.Appx. 1016, 1016 (Fed.Cir. 2015). ITC investigations are requested by the filing of a complaint against the offending importer. The ITC typically will decide whether to launch an investigation in response to a complaint within a month or so of its filing. Complaints should comply with the requirements set forth in ITC Rule 210.12, 19 C.F.R. §210.12. Requests for temporary relief are governed by 19 C.F.R. §§210.8(a)(2) and 210.52 – 210.56, and discovery is governed by 19 C.F.R. §210.27, et seq.
14 — 48
WWW.IICLE.COM
15
Restrictive Covenants and Post-Employment Restraints
MICHAEL R. LEVINSON Seyfarth Shaw LLP
DANIEL F. LANCILOTI Freeborn & Peters LLP Chicago
®
©COPYRIGHT 2017 BY IICLE .
INTELLECTUAL PROPERTY LAW
I. [15.1] Introduction II. [15.2] Types of Restrictive Covenants A. [15.3] Noncompetition Provisions B. [15.4] Nonsolicitation Provisions 1. [15.5] Nonsolicitation of Customers 2. [15.6] Nonsolicitation of Employees C. [15.7] Nondisclosure or Confidentiality Provisions III. [15.8] Legal Requirements A. [15.9] Ancillary to Valid Transaction or Relationship B. [15.10] Adequate Consideration C. [15.11] Reasonableness 1. [15.12] Reasonable Time Restrictions 2. [15.13] Reasonable Geographic Restrictions 3. [15.14] Reasonable Activity Restrictions a. [15.15] Noncompetition b. [15.16] Nonsolicitation of Clients or Customers c. [15.17] Nonsolicitation of Employees D. [15.18] Legitimate Business Interest 1. [15.19] Near-Permanent Relationships a. [15.20] Nature-of-the-Business Test b. [15.21] Agrimerica Seven-Factor Test 2. [15.22] Confidential Information IV. [15.23] Remedies for Violation A. B. C. D.
[15.24] [15.25] [15.26] [15.27]
Injunctive Relief Monetary Relief No Attorneys’ Fees Punitive Damages
V. [15.28] Drafting and Enforcement Issues A. B. C. D.
15 — 2
[15.29] [15.30] [15.31] [15.32]
Extender Clauses Termination Without Cause Assignment of Restrictive Covenants Clawbacks
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
E. F. G. H. I. J.
[15.33] [15.34] [15.35] [15.36] [15.37] [15.38]
Choice of Law Blue Penciling Noncompetition Provision Ancillary to the Sale of a Business Employee Patent Act Whistleblower Act Restrictive Covenants Entered Post-Employment
VI. [15.39] Conclusion
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 3
§15.1
INTELLECTUAL PROPERTY LAW
I. [15.1] INTRODUCTION In today’s business environment, it is not uncommon for employees at all levels to change jobs several times throughout their careers. Often these employees will have had access to their former employers’ confidential business information and trade secrets and will have built relationships with their former employers’ customers or clients. With this in hand, it is all too tempting for departed employees to use the information or relationships, intentionally or unintentionally, to compete against their former employers. The employee rationalizes the conduct by arguing that he or she is free to use the general skills and knowledge acquired during his or her employment. The employer, however, argues that it developed proprietary business information and customer relationships that, but for his or her employment, the employee would not have obtained. As a result, more than ever, employers and their lawyers have been developing and implementing business tools designed to protect the employer’s customer relationships and confidential and trade secret information. One such tool is a noncompetition agreement, also known as a “restrictive covenant.” A restrictive covenant typically limits a contracting party from competing with the business, soliciting clients or customers, and disseminating trade secrets or other confidential information of the contracting party’s former employer. Coady v. Harpo, Inc., 308 Ill.App.3d 153, 719 N.E.2d 244, 250, 241 Ill.Dec. 383 (1st Dist. 1999). One common misconception about restrictive covenants is that they are never enforceable because they restrain competition and are against public policy. Another common misconception about restrictive covenants is that they are always enforceable, like any other contract freely negotiated. The truth, of course, lies somewhere in the middle. Although for years courts have set down blackletter law regarding restrictive covenants, a review of Illinois caselaw proves that there is no bright-line test or cookie-cutter approach for when restrictive covenants will be enforced. Often a court’s ruling on the enforceability of a restrictive covenant will turn on a variety of unique facts present in the particular situation. Because these covenants, by their very nature, restrict a person’s ability to pursue employment of his or her choosing, courts do view them as partial restraints of trade and will carefully scrutinize them to ensure their effect is not to prevent competition per se. Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill.App.3d 557, 599 N.E.2d 1072, 1079 – 1080, 175 Ill.Dec. 58 (1st Dist. 1992). However, if employers and their lawyers carefully and reasonably draft these covenants so their negative impact is minimized and implement other procedures to protect their confidential business information and customer relationships, restrictive covenants can be enforced. It is very important to recognize that the laws regarding the enforceability of restrictive covenants can vary from state to state. Thus, employees, employers, and their counsel should be familiar with the particular substantive and procedural laws of the state or states in which the covenants may need to be enforced. This chapter examines the use, application, and enforcement of restrictive covenants under Illinois law.
15 — 4
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.4
II. [15.2] TYPES OF RESTRICTIVE COVENANTS Restrictive covenants can be drafted to protect many aspects of an employer’s business, such as its long-term customer relationships, confidential business information, and existing employee workforce. Examples of the covenants designed to protect each of these business interests are set forth in §§15.3 – 15.7 below. It is important to note, however, that there is no form restrictive covenant provision that is uniformly enforced. In addition, a restrictive covenant provision that is found to be enforceable for one employer is not necessarily enforceable with respect to another employer. Courts will carefully scrutinize restrictive covenants with respect to both the law and the facts of any particular case. The sample provisions in §§15.3 – 15.7 are simply illustrative of the various types of covenants that exist. A. [15.3] Noncompetition Provisions In the most general restrictive covenant provision, an employee agrees that should he or she leave an employer, he or she will refrain from competing against the employer for a certain specified time period and often within a certain defined geographic area. For example, in Prairie Eye Center, Ltd. v. Butler, 329 Ill.App.3d 293, 768 N.E.2d 414, 417, 263 Ill.Dec. 654 (4th Dist. 2002), the court found reasonable and enforceable a restrictive covenant that provided: Upon the expiration or termination of this Agreement, employee covenants that he will not, for a period of two (2) years after expiration or termination, engage in, be associated with or have a financial interest in any medical practice or ophthalmology practice, either directly or indirectly, as employer, employee, principal agent, independent contractor, consultant, partner, stockholder, creditor in any other capacity, at any location(s) within Sangamon County, Illinois[,] or within ten (10) miles of Hillsboro, Illinois[,] and ten (10) miles of any branch office of Employer. A noncompetition provision typically prevents an employee from accepting employment from, working for, associating with, or performing other activities for a competitor for a set period of time. As discussed more fully below in §§15.11 – 15.17 below, the provision can be limited by a defined geographic area or a specific group of customers. B. [15.4] Nonsolicitation Provisions Another type of provision that is often used in restrictive covenants is a nonsolicitation provision. Similar to a noncompetition provision, a nonsolicitation provision seeks to prevent an employee from competing with his or her former employer. However, a nonsolicitation provision accomplishes this goal by preventing an employee from soliciting certain categories of people, usually an employer’s existing or prospective customers or its employees.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 5
§15.5
INTELLECTUAL PROPERTY LAW
1. [15.5] Nonsolicitation of Customers A nonsolicitation-of-customers provision precludes an employee from soliciting all or a defined scope of the employer’s customers or clients. For example, in Henry v. O’Keefe, No. 01 C 8698, 2002 WL 31324049, *1 (N.D.Ill. Oct. 18, 2002), the court enforced a restrictive covenant containing the following nonsolicitation provision: Restrictive covenant: For a period of two (2) years after the date of her termination of employment from [employer], [employee] shall not (a) solicit customers or clients of [employer] existing at the time of her employment with [employer]. 2. [15.6] Nonsolicitation of Employees Nonsolicitation-of-employees provisions can be used to prevent a former employee from soliciting the former employer’s employees to leave their employment and join a new employer. These provisions are also sometimes referred to as “anti-raiding” clauses. For example, in Arpac Corp. v. Murray, 226 Ill.App.3d 65, 589 N.E.2d 640, 644 – 645, 168 Ill.Dec. 240 (1st Dist. 1992), the court upheld an employment agreement that contained a restrictive covenant that barred the employee from recruiting his former employer’s employees. Specifically, the nonsolicitation-ofemployees provision provided: Murray acknowledges that Arpac’s relationships with its customers, their affiliates and related entities, and their employees and former persons, hereinafter referred to as prohibited persons, are special and unique, and that Arpac’s relationship with the prohibited persons may not be able to be replaced by Arpac. Murray further acknowledges that the protection of Arpac’s customers and business is essential. . . . Further, Murray expressly covenants and agrees that during the term of his employment by Arpac and for a period of twenty-four (24) months immediately following the expiration or termination of such employment for any reason . . . he will not at any time induce, or attempt to induce, any customer of Arpac to whom goods have been sold in the preceding five (5) years to refrain from purchasing the same or similar goods from Arpac or to cancel or fail to renew any contract with Arpac; or solicit the business of such customers directly or indirectly for his own account or for the account of any other person, firm, partnership or corporation; or induce, or attempt to induce, any employees, agents or sales personnel of Arpac to terminate any relationship with Arpac. [Emphasis added.] Id. C. [15.7] Nondisclosure or Confidentiality Provisions In addition to noncompetition and nonsolicitation provisions, restrictive covenants also often contain nondisclosure or confidentiality provisions that preclude an employee from using or disclosing information defined to be confidential either during employment or after employment terminates. A typical confidentiality provision was described in Abbott-Interfast Corp. v. Harkabus, 250 Ill.App.3d 13, 619 N.E.2d 1337, 1339 – 1340, 189 Ill.Dec. 288 (2d Dist. 1993), and provided:
15 — 6
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.8
Maintenance of Trade Secrets and Confidential Information. Employee shall use his best efforts and the utmost diligence to guard and protect all trade secrets and confidential information of Employer. Employee shall not, either during or after the period of his employment by Employer, in whole or in part, use for himself or any other person, firm, partnership, corporation, association or entity, the identity of Employer’s customers or customer lists, methods of operation, obtaining business, pricing, processes, techniques, systems, formulas, any information contained in the “customer history book” furnished by Employer to Employee, or other trade secrets or confidential information relating to Employer’s business. In the event Employee’s employment by Employer shall terminate for any reason whatsoever, he shall immediately return to Employer originals and any copies of all catalogs, price books, “customer history books”, designs, drawings, estimates, quotations, customer lists, records and papers and all other matters or documents of whatever nature which bears Employer’s secrets or confidential information, and which are in Employee’s possession or in his control. Employee acknowledges and agrees that the memorization or mental retention by Employee of the aforesaid secret or confidential information shall be deemed to be a “taking” hereunder, and thus subject to the restrictions contained in this Agreement. As discussed more fully in §15.8 below, although restrictive covenants often include nondisclosure or confidentiality provisions, some of the legal elements required for valid noncompetition and nonsolicitation provisions, such as reasonable geographic and time restrictions, are not required to enforce a nondisclosure or confidentiality provision.
III. [15.8] LEGAL REQUIREMENTS The first two inquiries that a court must make when determining enforceability of a restrictive covenant are whether the covenant is (a) ancillary to a valid transaction or relationship and (b) supported by adequate consideration. Illinois caselaw does not clearly state whether a nondisclosure or confidentiality provision must meet the ancillarity requirement. In most restrictive covenant cases in which the ancillarity requirement is discussed, the covenant at issue involves either a noncompetition or a nonsolicitation provision. Thus, the ancillarity requirement has not been discussed with respect to only a nondisclosure or confidentiality provision. However, in at least one case, the court appeared to apply the ancillarity requirement to both a noncompetition provision and a confidentiality provision contained in a restrictive covenant, stating: First, the Court must inquire into whether “the covenant is ancillary to a ‘valid contract.’ ” Abel v. Fox, 274 Ill.App.3d 811, 813 – 14, 211 Ill.Dec. 129, 654 N.E.2d 591, 593, (1995). To be enforceable “[t]he covenant must be subordinate to the contract’s main purpose.” Id. at 814, 211 Ill.Dec. 129, 654 N.E.2d at 593. The noncompete and non-disclosure agreements were clauses in a longer consulting agreement, which specified the terms of [defendant’s] employment with [plaintiff],
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 7
§15.9
INTELLECTUAL PROPERTY LAW
including [defendant’s] responsibilities, compensation and length of employment. Thus, the clauses were sufficiently ancillary to a valid contract. [Emphasis added.] Quixote Transportation Safety, Inc. v. Cooper, No. 03 C 1401, 2004 WL 528011, *3 (N.D.Ill. Mar. 12, 2004). Adequate consideration, however, is clearly a requirement for any restrictive covenant provision, including a nondisclosure or confidentiality provision. PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1271 – 1272 (7th Cir. 1995) (recognizing that consideration is necessary for enforceable confidentiality agreement). Once the threshold inquiries of ancillarity and consideration are met, the court will examine the reasonableness of the restrictive covenant. As discussed more fully in §§15.11 – 15.17 below, the terms of a restrictive covenant provision must be reasonable to be enforced. Coady v. Harpo, Inc., 308 Ill.App.3d 153, 719 N.E.2d 244, 250, 241 Ill.Dec. 383 (1st Dist. 1999). In determining a covenant’s reasonableness, the court will consider “whether enforcement of the covenant will injure the public, whether enforcement will cause undue hardship to the promisor and whether the restraint imposed by the covenant is greater than is necessary to protect the interests of the employer.” Id., quoting Tower Oil & Technology Co. v. Buckley, 99 Ill.App.3d 637, 425 N.E.2d 1060, 1065, 54 Ill.Dec. 843 (1st Dist. 1981). There is an important distinction that should be noted between nonsolicitation and noncompetition provisions, on the one hand, and confidentiality provisions, on the other hand. In addition to the factors stated above, the reasonableness of noncompetition and nonsolicitation provisions will be evaluated by the time and geographical scope stated in those covenants. Coady, supra. However, a confidentiality provision will not be deemed unenforceable for lack of a durational or geographic limitation when trade secrets and confidential information are involved. Id. A. [15.9] Ancillary to Valid Transaction or Relationship To be enforceable under Illinois law, a restrictive covenant must be ancillary to a valid transaction or relationship such that the covenant is subordinate to the main purpose of the transaction. Liautaud v. Liautaud, 221 F.3d 981 (7th Cir. 2000). The typical restrictive covenant stems from an employment relationship or from the sale of a business. 221 F.3d at 986. With respect to employment relationships, there exists a split in the Illinois appellate courts as to whether a covenant must be ancillary to a written employment agreement as opposed to an oral employment relationship. Applied Micro, Inc. v. SJI Fulfillment, Inc., 941 F.Supp. 750, 754 (N.D.Ill. 1996). In Creative Entertainment, Inc. v. Lorenz, 265 Ill.App.3d 343, 638 N.E.2d 217, 221, 202 Ill.Dec. 571 (1st Dist. 1994), the defendant was required to sign a restrictive covenant after having been employed by the plaintiff as an at-will employee for eight months. The terms of the employee’s at-will employment were not in writing, he received no additional compensation, and his continued employment was contingent upon his signing the restrictive covenant. After leaving the plaintiff’s employ, he began his own competing business in violation of the terms of his restrictive covenant. The plaintiff unsuccessfully sought to enforce the covenant. Id.
15 — 8
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.10
In finding the restrictive covenant unenforceable, the First District Appellate Court held that recovery under a restrictive covenant requires the existence of a valid employment contract. 638 N.E.2d at 219. Since the defendant signed the covenant as an at-will employee and without a contract, the court ruled that the restrictive covenant was simply a “naked agreement,” not subordinate to any valid contract. 638 N.E.2d at 221. However, the Second and Fourth Appellate Districts have subsequently held that a written employment agreement is not required as long as there exists a valid employment relationship. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 685 N.E.2d 434, 440, 226 Ill.Dec. 331 (2d Dist. 1997), quoting Abel v. Fox, 274 Ill.App.3d 811, 654 N.E.2d 591, 597, 211 Ill.Dec. 129 (4th Dist. 1995). These courts agree that “[t]o be enforceable, a covenant not to compete must be ancillary to either a transaction (an otherwise valid contract), or a valid relationship. . . . Therefore, a noncompetition covenant entered into by an at-will employee, whether the employee is employed under a written or oral agreement, complies with the requirement of ancillarity.” [Emphasis in original.] Id. The First District’s approach on ancillarity was weakened when a different division of the First District sided with the Lawrence & Allen and Abel courts on this very issue, stating: “Upon review of these cases and the underlying rationale, we agree with the second and fourth districts of this court and decline to follow Creative Entertainment. A restrictive covenant agreement may meet the requirements for ancillarity if it is ancillary to an employment relationship even though the employment may lack a written agreement and remain at will.” Woodfield Group, Inc. v. DeLisle, 295 Ill.App.3d 935, 693 N.E.2d 464, 468, 230 Ill.Dec. 335 (1st Dist. 1998). In addition, the United States District Court for the Northern District of Illinois has also held that oral employment relationships are sufficient to support a restrictive covenant. Applied Micro, supra, 941 F.Supp. at 754. Moreover, the Seventh Circuit Court of Appeals has held that a restrictive covenant could be based on “any other analogous circumstance giving one party a just right to be protected against competition from the other,” including a gift relationship. Liautaud, supra, 221 F.3d at 986, quoting More v. Bennett, 140 Ill. 69, 29 N.E. 888, 891 (1892). B. [15.10] Adequate Consideration In addition to the ancillary requirement, a restrictive covenant must be supported by adequate consideration. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 685 N.E.2d 434, 440, 226 Ill.Dec. 331 (2d Dist. 1997). Valid consideration from both parties is an essential element of any oral or written agreement, including restrictive covenants. Corroon & Black of Illinois, Inc. v. Magner, 145 Ill.App.3d 151, 494 N.E.2d 785, 98 Ill.Dec. 663 (1st Dist. 1986). Traditionally, courts do not inquire into the adequacy of consideration, only its existence. Prairie Rheumatology Associates, S.C. v. Francis, 2014 IL App (3d) 140338, ¶14, 24 N.E.3d 58, 388 Ill.Dec. 150. However, Illinois law excepts restrictive covenants from this rule, recognizing that a promise of continued employment alone may be an illusory benefit if the employment is at will. Thus, courts require that adequate consideration must be given for a restrictive covenant to be enforced. 2014 IL App (3d) 140338 at ¶15.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 9
§15.10
INTELLECTUAL PROPERTY LAW
Changes in conditions of employment, such as granting of stock options (First Health Group Corp. v. National Prescription Administrators, Inc., 155 F.Supp.2d 194, 229 (M.D.Pa. 2001) (applying Illinois law)) or increases in pay can provide adequate consideration to support a restrictive covenant. See Southern Illinois Medical Business Associates v. Camillo, 190 Ill.App.3d 664, 546 N.E.2d 1059, 138 Ill.Dec. 4 (5th Dist. 1989). In addition, Illinois courts have held that at-will employment that continues for a “substantial period of time” after a restrictive covenant is executed can be sufficient consideration to support a noncompetition agreement. Lawrence & Allen, supra, 685 N.E.2d at 441. Generally, a “substantial period of time” means two years or more of continued employment. Brown & Brown, Inc. v. Mudron, 379 Ill.App.3d 724, 887 N.E.2d 437, 441, 320 Ill.Dec. 293 (3d Dist. 2008). The court in Curtis 1000, Inc. v. Suess, 24 F.3d 941, 946 (7th Cir. 1994), in which eight years of continued employment was considered a substantial period, thus providing consideration to support the restrictive covenant agreement, explained the reason why employment must continue for a substantial period of time: Suppose that [the employer], when it asked [the employee] to sign the final covenant, intended to fire him the minute he signed and wanted to make sure that he would not go to work for a competitor of [the employer]. Then [the employee] would in fact have received no consideration for signing, though he wouldn’t know it at the time of signing. The judicially devised requirement of a “substantial period” of postcovenant employment avoids the need to investigate the employer’s intentions; it does this by in effect creating an irrebuttable presumption that if the employee was fired shortly after he signed the covenant the consideration for the covenant was illusory. Some Illinois courts have applied “two years of continued employment” as somewhat of a bright-line test regardless of whether the employer fired the employee or the employee quit on his or her own accord. In 2013, the First District held in Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, 993 N.E.2d 938, 373 Ill.Dec. 379, that when the only consideration for a restrictive covenant is at-will employment, employment must last for at least two years for there to be adequate consideration. Fifield did not find that there was any magic to two years, other than “Illinois courts have repeatedly held that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant.” 2013 IL App (1st) 120327 at ¶19. As a result, the court in Fifield found unenforceable for lack of consideration post-employment restrictions against a former insurance company employee who worked for only three months after signing the restrictive covenant. Fifield announced a bright-line rule that has been widely followed by other Illinois courts. See, e.g., McInnis v. OAG Motorcycle Ventures, Inc., 2015 IL App (1st) 142644, 35 N.E.3d 1076, 394 Ill.Dec. 107; Prairie Rheumatology Associates, S.C. v. Francis, 2014 IL App (3d) 140338, 24 N.E.3d 58, 388 Ill.Dec. 150; Vapor 4 Life, Inc. v. Nicks, No. 13 CH 14827, 2013 WL 6631082, *1 (Cook Cty.Cir. Dec. 3, 2013); Klein Tools, Inc. v. Stanley Black & Decker, Inc., No 13 CH 13975, 2013 WL 6149305, *2 (Cook Cty.Cir. Oct. 10, 2013).
15 — 10
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.11
Federal courts in Illinois, however, have mostly not followed Fifield. See, e.g., LKQ Corp. v. Thrasher, 785 F.Supp.2d 737 (N.D.Ill. 2011); Traffic Tech, Inc. v. Kreiter, Case No. 14-cv-7528, 2015 WL 9259544 (N.D.Ill. Dec. 18, 2015); Cumulus Radio Corp. v. Olson, 80 F.Supp.3d 900 (C.D.Ill. 2015); Montel Aetnastak, Inc.v. Miessen, 998 F.Supp.2d 694 (N.D.Ill. 2014); R.J. O’Brien & Associates, LLC v. Williamson, Case No. 14 C 2715, 2016 WL 930628 (N.D.Ill. Mar. 10, 2016); Allied Waste Services of North America, LLC v. Tibble, Case No. 16 C 1660, 2016 WL 1441449 (N.D.Ill. Apr. 7, 2016); Airgas USA, LLC v. Adams, No. 15 C 50316, 2016 WL 3536788 (N.D.Ill. June 27, 2016). These courts still required continued employment for a substantial period, but rejected Fifield’s two-year test. In Bankers Life & Casualty Co. v. Miller, No. 14 CV 3165, 2015 WL 515965 (N.D.Ill. Feb. 6, 2015), for example, the district court denied a motion to dismiss a restrictive covenant complaint when the former employee had been employed for less than a year. The court had held that “[t]he Illinois Supreme Court would similarly reject a rigid approach to determining whether a restrictive covenant was supported by adequate consideration; it would not adopt a bright-line rule requiring continued employment for at least two years in all cases.” 2015 WL 515965 at *4. In Instant Technology, LLC v. DeFazio, 40 F.Supp.3d 989, 1010 (N.D.Ill. 2014), on the other hand, the district court followed Fifield and predicted that the Illinois Supreme Court would “define a ‘substantial period’ as two years or more of continued employment.” The Seventh Circuit affirmed, but without any discussion of consideration or Fifield. C. [15.11] Reasonableness Once a court has made the threshold determination that a restrictive covenant has met the ancillarity and adequate consideration requirements of Illinois law, it will look at the reasonableness of the covenant. Under Illinois law, a restrictive covenant is reasonable only if the covenant “(1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public.” Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871, ¶17, 965 N.E.2d 393, 358 Ill.Dec. 322. The Illinois Supreme Court held in Reliable Fire that the “question of reasonableness must be decided on an ad hoc basis. There is no inflexible formula.” 2011 IL 111871 at ¶33, quoting Consultants & Designers, Inc. v. Butler Service Group, Inc., 720 F.2d 1553, 1557 (11th Cir. 1983). Reasonableness must be gauged by “all of the circumstances,” and the “same identical contract and restraint may be reasonable and valid under one set of circumstances, and unreasonable and invalid under another.” [Emphasis in original.] 2011 IL 111871 at ¶42, quoting Arthur Murray Dance Studios of Cleveland, Inc. v. Witter, 105 N.E.2d 685, 693 (Ohio C.P. 1952). Before Reliable Fire, a restrictive covenant’s reasonableness was measured by its hardship to the employee, its effect on the general public, and the reasonableness of the time, territory, or activity restrictions. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 685 N.E.2d 434, 441, 226 Ill.Dec. 331 (2d Dist. 1997). A nondisclosure or confidentiality provision was not deemed unenforceable for lack of a durational or geographic limitation when trade secrets and confidential information were involved. Coady v. Harpo, Inc.,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 11
§15.11
INTELLECTUAL PROPERTY LAW
308 Ill.App.3d 153, 719 N.E.2d 244, 250, 241 Ill.Dec. 383 (1st Dist. 1999). While Reliable Fire did not expressly change these measures of reasonableness, it did make clear that reasonableness is not limited to a consideration of these factors alone. The Supreme Court expressly held in Reliable Fire that an employee’s legitimate interest is not limited to confidential information or long-term customer relations, which historically were the only interests Illinois courts recognized as legitimate. Now, “whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case.” 2011 IL 111871 at ¶43. Confidential information, near-permanent customer relationships, and time and place restrictions are among the factors that a court may consider. AssuredPartners, Inc. v. Schmitt, 2015 IL App (1st) 141863, 44 N.E.3d 463, 398 Ill.Dec. 434. Reliable Fire represents a major shift in Illinois law. It potentially will lead to more robust enforcement of restrictive covenants based on business interests not previously recognized. Since the Supreme Court’s ruling in Reliable Fire in 2011, a number of reported cases have applied its flexible reasonableness standard. For example, in Zabaneh Franchises, LLC v. Walker, 2012 IL App (4th) 110215, 972 N.E.2d 344, 361 Ill.Dec. 859, the Illinois appellate court applied Reliable Fire’s reasonableness standard and held enforceable a two-year restrictive covenant that prohibited a former employee from performing tax services to those clients she worked with while employed by the plaintiff. The fact that the restriction was limited to only those clients with whom the former employee dealt while working for the employer was a key factor in the court’s decision. 2012 IL App (4th) 110215 at ¶23. The Zabaneh court explained that “[t]his limited restriction reasonably balances defendant’s right to earn a living with plaintiff’s right to protect its customer relationships and its investment in developing defendant’s skills.” 2012 IL App (4th) 110215 at ¶21. In contrast, in Multimedia Sales & Marketing, Inc. v. Marzullo, No. 12-CH-24766 (Cook Cty.Cir. Oct. 5, 2012), the trial court applied Reliable Fire’s reasonableness standard and held unenforceable a two-year restrictive covenant that prohibited the defendants from working in any capacity within the radio time sales industry and prohibited the defendants from contacting potential customers with whom they never had contact. See also Rubloff Development Group, Inc. v. SuperValu, Inc., 863 F.Supp.2d 732 (N.D.Ill. 2012) (applying Reliable Fire’s reasonableness standard and invalidating confidentiality provision that effectively prevented employee from holding another job in same field); Critical Care Systems, Inc. v. Heuer, 2014 IL App (2d) 130745-U (affirming circuit court’s denial of preliminary injunction under Reliable Fire’s reasonableness test because plaintiff failed to establish legitimate business interest); AssuredPartners, Inc. v. Schmitt, 2015 IL App (1st) 141863, 44 N.E.3d 463, 398 Ill.Dec. 434 (affirming summary judgment because noncompetition provision failed to meet requirements of reasonableness under Reliable Fire). The reasonableness analysis that Illinois courts have already undertaken remains valuable. Those cases illustrate how the courts have defined “reasonableness” in particular circumstances. Reliable Fire expressly recognized that “appellate court precedent for the past three decades remains intact” as “nonconclusive examples” of how the reasonableness test is applied. 2011 IL 111871 at ¶42. However, near-permanent customer relationships and the employee’s acquisition of confidential information through his or her employment are no longer the only factors to consider in determining whether an employer has a legitimate business interest. 2011 IL 111871 at ¶43. When examining the totality of the facts and circumstances of the individual case under
15 — 12
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.11
Reliable Fire’s reasonableness test, other factors may be considered to determine whether a legitimate business interest exists. For example, in Gastroenterology Consultants of North Shore, S.C. v. Meiselman, 2013 IL App (1st) 123692, 989 N.E.2d 1126, 371 Ill.Dec. 198, the appellate court recognized that, in addition to near-permanent relationships, confidential information, and geographic restrictions, the trial court also considered (1) the level of the plaintiff’s investment in time, effort, or money in the development of the defendant’s relationship with his patients, (2) the defendant’s patient-referral sources, (3) whether the plaintiff assisted the defendant in the development of his professional practice through advertising or marketing, (4) the defendant’s maintenance of a separate office where he treated patients, (5) the fact that the defendant, not the plaintiff, billed for his services, and (6) whether the defendant would have developed his relationship with his patients and referral sources “but for” his affiliation with the plaintiff. 2013 IL App (1st) 123692 at ¶11. The Meiselman court held that the lower court’s finding, based on the totality of the circumstances, that the plaintiff had failed to establish a legitimate business interest in need of protection was not against the manifest weight of the evidence and, therefore, affirmed the lower court’s denial of the plaintiff’s preliminary injunction. 2013 IL App (1st) 123692 at ¶15. Examining the totality of the circumstances under Reliable Fire’s reasonableness test, however, does not mean that the court must examine every single circumstance that may exist. In Instant Technology LLC v. DeFazio, 793 F.3d 748, 751 (7th Cir. 2015), the Seventh Circuit Court of Appeals held that a “totality of the circumstances” standard is a grant of discretion. “If the trier of fact identifies the right standard and considers the most pertinent information, a reviewing court should not second-guess its conclusions unless they are clearly wrong.” [Emphasis added.] Id. Thus, when examining the totality of the circumstances, the trial court can select specific information it deems material in determining whether a restrictive covenant meets the rule of reasonableness under Reliable Fire. Id. Interestingly, in Instant Technology, the Seventh Circuit expressed concern that determining the reasonableness of a restrictive covenant based on an examination of the totality of the circumstances could make it difficult for employers and employees to predict which covenants are enforceable until they are litigated years later. This uncertainty, according to the Instant Technology court, could have unforeseen negative consequences. The court stated: Making validity turn on “the totality of the circumstances” — which can’t be determined until litigation years after the events — makes it hard to predict which covenants are enforceable. If employers can’t predict which covenants courts will enforce, they will not make investments that may depend on covenants’ validity, and they will not pay employees higher wages for agreeing to bear potentially costly terms. Both employers and employees may be worse off as a result. Risk-averse employees who hope that their covenants will be unenforceable, but fear that they will be sustained, may linger in jobs they would be happier (and more productive) leaving. But our rule of decision comes from state law. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Reforming that law, or trying to undermine it, is beyond our remit. 793 F.3d at 751.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 13
§15.12
INTELLECTUAL PROPERTY LAW
Despite these concerns expressed by the Seventh Circuit, the three-part rule of reasonableness test set forth in Reliable Fire remains the law in Illinois and has been consistently applied by courts when examining the enforceability of restrictive covenants. Sections 15.12 – 15.17 below survey how Illinois courts have applied the reasonableness test before Reliable Fire, bearing in mind that the door is now open for courts to consider different or additional factors than they have considered previously.
PRACTICE POINTER
Research restrictive covenant cases decided since Reliable Fire to see how lower Illinois courts are applying the reasonableness test announced by the Supreme Court.
1. [15.12] Reasonable Time Restrictions In determining whether the temporal scope of a noncompetition or nonsolicitation provision is reasonable, courts have looked to such factors as the time it takes to acquire and maintain clients. Midwest Television, Inc. v. Oloffson, 298 Ill.App.3d 548, 699 N.E.2d 230, 232 Ill.Dec. 783 (3d Dist. 1998). When restrictive covenants are otherwise reasonable and the employer has a protectable interest, courts have consistently enforced time restrictions of lengths varying from one to three years after employment ends. For example, in Midwest Television, 699 N.E.2d at 235, the court found that a one-year restriction was reasonable since the testimony showed that a new advertiser’s business could take more than 12 months to develop. Likewise, in Henry v. O’Keefe, No. 01 C 8698, 2002 WL 31324049 (N.D.Ill. Oct. 18, 2002), the court held that a twoyear covenant was reasonable since it took the employer up to two years or more after initially contacting a potential client before the employer received business from that source. See also Hanchett Paper Co. v. Melchiorre, 341 Ill.App.3d 345, 792 N.E.2d 395, 275 Ill.Dec. 164 (2d Dist. 2003) (enforcing one-year covenant); Dam, Snell & Taveirne, Ltd. v. Verchota, 324 Ill.App.3d 146, 754 N.E.2d 464, 257 Ill.Dec. 806 (2d Dist. 2001) (enforcing two-year covenant); Tomei v. Tomei, 235 Ill.App.3d 166, 602 N.E.2d 23, 24, 27, 176 Ill.Dec. 716 (1st Dist. 1992) (enforcing three-year covenant). In determining the reasonableness of time restrictions, courts have also considered the volatility of the employer’s customer and other business information. For example, in Unisource Worldwide, Inc. v. Carrara, 244 F.Supp.2d 977, 982 (C.D.Ill. 2003), the court found an employer’s two-year restrictive covenant to be unreasonable since the prices, costs, and other customer information governing the employer’s operations at any particular time were volatile and changed about every six months. The Unisource court reasoned that the employer did not need two years of protection against the use of its information since it became stale after 6 to 12 months. 244 F.Supp.2d at 983. 2. [15.13] Reasonable Geographic Restrictions In determining whether the geographic scope of a noncompetition or nonsolicitation provision is reasonable, courts have considered “whether the restricted area is coextensive with
15 — 14
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.13
the area in which the employer is doing business.” Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc., 378 Ill.App.3d 437, 879 N.E.2d 512, 523, 316 Ill.Dec. 445 (1st Dist. 2007), quoting Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 685 N.E.2d 434, 442, 226 Ill.Dec. 331 (2d Dist. 1997). Consistent with Illinois policy, courts applying Illinois law have restricted an employee only in those geographical areas where the employee could have established “relationships with the employer’s customers in ways that could have been detrimental in the hands of a competitor.” Cambridge Engineering, 879 N.E.2d at 523. For example, the court in Midwest Television, Inc. v. Oloffson, 298 Ill.App.3d 548, 699 N.E.2d 230, 235, 232 Ill.Dec. 783 (3d Dist. 1998), held that a 100-mile geographic limitation in a radio disc jockey’s covenant was enforceable when the plaintiff demonstrated that its radio station had a 60-mile broadcast range, with the FM station capable of reaching up to 90 miles. In addition, the plaintiff’s station manager testified that the 100-mile restriction was necessary because a station with a stronger signal located near the edge of the zone could cover the plaintiff’s broadcast territory, competing for its listeners and advertisers. In contrast, in Lawrence & Allen, supra, the court found a nationwide geographic restriction contained in a restrictive covenant to be unenforceable since the plaintiff’s office was located in Illinois and the plaintiff failed to present any evidence that its clients were nationwide. However, the absence of a geographic limitation has not been fatal to a restrictive covenant as long as the purpose of the restriction is to protect the employer from losing customers to a former employee who, by virtue of the prior relationship, gained special knowledge and familiarity with the customers’ requirements. Abbott-Interfast Corp. v. Harkabus, 250 Ill.App.3d 13, 619 N.E.2d 1337, 189 Ill.Dec. 288 (2d Dist. 1993). Illinois courts have repeatedly upheld restrictive covenants that had no geographic limitations but limited their effect to those customers with whom the employee had material contact. See YCA, LLC v. Berry, No. 03 C 3116, 2004 WL 1093385, *9 (N.D.Ill. May 7, 2004). However, when a restrictive covenant prohibits an employee from servicing a former employer’s customers with whom he or she did not solicit or have any direct contact, courts have been less likely to enforce such a provision. Lawrence & Allen, supra, 685 N.E.2d at 441. For example, in Liautaud v. Liautaud, 221 F.3d 981, 988 (7th Cir. 2000), the Seventh Circuit found unenforceable a covenant that lacked a geographic limitation when the plaintiff failed to demonstrate why the defendant could not expand his sandwich shops into cities where the plaintiff did not operate. Likewise, in Unisource Worldwide, Inc. v. Carrara, 244 F.Supp.2d 977, 983 (C.D.Ill. 2003), the court found overbroad and unenforceable a restrictive covenant that prohibited the defendant from doing business not only with customers he worked with while employed by the plaintiff but also with customers and products he never dealt with before. On the other hand, in Dam, Snell & Taveirne, Ltd. v. Verchota, 324 Ill.App.3d 146, 754 N.E.2d 464, 470, 257 Ill.Dec. 806 (2d Dist. 2001), the Second District found valid a restrictive covenant that prevented the defendant from providing accounting services to all of the plaintiff’s clients, regardless of whether the defendant had provided services to such clients. The court stated:
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 15
§15.14
INTELLECTUAL PROPERTY LAW
Nor do we believe that the restrictive covenant was overly broad because it prevented [the employee] from providing accounting services to all of [the employer’s] clients, regardless of whether [the employee] had provided services for such clients during her employment with [the employer]. Based on our review of the governing law, we believe that [the employer] had a protectable legal interest in all of its business clients and could lawfully prohibit its former employees from performing accounting services on behalf of any of its clients for a reasonable period of time after the termination of their employment. Id. 3. [15.14] Reasonable Activity Restrictions The very purpose of a restrictive covenant is to prohibit competitive or potentially competitive activities. While it is, of course, impossible to predict or discuss every type of competitive activity that parties might contract to restrict, there are certain activities, discussed in §§15.15 – 15.17 below, that have appeared time and time again in restrictive covenants. They include (a) competition through employment, ownership, or other affiliation with a competitor; (b) solicitation of customers; and (c) solicitation of employees. a. [15.15] Noncompetition Noncompetition provisions typically restrict an employee from accepting employment from, owning or operating, or otherwise affiliating with an existing or potential competitor of his or her former employer or from starting up a competitive business. Activity restrictions such as a noncompetition provision are similar to geographic and time restrictions in that they must be narrowly tailored to protect against only activities that threaten the employer’s legitimate interests. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 685 N.E.2d 434, 442, 226 Ill.Dec. 331 (2d Dist. 1997). Thus, courts have upheld activity restrictions that prohibited former employees from obtaining new positions that required them to perform “services which are the same or of similar kind or are of similar or greater responsibility as those” they performed while working for the plaintiff. Midwest Television, Inc. v. Oloffson, 298 Ill.App.3d 548, 699 N.E.2d 230, 235, 232 Ill.Dec. 783 (3d Dist. 1998). One federal district court has upheld a provision that prohibited an employee from providing services to a competitor “if doing so would involve the actual or threatened unauthorized use or disclosure of [the employer’s] Confidential Documents.” RTC Industries, Inc. v. Haddon, No. 06 C 5734, 2007 WL 2743583, *1 (N.D.Ill. Sept. 10, 2007). The district court judge ruled that the provision could be an enforceable activity restraint as long as the restriction was necessary to protect the employer’s legitimate business interest. 2007 WL 2743583 at *4. The judge recognized that, under Illinois law, an employer could indirectly restrict an employee from inevitably using or disclosing the employer’s confidential information. 2007 WL 2743583 at *5, citing PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). Thus, an employer could also directly restrict an employee’s disclosure of confidential information using a noncompetition provision. The RTC Industries court reasoned that it “would be a strange result if, as a matter of law, contracting parties could not do directly what the Illinois law permits them to do indirectly.” 2007 WL 2743583 at *5.
15 — 16
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.16
Noncompetition provisions that restrict employees from working altogether for a competitor, rather than narrowly restricting competitive activities, have often been found to be unenforceable. Telxon Corp. v. Hoffman, 720 F.Supp. 657, 664 – 665 (N.D.Ill. 1989) (“[T]he relevant clauses do not preclude employment only in those capacities which might threaten Telxon’s legitimate interests. As written, the agreement would prevent Hoffman from working as a competitor’s janitor.”). Thus, if the employer’s protectable interests are not at risk, courts will not permit sweeping activity restrictions. Liautaud v. Liautaud, 221 F.3d 981, 988 (7th Cir. 2000) (finding activity restriction oppressive to defendant because it prevented defendant from opening any kind of sandwich shop outside Madison, Wisconsin, regardless of whether that shop used plaintiff’s secret recipes, products, or systems); AssuredPartners, Inc. v. Schmitt, 2015 IL App (1st) 141863, ¶35, 44 N.E.3d 463, 398 Ill.Dec. 434 (finding overbroad and unenforceable restrictive covenant that created blanket prohibition intended to bar plaintiff insurance agent from working as broker in any capacity within entire universe of professional liability insurance business anywhere in country). b. [15.16] Nonsolicitation of Clients or Customers A restrictive covenant can also restrict an employee from soliciting a former employer’s clients or customers to sell them services or products that are similar to those sold by the former employer. Covenants that restrict a specific limited activity, such as soliciting particular clients, have been subject to a lower degree of scrutiny than covenants that prohibit employees from engaging in broader types of competition with their employers. Abbott-Interfast Corp. v. Harkabus, 250 Ill.App.3d 13, 619 N.E.2d 1337, 1341, 189 Ill.Dec. 288 (2d Dist. 1993). It is not clear if such different scrutiny will survive Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871, 965 N.E.2d 393, 358 Ill.Dec. 322. An activity restriction that prohibits an employee from soliciting any of the employer’s clients has been less likely to be upheld than an activity restriction that prohibits an employee from soliciting only those clients with whom the employee had contact while he or she was employed with the employer. Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc., 378 Ill.App.3d 437, 879 N.E.2d 512, 528, 316 Ill.Dec. 445 (1st Dist. 2007) (holding nonsolicitation provision invalid because it prevented employee from contacting customers with whom he had no contact); Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 685 N.E.2d 434, 441, 226 Ill.Dec. 331 (2d Dist. 1997) (finding nonsolicitation provision overly broad because it prevented defendant from soliciting any of plaintiff’s clients, regardless of whether defendant developed relationship with those clients while employed by plaintiff); Hay Group, Inc. v. Bassick, 36 Employee Benefits Cas. (BNA) 1369 (N.D.Ill. 2005) (finding nonsolicitation provision unenforceable because it restricted employee from soliciting over 6,000 of her former employer’s customers with whom she had no contact during her employment); AssuredPartners, Inc. v. Schmitt, 2015 IL App (1st) 141863, ¶37, 44 N.E.3d 463, 398 Ill.Dec. 434 (recognizing that courts are reluctant to enforce nonsolicitation provisions that prohibit former employees from servicing customers they never had contact with while working for their original employer); Deere Employees Credit Union v. Smith, 2016 IL App (3d) 150516-U, ¶33 (invalidating restrictive covenant because it prohibited employee from targeting any and every customer regardless of whether employee had any contact with those customers). But see Dam,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 17
§15.17
INTELLECTUAL PROPERTY LAW
Snell & Taveirne, Ltd. v. Verchota, 324 Ill.App.3d 146, 754 N.E.2d 464, 470, 257 Ill.Dec. 806 (2d Dist. 2001) (holding enforceable restrictive covenant that prevented defendant from providing accounting services to all of plaintiff’s clients regardless of whether defendant had provided services for such clients during her employment with plaintiff). Activity restraints that lack both a geographic limitation and any qualifying language concerning the particular customers to which they apply have been found to be unreasonable. Eichmann v. National Hospital & Health Care Services, Inc., 308 Ill.App.3d 337, 719 N.E.2d 1141, 241 Ill.Dec. 738 (1st Dist. 1999). It has even been held that a solicitation that occurs during a period covered by a nonsolicitation agreement violates that agreement even if the person is only soliciting the recipient to give him or her business after the nonsolicitation period expires. Henry v. O’Keefe, No. 01 C 8698, 2002 WL 31324049, *5 (N.D.Ill. Oct. 18, 2002). “Whether a particular client contact constitutes a solicitation, depends upon the method employed and the intent of the solicitor to target a specific client in need of his services.” Tomei v. Tomei, 235 Ill.App.3d 166, 602 N.E.2d 23, 26, 176 Ill.Dec. 716 (1st Dist. 1992). See, e.g., Smith, Waters, Kuehn, Burnett & Hughes, Ltd. v. Burnett, 192 Ill.App.3d 693, 548 N.E.2d 1331, 1336, 139 Ill.Dec. 617 (3d Dist. 1989) (finding attorney did not violate nonsolicitation agreement by placing general legal advertisements in local newspaper). But see Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cross, No. 98 C 1435, 1998 WL 122780 (N.D.Ill. Mar. 13, 1998) (finding insurance broker violated nonsolicitation covenant by contacting his former customers to inform them that he had resigned and joined competitor). c. [15.17] Nonsolicitation of Employees An employer’s protectable interest in maintaining a stable workforce was acknowledged in Arpac Corp. v. Murray, 226 Ill.App.3d 65, 589 N.E.2d 640, 168 Ill.Dec. 240 (1st Dist. 1992). There, the court examined the validity of covenants that prevent former employees from raiding the employer’s workforce by soliciting employees and enticing them to leave their employment and join the former employee’s new employer. The Arpac court found those covenants enforceable as long as they are narrowly tailored to protect the plaintiff’s legitimate business interest in maintaining a stable workforce. However, in early 2003, the court in Unisource Worldwide, Inc. v. Carrara, 244 F.Supp.2d 977, 983 (C.D.Ill. 2003), issued an opinion that refused to acknowledge the existence of an employer’s protectable interest in maintaining a stable workforce. The court reasoned that the only two legitimate business interests that exist that could give rise to a restrictive covenant are near-permanent relationships with clients and confidential information. As a result, the Unisource court held that employers do not have a protectable interest in maintaining a stable workforce and found the defendant’s anti-raiding provision unenforceable. Id. The Northern District of Illinois addressed a similar issue a few months later in Pactiv Corp. v. Menasha Corp., 261 F.Supp.2d 1009 (N.D.Ill. 2003). There, the district court rejected as overly broad a covenant between employers that prevented one employer from hiring away the other’s
15 — 18
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.17
management-level employees. The court found the restriction to be an invalid restraint on trade. 261 F.Supp.2d at 1014 – 1015. Interestingly, the decision did not mention the earlier Unisource decision and did not hold whether the plaintiff had a protectable interest in maintaining a stable workforce. Rather, the Pactiv court’s decision focused on the plaintiff’s right to protect its confidential information. The court noted that, although the plaintiff had a protectable interest in not having the defendant hire away some of its management-level employees (specifically, those who learned of information while working on an agreement between the plaintiff and the defendant), the contract was overly broad because it included all of the plaintiff’s managementlevel employees, even those who possessed no confidential information. Although Pactiv was not factually analogous to Unisource because it did not involve an employee’s restrictive covenant, it provided the basis for another federal district court to reconcile Unisource with Arpac, supra. In YCA, LLC v. Berry, No. 03 C 3116, 2004 WL 1093385, **17 – 18 (N.D.Ill. May 7, 2004), the court examined the validity of an anti-raiding clause that provided that the defendant employee would not directly or indirectly by assisting others, recruit or hire, or attempt to recruit or hire, any other associate of [the plaintiff], or induce or attempt to induce any associate of [the plaintiff] to terminate association with [the plaintiff]. In examining the Unisource holding, the YCA court noted that although the court in Unisource found no protectable interest in maintaining a stable workforce, it did acknowledge the protection of confidential information as a “legitimate business interest.” 2004 WL 1093385 at *17, quoting Unisource, 244 F.Supp.2d at 983. As a result, the YCA court held that covenants not to recruit are enforceable under Illinois law to the extent that they support the employer’s legitimate business interest in guarding its confidential information from potential competitors. The court in YCA found the covenant to be overly broad because it prevented the defendant from “recruiting any [of the plaintiff’s] employees for any business, even for businesses doing wholly different lines of work, in geographic areas where [the plaintiff] does not even function.” [Emphasis in original.] 2004 WL 1093385 at *18. The court could not “understand what legitimate business purpose is accomplished by so broad a restrictive covenant. Indeed, to demonstrate the absurdity of this covenant, the Court noted that it would theoretically prevent [the defendant] from recruiting [the plaintiff’s] janitor to work as a postal carrier in Somalia.” Id. The court held that an anti-raiding covenant could protect the plaintiff’s legitimate business interest (here, confidential information) only if it prevented the defendant from recruiting the plaintiff’s employees who possessed confidential information to work for a competitor. The court proceeded to limit the covenant to cases in which the defendant attempted to recruit the plaintiff’s employees who potentially possessed confidential information. See also Hay Group, Inc. v. Bassick, 36 Employee Benefits Cas. (BNA) 1369 (N.D.Ill. 2005) (finding provision that prohibited defendant former employee from soliciting “any” employees or worldwide affiliates of plaintiff overly broad and unenforceable). While the covenant at issue in Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871, 965 N.E.2d 393, 358 Ill.Dec. 322, included a restriction on soliciting employees, the court did not separately discuss that aspect of the covenant. Nonetheless, it is apparent from the court’s opinion
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 19
§15.18
INTELLECTUAL PROPERTY LAW
that it intended its analysis and the reasonableness test it announced to apply to that type of restriction as well. As a result, Unisource is likely not good law to the extent it held that only two legitimate business interests exist. Pactiv and YCA are also distinguishable from Reliable Fire to the extent they suggest that an employer’s legitimate interest is limited to confidential information. Reliable Fire suggests that Arpac got it right that a stable workforce can be a legitimate business interest, based on the facts and circumstances present there. Although the Illinois Supreme Court has not decided a restrictive covenant case involving whether an employer has a legitimate business interest in maintaining a stable workforce, it addressed a similar issue in H & M Commercial Driver Leasing, Inc. v. Fox Valley Containers, Inc., 209 Ill.2d 52, 805 N.E.2d 1177, 282 Ill.Dec. 160 (2004). In H & M, the plaintiff entered into a contract to lease truck drivers to the defendant company on a per-hour basis. The contract between the plaintiff and the defendant contained a provision that prevented the defendant, for one year from the termination of the agreement, from hiring any of the plaintiff’s employees that were leased to the defendant. After the defendant hired one of the plaintiff’s employees, the plaintiff brought an action for breach of contract. The Illinois Supreme Court upheld the restriction, finding that it did not act as an unreasonable restraint on trade. 805 N.E.2d at 1184. In reaching this decision, the H & M court reasoned that the plaintiff had a legitimate interest in preventing the defendant from hiring away its truck driver employees because the plaintiff’s sole business asset was its truck drivers. The restriction on hiring the plaintiff’s employees afforded the plaintiff fair protection of that interest. Id. “[T]o conclude otherwise,” the H & M court held, “would render H & M nothing more than ‘an involuntary and unpaid employment agency.’ ” 805 N.E.2d at 1184, quoting Therapy Services, Inc. v. Crystal City Nursing Center, Inc., 239 Va. 385, 389 S.E.2d 710, 712 (1990). Especially in light of Reliable Fire, supra, the H & M decision strongly suggests that the Illinois Supreme Court would recognize an employer’s legitimate interest in maintaining a stable workforce. D. [15.18] Legitimate Business Interest Even if a restrictive covenant is reasonable in its time, geography, and activity restrictions, it will not necessarily be enforced. The employer must still prove that it has a legitimate business interest that needs to be protected by the restrictive covenant. An enforceable restrictive covenant will protect only an employer’s “legitimate business interest.” Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill.App.3d 557, 599 N.E.2d 1072, 1079 – 1080, 175 Ill.Dec. 58 (1st Dist. 1992). Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871, 965 N.E.2d 393, 358 Ill.Dec. 322, expressly rejected the Illinois law that had long held that only confidential information and long-term customer relations qualify as legitimate business interests. The court announced this new test: Whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Factors to be considered in this analysis
15 — 20
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.20
include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case. 2011 IL 111871 at ¶43. Reliable Fire expressly overruled prior Illinois cases that limited an employer’s legitimate business interests to confidential information and long-term customer relations. Those cases are worth reviewing to the extent they are at least “nonconclusive examples” of how the courts have determined under the particular facts and circumstances of a particular case whether one or the other of those business interests existed. 2011 IL 111871 at ¶42. Here is how Illinois courts previously characterized the two “protectable interests” that were sufficient to justify enforcement of a covenant not to compete: (1) when, by the nature of the business, the customers’ relationships with the employer are near-permanent and the employee would not have had contact with the customers absent the employee’s employment; and (2) when the employee gained trade secrets or other confidential information through his or her employment and attempted to use it for his or her own benefit. Id. Each is discussed in turn in §§15.19 – 15.22 below, with the understanding that the cases decided on each are nothing more than “nonconclusive examples.” Id. Their precedential and persuasive values are limited in light of Reliable Fire, supra. 1. [15.19] Near-Permanent Relationships To satisfy the prior near-permanency test, an employer did not need to show that its customer relationships were perpetual or indissoluble, that it had an exclusive relationship with its customers, or that a near-permanent relationship existed with each customer; nor did the employer have to show that it had an exclusive relationship with its customers. Audio Properties, Inc. v. Kovach, 275 Ill.App.3d 145, 655 N.E.2d 1034, 1037, 211 Ill.Dec. 651 (1st Dist. 1995). Rather, employers could establish the existence of a near-permanent relationship by using either the nature-of-the-business test espoused in Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill.App.3d 557, 599 N.E.2d 1072, 175 Ill.Dec. 58 (1st Dist. 1992), which considered the general characteristics of a business, or the seven-factor test established in Agrimerica, Inc. v. Mathes, 170 Ill.App.3d 1025, 524 N.E.2d 947, 120 Ill.Dec. 765 (1st Dist. 1988). Clearly, neither of these tests is viable any longer in light of Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871, 965 N.E.2d 393, 358 Ill.Dec. 322. However, the cases applying each provide a good framework for at least beginning to amass the totality of facts and circumstances that must now be considered. a. [15.20] Nature-of-the-Business Test Some Illinois courts recognized that near permanency turned in large part on the nature of the business involved. Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill.App.3d 557, 599 N.E.2d 1072, 1081, 175 Ill.Dec. 58 (1st Dist. 1992). Some businesses were more amenable to success
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 21
§15.21
INTELLECTUAL PROPERTY LAW
under this test. For example, near-permanent client relationships were generally found to be inherent in employers that (1) provided professional services such as insurance brokerages or certified public accountants, (2) provided a unique product or service, and (3) had entered into contracts with their customers. 599 N.E.2d at 1081 – 1082. Courts recognized that it was difficult to show a near-permanent relationship with customers of businesses that were engaged in sales, did not provide a unique product, had customers that engaged in cross-purchasing, and had customers whose identities were well known throughout the industry. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 685 N.E.2d 434, 444, 226 Ill.Dec. 331 (2d Dist. 1997). In addition, businesses that did not engender customer loyalty and businesses in which customers utilized many suppliers simultaneously to meet their needs generally did not succeed under the nature-of-the-business test. Id. As the Seventh Circuit explained in Curtis 1000, Inc. v. Suess, 24 F.3d 941, 948 (7th Cir. 1994): The Illinois cases distinguish between sellers of services, especially professional services such as accounting and consulting, and sellers of ordinary goods. In the former class, where the quality of the seller’s service is difficult to determine by simple inspection, customers come to repose trust in a particular seller, and that trust is a valuable business asset, created by years of careful management, that the employee is not allowed to take away with him. . . . In the latter class, involving the sale of goods, the element of trust is attenuated, particularly where as in this case the good is a simple and common one sold under competitive conditions. In these cases Illinois law does not permit the seller to claim a protectable interest in his relations with his customers. [Citations omitted.] b. [15.21] Agrimerica Seven-Factor Test In Agrimerica, Inc. v. Mathes, 170 Ill.App.3d 1025, 524 N.E.2d 947, 951, 120 Ill.Dec. 765 (1st Dist. 1988), the court identified seven factors that would aid in determining whether a nearpermanent relationship existed: “(1) the number of years required to develop the clientele; (2) the amount of money invested to acquire clients; (3) the degree of difficulty in acquiring clients; (4) the extent of personal customer contact by the employee; (5) the extent of the employer’s knowledge of its clients; (6) the duration of the customers’ association with the employer; and (7) the continuity of the employer-customer relationships.” To establish a legitimate business interest under this near-permanent-relationship test, the plaintiff had to show that “but for the employment in question, the employee would not have come into contact with the employer’s customers.” Quixote Transportation Safety, Inc. v. Cooper, No. 03 C 1401, 2004 WL 528011, *4 (N.D.Ill. Mar. 12, 2004), quoting Agrimerica, supra, 524 N.E.2d at 952. However, if the employee personally knew the customers before the inception of the employment in question, the employer likely would not have any protectable interest in those customers. Com-Co Insurance Agency, Inc. v. Service Insurance Agency, Inc., 321 Ill.App.3d 816, 748 N.E.2d 298, 303, 254 Ill.Dec. 852 (1st Dist. 2001).
15 — 22
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.22
Whether a protectable interest existed under the seven-factor test depended on the particular facts of each case. See Hanchett Paper Co. v. Melchiorre, 341 Ill.App.3d 345, 792 N.E.2d 395, 402, 275 Ill.Dec. 164 (2d Dist. 2003) (finding that plaintiff packaging distributor demonstrated near-permanent relationships with its customers using seven-factor test). But see Quixote, supra (finding that plaintiff distributor of transportation safety equipment failed to demonstrate nearpermanent relationships with its customers with seven-factor test). 2. [15.22] Confidential Information Illinois courts enforced restrictive covenants when the former employee learned trade secrets or other confidential information while in the plaintiff’s employ and subsequently attempted to use it for his or her own benefit. Office Mates 5, North Shore, Inc. v. Hazen, 234 Ill.App.3d 557, 599 N.E.2d 1072, 1084, 175 Ill.Dec. 58 (1st Dist. 1992). Illinois courts have not clearly delineated the difference between trade secrets and confidential information. What seems obvious from the caselaw, however, is that confidential information can be something less than a trade secret, yet still be confidential. How much less is unclear, though. To be confidential, information must not be generally known, must be valuable to competitors, and must be protected or kept secret by the business claiming that it is confidential. Unisource Worldwide, Inc. v. Carrara, 244 F.Supp.2d 977, 985 (C.D.Ill. 2003). Information that is generally known by persons in the trade or that could easily be duplicated by reference to telephone directories or industry publications is not protectable. Unisource, supra, 244 F.Supp.2d at 986; Lifetec, Inc. v. Edwards, 377 Ill.App.3d 260, 880 N.E.2d 188, 196, 316 Ill.Dec. 710 (4th Dist. 2007). This is especially true in industries in which customers do business with more than one distributor so that their identities are known to competitors. Unisource, supra, 244 F.Supp.2d at 986; Lifetec, supra. In addition, “pricing information conveyed to a customer that the customer is at liberty to divulge is not confidential.” Unisource, 244 F.Supp.2d at 987. Furthermore, an employer has no proprietary interest in information, such as purchase history, needs, and preferences, belonging to its clients. Id. However, when assessing the confidential nature of an employer’s business information, courts have considered the “compilation, generation, and use of information and the circumstances under which the information was maintained.” Lifetec, supra, 880 N.E.2d at 197. An employer can have a protectable business interest in information that the employer compiles and organizes in one place and maintains in a confidential manner. Id. Thus, for example, while the identities of customers may not be confidential, information specific to those customers that an employer compiles over time and maintains in a confidential manner, such as client business cycles, contract expiration dates, and personnel preferences, has qualified as confidential information worthy of protection via a reasonably drafted restrictive covenant. Agency, Inc. v. Grove, 362 Ill.App.3d 206, 839 N.E.2d 606, 616, 298 Ill.Dec. 283 (2d Dist. 2005). In addition, while pricing may lose its confidentiality once it is provided to a customer without any confidentiality restrictions, the underlying components, such as margins, pricing formulae, and material costs, that could reveal how the pricing was calculated before it was given to the customers can qualify as a protectable interest as long as the employer maintains that information in a confidential manner. Lifetec, supra, 880 N.E.2d at 197.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 23
§15.23
INTELLECTUAL PROPERTY LAW
IV. [15.23] REMEDIES FOR VIOLATION Once a party to a restrictive covenant learns of an actual or threatened violation of the covenant by another party, it can seek one of several remedies under Illinois law. Generally, a plaintiff will file a complaint against the offending party requesting both injunctive relief and money damages. See §§15.24 – 15.27 below. A. [15.24] Injunctive Relief A plaintiff can seek a permanent injunction to prevent the offending party from violating or continuing to violate the terms of the restrictive covenant. To obtain a permanent injunction, a plaintiff must plead and prove that (1) it possesses a clear, protectable interest, (2) there is no adequate remedy at law, and (3) irreparable harm will result if the relief is not granted. Sheehy v. Sheehy, 299 Ill.App.3d 996, 702 N.E.2d 200, 234 Ill.Dec. 34 (1st Dist. 1998). For purposes of a permanent injunction, an inadequate remedy at law can be the threat of irreparable or other harm that cannot be adequately corrected by the payment of monetary damages. Id. Often, however, by the time the court has had the opportunity to hear the evidence and rule on the merits, the term of the restrictive covenant has expired and, unless the restrictions are extended by the court, the request for an injunction becomes moot. Thus, in most cases, the most useful form of injunctive relief is a temporary restraining order (TRO) followed by a preliminary injunction. If a plaintiff acts quickly upon learning of an actual or threatened violation of the restrictive covenant, it can often seek interim injunctive relief on an expedited basis in the form of a TRO and/or a preliminary injunction. TROs and preliminary injunctions are provisional remedies granted to preserve the status quo until the court has the opportunity to conduct a full hearing on the merits of the case. As a result, the burden of proof to obtain these preliminary remedies is not as onerous as for obtaining permanent injunctive relief. To obtain such expedited injunctive relief, the moving party must demonstrate that (1) the employer possesses a clear right or interest needing protection, (2) the employer has no adequate remedy at law, (3) irreparable harm will result if the preliminary injunction or TRO is not granted, and (4) there is a reasonable likelihood the moving party will succeed on the merits of the case. Hanchett Paper Co. v. Melchiorre, 341 Ill.App.3d 345, 792 N.E.2d 395, 400, 275 Ill.Dec. 164 (2d Dist. 2003). Once a protectable interest is established, irreparable injury is presumed to ensue if the interest is not protected. Arpac Corp. v. Murray, 226 Ill.App.3d 65, 589 N.E.2d 640, 649, 168 Ill.Dec. 240 (1st Dist. 1992). In addition, it is not necessary that a party seeking an injunction show an actual loss of sales before relief will be granted, as the threat of immediate and irreparable harm will suffice. U-Haul Company of Central Illinois v. Hindahl, 90 Ill.App.3d 572, 413 N.E.2d 187, 45 Ill.Dec. 854 (3d Dist. 1980). B. [15.25] Monetary Relief In addition to injunctive relief, a plaintiff may also seek money damages for a violation of a restrictive covenant. Generally, money damages are sought as a remedy for the former employer’s breach of its employment contract or other agreement containing the restrictive covenant. As with any breach-of-contract action, the proper measure of damages is the amount of money that will place the injured party in as satisfactory a position as it would have been in had the contract been performed. Equity Insurance Managers of Illinois, LLC v. McNichols, 324
15 — 24
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.26
Ill.App.3d 830, 755 N.E.2d 75, 257 Ill.Dec. 973 (1st Dist. 2001). A person breaching a contract can be held liable for any damages that may fairly and reasonably be considered as arising from the breach in light of the facts that were known or should have been known. Hartbarger v. SCA Services, Inc., 200 Ill.App.3d 1000, 558 N.E.2d 596, 146 Ill.Dec. 633 (5th Dist. 1990). Because these cases often involve defendants usurping their former employers’ business opportunities or misappropriating their confidential information, money damages are often measured in terms of an employer’s lost profits. The amount of an award of damages for lost profits need not be proved with absolute certainty, but the evidence must show a loss with a reasonable degree of certainty and afford a reasonable basis for the calculation of damages. Prairie Eye Center, Ltd. v. Butler, 329 Ill.App.3d 293, 768 N.E.2d 414, 422, 263 Ill.Dec. 654 (4th Dist. 2002). Accord Hill v. Names & Addresses, Inc., 212 Ill.App.3d 1065, 571 N.E.2d 1085, 1094 – 1095, 157 Ill.Dec. 66 (1st Dist. 1991) (awarding lost profits in breach-of-contract dispute); Everen Securities, Inc. v. A.G. Edwards & Sons, Inc., 308 Ill.App.3d 268, 719 N.E.2d 312, 319, 241 Ill.Dec. 451 (3d Dist. 1999) (awarding lost profits in breach-of-fiduciary-duty case). Additional money damages can be sought for injury to reputation and goodwill and the resulting potential loss of future business. These damages are often difficult to calculate, though. In addition to a breach-of-contract claim, a plaintiff should also consider asserting certain tort and statutory claims if the facts permit. For example, when an employee attempts to take a former employer’s current clients under contract or prospective clients, the former employer should consider claims for tortious interference with contract and tortious interference with prospective business advantage. In addition, if the employee had a fiduciary relationship with the employer, a claim for breach of fiduciary duties should be considered. Furthermore, when an employee has taken an employer’s confidential or trade secret information, the employer should consider claims for violation of the Illinois Trade Secrets Act, 765 ILCS 1065/1, et seq., or the Computer Fraud and Abuse Act of 1986, Pub.L. No. 99-474, 100 Stat. 1213, codified at 18 U.S.C. §1030. These claims arise independent of the restrictive covenant and are governed by their own legal requirements. However, they are often asserted in restrictive covenant cases in conjunction with a claim for injunctive relief and breach of contract. C. [15.26] No Attorneys’ Fees Generally, absent a statute or contract provision specifically providing for the assessment of attorneys’ fees and costs, under Illinois law each party is responsible for its own costs of litigation. Installco Inc. v. Whiting Corp., 336 Ill.App.3d 776, 784 N.E.2d 312, 271 Ill.Dec. 94 (1st Dist. 2002). As a result, attorneys’ fees are not generally recoverable in restrictive covenant cases absent a prevailing party provision or some other type of provision in the agreement that awards attorneys’ fees to one of the parties. To protect themselves against the expense of litigating noncompetition agreements, employers often include provisions in their restrictive covenants requiring the employee to pay the employer’s attorneys’ fees should the employer file a lawsuit to enforce the provisions of the restrictive covenant.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 25
§15.27
INTELLECTUAL PROPERTY LAW
Other agreements sometimes provide for attorneys’ fees to be awarded to the prevailing party. However, a prevailing party provision may not be the best way to address attorneys’ fees since disputes often subsequently arise over which party “prevailed” in the litigation. This is especially relevant when a court awards partial relief to the plaintiff, perhaps by blue-penciling the covenant. D. [15.27] Punitive Damages Obtaining punitive damages in restrictive covenant cases is a difficult task. Generally, under Illinois law, punitive damages are appropriate only when a defendant’s actions are accompanied by aggravating circumstances such as wantonness, willfulness, malice, fraud, oppression, violence, and recklessness. PCx Corp. v. Ross, 209 Ill.App.3d 530, 568 N.E.2d 311, 154 Ill.Dec. 311 (1st Dist. 1991). When these aggravating circumstances exist, punitive damages can be awarded as punishment to the wrongdoer and as a means to deter the particular defendant from committing like offenses in the future. Maher & Associates, Inc. v. Quality Cabinets, 267 Ill.App.3d 69, 640 N.E.2d 1000, 203 Ill.Dec. 850 (2d Dist. 1994). However, punitive damages are not recoverable simply for a breach of contract, even if the breach is “wilful.” C-B Realty & Trading Corp. v. Chicago & North Western Ry., 289 Ill.App.3d 892, 682 N.E.2d 1136, 1143, 225 Ill.Dec. 59 (1st Dist. 1997). Rather, punitive damages are recoverable for a breach of contract only when “the conduct causing the breach is also a tort for which punitive damages are recoverable.” Id., quoting Morrow v. L.A. Goldschmidt Associates, Inc., 112 Ill.2d 87, 492 N.E.2d 181, 184, 96 Ill.Dec. 939 (1986). Thus, a plaintiff’s claim for punitive damages should be sought through a tort claim, such as tortious interference or breach of fiduciary duty.
V. [15.28] DRAFTING AND ENFORCEMENT ISSUES Numerous issues frequently arise in the drafting and enforcement of restrictive covenants. Sections 15.29 – 15.38 below describe some of the more common issues encountered by employers, employees, and their lawyers. A. [15.29] Extender Clauses Clauses that extend the restrictive covenant period for the length of time that the defendant violated the covenant are often referred to as “extender clauses.” Extender clauses have been enforced by Illinois courts when they were clearly set forth in the restrictive covenant. Prairie Eye Center, Ltd. v. Butler, 329 Ill.App.3d 293, 768 N.E.2d 414, 424, 263 Ill.Dec. 654 (4th Dist. 2002) (finding restrictive covenant provided for extension of restriction equal to period of time of breach). In Prairie Eye Center, the covenant provided that, upon its breach, “the period of noncompetition shall be extended by a period of time equal to that period beginning when such violation commenced and ending when the activities constituting such violation shall have terminated.” 768 N.E.2d at 417.
15 — 26
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.30
Interestingly, some courts have extended the restrictive covenant period even in the absence of an extender clause. See Henry v. O’Keefe, No. 01 C 8698, 2002 WL 31324049, *6 (N.D.Ill. Oct. 18, 2002); Loewen Group International, Inc. v. Haberichter, 165 F.3d 32, 1998 WL 796076, *7 (7th Cir. 1998) (text available in Westlaw) (“courts have recognized that where an employee violates a covenant not to compete, the time period may be extended beyond that specified in the contract”). The rationale of these courts seems to be that unless the covenant is extended for a period equal to the time of the breach, the length of the restrictive covenant would be unfairly reduced. But see Stenstrom Petroleum Services Group, Inc. v. Mesch, 375 Ill.App.3d 1077, 874 N.E.2d 959, 314 Ill.Dec. 594 (2d Dist. 2007) (refusing to commence six-month noncompetition period from date that defendant ceased breaching restrictive covenant, rather than from date of defendant’s employment termination, because covenant failed to contain extender clause or any other provision that could modify commencement date); Citadel Investment Group, LLC v. Teza Technologies LLC, 398 Ill.App.3d 724, 924 N.E.2d 95, 338 Ill.Dec. 235 (1st Dist. 2010) (refusing to extend nine-month noncompetition period because noncompetition agreements contained no provision allowing for extension of time or modification of commencement date).
PRACTICE POINTER
Rather than relying on the court to extend the restrictive covenant period, it is recommended that an extender clause be placed in the restrictive covenant.
B. [15.30] Termination Without Cause For a noncompetition clause to be enforceable, the employee must have been terminated for cause or must have quit on his or her own accord. Bishop v. Lakeland Animal Hospital, P.C., 268 Ill.App.3d 114, 644 N.E.2d 33, 205 Ill.Dec. 817 (2d Dist. 1994). The driving force behind this rule is the implied covenant of good faith that exists in every contract. Rao v. Rao, 718 F.2d 219, 223 (7th Cir. 1983). “Good faith between contracting parties requires that a party vested with contractual discretion must exercise his discretion reasonably and may not do so arbitrarily or capriciously.” 718 F.2d at 223, quoting Foster Enterprises, Inc. v. Germania Federal Savings & Loan Ass’n, 97 Ill.App.3d 22, 421 N.E.2d 1375, 1381, 52 Ill.Dec. 303 (3d Dist. 1981). The implied covenant of good faith “modifies [the employer’s] discretionary right to dismiss [the employee] and then to invoke the restrictive covenant.” 718 F.2d at 223. Thus, the Seventh Circuit found a restrictive covenant invalid as a matter of law when an employer terminated its employee in bad faith nine days before the employee was entitled to purchase 50 percent of the employer’s stock. Rao, supra. Following the reasoning in Rao, the court in Bishop, supra, 644 N.E.2d at 37, refused to enforce a restrictive covenant when the employer terminated the employee without cause. Likewise, in Dunning v. Chemical Waste Management, Inc., No. 91 C 2502, 1997 WL 222891, **10 – 11 (N.D.Ill. Apr. 24, 1997), the court held that an employer’s breaching of an employment agreement by firing an employee without cause would prohibit it from enforcing a restrictive covenant against the employee. See also Galesburg Clinic Ass’n v. West, 302 Ill.App.3d 1016,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 27
§15.31
INTELLECTUAL PROPERTY LAW
706 N.E.2d 1035, 1036 – 1037, 236 Ill.Dec. 161 (3d Dist. 1999) (excusing compliance with restrictive covenant when partnership agreement had been breached). Similarly, in Francorp, Inc. v. Siebert, 126 F.Supp.2d 543, 546 (N.D.Ill. 2000), the court refused to enforce an employer’s restrictive covenant when the employer, prior to the employees’ departure from the employer, breached its employment agreement with its employees by failing to pay them for a substantial period of time. It is unclear from the caselaw whether Illinois courts have adopted a blanket rule prohibiting enforcement of a restrictive covenant if the employee was terminated without cause, even if authorized by the employment agreement. While Rao, supra, appears to require that the employer must be found to have acted in bad faith in terminating the employee, Bishop, supra, appears to adopt a broader rule that the employer cannot enforce the restrictive covenant if it terminated the employee without cause. See Francorp, supra, 126 F.Supp.2d at 546 (recognizing that Bishop holding takes Rao rule further, holding that employer cannot enforce noncompetition agreement against employee who has been dismissed without cause, even if employment agreement authorizes such termination, because firing without cause breaches implied covenant of good faith and fair dealing “inherent in every contract”). C. [15.31] Assignment of Restrictive Covenants Can a successor corporation enforce the restrictive covenant obligations that were made with the predecessor corporation and assigned to the successor when the business was sold? As a general rule, courts recognize the parties’ ability to freely assign rights and duties under a contract. AutoMed Technologies, Inc. v. Eller, 160 F.Supp.2d 915, 924 (N.D.Ill. 2001). However, there is little Illinois caselaw that addresses the issue of assignment with respect to restrictive covenants. Id. In those few cases addressing this issue, courts have generally permitted assignment of restrictive covenants even in the absence of an assignment provision in the employment agreement. For example, in AutoMed, the court, applying Illinois law, held that a restrictive covenant was assignable to a corporate acquirer even though the employment agreement was silent on the issue of assignment and the employee did not expressly consent to the assignment. The AutoMed court rejected the defendant’s argument that his employment agreement was an executory contract, with elements of personality, that could not be assigned without the consent of both parties. The court reasoned that employees are not prejudiced by having their employment contracts assigned to a successor business because courts will always carefully scrutinize any restrictive covenants contained in those agreements. In addition, the court found that the confidential information and goodwill protected by restrictive covenants are typically critical components of an asset purchase. Thus, any rule prohibiting such assignment would frustrate many acquisitions. Id. Likewise, in Hexacomb Corp. v. GTW Enterprises, Inc., 875 F.Supp. 457, 464 (N.D.Ill. 1993), the court held that a successor corporation in an asset purchase agreement could enforce confidentiality agreements and restrictive covenants that an employee signed with its predecessor corporation. See also Hamer Holding Group, Inc. v. Elmore, 202 Ill.App.3d 994, 560 N.E.2d 907,
15 — 28
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.32
917, 148 Ill.Dec. 310 (1st Dist. 1990) (holding that successor employer in asset purchase agreement could enforce restrictive covenant made with its predecessor corporation). The reasons for allowing the assignment of a restrictive covenant are even more compelling when the business is sold in its entirety as a going concern rather than through an asset purchase agreement. AutoMed, supra, 160 F.Supp.2d at 924. “Any vestiges of personality are further mitigated when the business is acquired in its entirety, as a going concern. For all practical purposes the employees still work for the same business and their duties vary little, if at all, following the assignment.” Id.
PRACTICE POINTER
To avoid any potential issues regarding a successor corporation’s rights to enforce restrictive covenants of its predecessor, an employer should include in its employment agreements specific provisions that allow for the assignment of all the duties and obligations of the employee under the agreement.
D. [15.32] Clawbacks Forfeiture or clawback provisions require an employee to pay back or forfeit specified compensation or other benefits received during the time when he or she was violating the restrictive covenant. Courts have enforced forfeiture provisions when the provisions were reasonable and necessary to protect the employer’s legitimate business interests. Tatom v. Ameritech Corp., 305 F.3d 737, 745 (7th Cir. 2002). Thus, the court in Torrence v. Hewitt Associates, 143 Ill.App.3d 520, 493 N.E.2d 74, 97 Ill.Dec. 592 (1st Dist. 1986), upheld a liquidated-damages clause in an employment agreement that permitted the employer to take 30 percent of the employee’s partnership share if the employee violated the restrictive covenant. Similarly, the court in Tatom, supra, upheld an employment provision that called for the forfeiture of an employee’s bonus in the form of stock options in the event the employee went to work for a competitor. However, a forfeiture provision may not be enforceable when it requires an employee to pay back actual wages earned rather than a bonus or equity share in a company. For example, in Johnson v. Country Life Insurance Co., 12 Ill.App.3d 158, 300 N.E.2d 11, 14 – 15 (4th Dist. 1973), the court found a forfeiture provision to be an unenforceable anticompetitive clause. The provision in question would have caused an insurance agent to lose the commissions on life insurance policies he sold if he represented any other insurer in the region. By depriving the agent of his compensation, the forfeiture provision had a direct and inescapable effect on his livelihood. 300 N.E.2d at 15. When an employee owes a fiduciary relationship to his or her employer, he or she may be required to pay compensation back to the employer for the period of time he or she is in violation of the restrictive covenant, even in the absence of a forfeiture provision. See Hill v. Names & Addresses, Inc., 212 Ill.App.3d 1065, 571 N.E.2d 1085, 1092, 157 Ill.Dec. 66 (1st Dist. 1991)
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 29
§15.33
INTELLECTUAL PROPERTY LAW
(recognizing that “one who breaches fiduciary duties has no entitlement to compensation during a wilful or deliberate course of conduct adverse to the principal’s interests”), quoting ABC Trans National Transport, Inc. v. Aeronautics Forwarders, Inc., 90 Ill.App.3d 817, 413 N.E.2d 1299, 1315, 46 Ill.Dec. 186 (1st Dist. 1980). E. [15.33] Choice of Law Illinois recognizes the validity of an express choice-of-law provision contained in a contract. When an express choice of law is made, that provision will be given effect in Illinois unless (1) the chosen state has no substantial relationship to the parties or the transaction or (2) application of the chosen law would be contrary to a fundamental public policy “of a state with a materially greater interest in the issue in dispute.” Brown & Brown, Inc. v. Mudron, 379 Ill.App.3d 724, 887 N.E.2d 437, 439 – 440, 320 Ill.Dec. 293 (3d Dist. 2008). Applying this analysis, the Third District Appellate Court in Brown refused to apply Florida law to determine the enforceability of a restrictive covenant despite the fact that the employment agreement at issue contained a Florida choice-of-law provision. 887 N.E.2d at 440. The Brown court held that Florida law, which does not consider the hardship a restrictive covenant imposes on an individual employee when determining its enforceability, is contrary to Illinois’ fundamental public policy. In addition, the Brown court found that the facts of that particular case clearly demonstrated that Illinois, and not Florida, had a materially greater interest in the dispute. Id. Specifically, the employer, the defendants, and all the customers allegedly solicited or serviced by the defendant were located in Illinois. In addition, the defendant’s alleged acts that the plaintiff claimed caused the breach of the agreement occurred in Illinois. The only connection to Florida was that the plaintiff was incorporated in that state. Based on these facts, the Brown court refused to enforce the Florida choice-of-law provision and, instead, applied Illinois law. See also Del Monte Fresh Produce, N.A., Inc. v. Chiquita Brands International Inc., 616 F.Supp.2d 805 (N.D.Ill. 2009) (refusing to enforce Florida choice-of-law provision contained in employer’s noncompetition agreement and instead applying Illinois law). Similarly, in LKQ Corp. v. Fengler, No. 12-cv-2741, 2012 WL 1405774, *4 (N.D.Ill. Apr. 23, 2012), the district court refused to apply an Illinois choice-of-law provision contained in the employer’s confidentiality, noncompetition, and nonsolicitation agreement. In analyzing the choice-of-law issue, the LKQ court recognized California’s long-standing public policy against restraints on employment and held that such policy was “strong enough and of such a fundamental nature as to ‘justify overriding the chosen law of the parties.’ ” Id., quoting Potomac Leasing Co. v. Chuck’s Pub, Inc., 156 Ill.App.3d 755, 509 N.E.2d 751, 753 – 754, 109 Ill.Dec. 90 (2d Dist. 1987). In addition, several facts demonstrated that California had a more substantial relationship to the parties and the transactions at issue. 2012 WL 1405774 at *5. For example, the defendant employee had been a resident of California all his life and had never been to, or conducted business in, Illinois. Both the former employer and the defendant’s new employer were California companies with their principal places of business located in California. In addition, all the work that the employee conducted for the former employer occurred in California. The only connection
15 — 30
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.34
to Illinois was that the plaintiff, who was the employer’s parent company, had its principal place of business located in Illinois and the agreement was drafted in Illinois. These facts, however, were not enough to give Illinois a substantial relationship to the parties or the transactions at issue. Id. Citing the two-part test set forth in Brown, supra, the district court held that (1) California had a materially greater interest in the case than Illinois and (2) application of Illinois law would contravene California’s fundamental policy against noncompetition clauses. Specifically, the LKQ court stated: Indeed, it would be odd to use Illinois law to resolve a California-centered dispute between two California companies over a California employee about events that transpired in California. In sum, because California has, as a matter of fundamental public policy, “chosen to provide its workers greater protections” from noncompetition provisions, and because California “has a materially greater interest in this dispute than does” Illinois, the Court concludes that California law applies to LKQ’s contractual claims. See Brown and Brown, Inc., 320 Ill.Dec. 293, 887 N.E.2d at 440. Id. F. [15.34] Blue Penciling Under Illinois law, a court, at its discretion, may modify, or “blue pencil,” an unreasonable restrictive covenant to make it comport with the law, or it may sever unenforceable provisions from a contract. Pactiv Corp. v. Menasha Corp., 261 F.Supp.2d 1009, 1015 (N.D.Ill. 2003). In determining whether to modify or sever an overly broad restraining provision, courts will consider the fairness of the restraint initially imposed. When the original terms of the restrictive covenant require only slight modification, courts are more likely to uphold a modified version of the covenant. See, e.g., Weitekamp v. Lane, 250 Ill.App.3d 1017, 620 N.E.2d 454, 461, 189 Ill.Dec. 486 (4th Dist. 1993) (affirming trial court’s decision to blue pencil noncompetition agreement when original restrictions were found not to be excessively unfair); Arpac Corp. v. Murray, 226 Ill.App.3d 65, 589 N.E.2d 640, 652, 168 Ill.Dec. 240 (1st Dist. 1992) (upholding trial court’s modification of noncompetition agreement when revisions were minimal and remaining provisions were found to be reasonable). However, when the terms of a restrictive covenant are so overbroad as to be unfair to the employee, courts have refused to modify the covenant despite the existence of blue-pencil and severability clauses. Eichmann v. National Hospital & Health Care Services, Inc., 308 Ill.App.3d 337, 719 N.E.2d 1141, 1149, 241 Ill.Dec. 738 (1st Dist. 1999) (refusing to modify unreasonable noncompetition provision despite existence of blue-pencil clause); Hay Group, Inc. v. Bassick, 36 Employee Benefits Cas. (BNA) 1369 (N.D.Ill. 2005) (refusing to sever unenforceable noncompetition provision contained in defendant’s noncompetition agreement despite existence of severability clause because overbroad provisions rendered agreement patently unfair); Del Monte Fresh Produce, N.A., Inc. v. Chiquita Brands International Inc., 616 F.Supp.2d 805, 818 (N.D.Ill. 2009) (holding that noncompetition agreement was simply too broad and far-reaching to be salvaged through modification).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 31
§15.34
INTELLECTUAL PROPERTY LAW
For example, in refusing to modify an overly broad restrictive covenant, the Illinois Supreme Court stated: To stake out unrealistic boundaries in time and space, as the employer did in this case, is to impose upon an employee the risk of proceeding at his peril, or the burden of expensive litigation to ascertain the scope of his obligation. While we do not hold that a court of equity may never modify the restraints embodied in a contract of this type and enforce them as modified, the fairness of the restraint initially imposed is a relevant consideration to a court of equity. We conclude that the restrictions in the employment contract were not reasonably necessary for the protection of the plaintiff. House of Vision, Inc. v. Hiyane, 37 Ill.2d 32, 225 N.E.2d 21, 25 (1967). Furthermore, the First District Appellate Court explained, albeit in dicta, that blue penciling a noncompetition agreement that is so unreasonable as to be unfair could violate Illinois public policy: Such reformation, if permitted by courts, would give employers an incentive to draft restrictive covenants as broadly as possible, since the courts would automatically amend and enforce them to the extent that they were reasonable in the particular circumstances of each case. This could have a severe chilling effect on employee posttermination activities; an employee unschooled in the law cannot be expected to know to what extent such a covenant is enforceable, particularly since the courts apply a multifactor reasonableness standard instead of a bright-line rule. Thus it is possible that under such a regime, an intentionally overbroad covenant could end up tying an employee’s hands for years although a majority of courts would find it unreasonable on its face. Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc., 378 Ill.App.3d 437, 879 N.E.2d 512, 529, 316 Ill.Dec. 445 (1st Dist. 2007). See also Triumph Packaging Group v. Ward, 834 F.Supp.2d 796 (N.D.Ill. 2011) (refusing to modify overbroad noncompetition clause because it would provide disincentive for employers to draft narrow and precise agreements); AssuredPartners, Inc. v. Schmitt, 2015 IL App (1st) 141863, ¶52, 44 N.E.3d 463, 398 Ill.Dec. 434 (finding judicial modification of overbroad restrictive covenant inappropriate when covenant contained several deficiencies making it unreasonable); Critical Care Systems, Inc. v. Heuer, 2014 IL App (2d) 130745-U, ¶34 (refusing to blue pencil because it would be impermissible rewriting of covenant); Deere Employees Credit Union v. Smith, 2016 IL App (3d) 150516-U, ¶37 (refusing to modify covenant because it would give employers an incentive to draft restrictive covenants as broadly as possible believing court will later amend and enforce them to extent reasonable). Furthermore, in determining whether to modify or sever portions of a restrictive covenant, the court will consider the extent to which the provisions operate independently of each other. House of Vision, supra, 225 N.E.2d at 25. When overly broad provisions are found to be closely tied to other, more specific and perhaps even enforceable provisions in the covenant, the overly broad provisions may swallow up the enforceable provisions, rendering the entire covenant unenforceable. Hay Group, supra (invalidating specific activity restrictions because they were
15 — 32
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.35
merely subset of general and unenforceable prohibition on competition and were not to be considered in lieu of that general prohibition). See also Deere Employees Credit Union, supra, 2016 IL App (3d) 150516-U at ¶37 (invalidating entire agreement because overbroad restrictive covenant term was essential term and could not be severed from contract). G. [15.35] Noncompetition Provision Ancillary to the Sale of a Business Restrictive covenants are evaluated differently depending on whether they derive from an employment relationship or are ancillary to the sale of a business. Health Professionals, Ltd. v. Johnson, 339 Ill.App.3d 1021, 791 N.E.2d 1179, 274 Ill.Dec. 768 (3d Dist. 2003). Courts impose a less stringent test of reasonableness on covenants ancillary to the sale of a business than on covenants in employment agreements because of the difference in the nature of the interests being protected. Id. See also Harris v. Central Garden & Pet Co., No. 09 C 2354, 2011 WL 3290334, *3 (N.D.Ill. Aug. 1, 2011). Illinois courts have not identified any specific test for determining whether a noncompetition agreement is ancillary to the sale of a business. Health Professionals, supra. However, when analyzing this issue, courts have focused “on facts demonstrating the intent of the parties to protect the integrity of the sale, such as requiring execution of the [noncompetition] agreement as a condition precedent to the sale, and identifying the [noncompetition] agreement as a necessary closing document.” Health Professionals, 791 N.E.2d at 1190. Restrictive covenants that are ancillary to the sale of a business are intended to protect the goodwill purchased by the buyer. Id. “ ‘Goodwill’ represents the advantages a business has over competitors due to its name, location, and owner’s reputation.” Smith v. Burkitt, 342 Ill.App.3d 365, 795 N.E.2d 385, 390, 277 Ill.Dec. 18 (5th Dist. 2003), quoting Weitekamp v. Lane, 250 Ill.App.3d 1017, 620 N.E.2d 454, 460, 189 Ill.Dec. 486 (4th Dist. 1993). “A covenant ancillary to the sale of a business ensures the buyer that the former owner will not walk away from the sale with the company’s customers and goodwill, leaving the buyer with an acquisition that turns out to be only chimerical.” Smith, 795 N.E.2d at 390. In a sale of a business, there is generally more equal bargaining power between the parties and the terms of the restrictive covenant are closer to those of a real negotiation. Health Professionals, supra, 791 N.E.2d at 1189. As a result, courts will not scrutinize these covenants as closely as a covenant from an employer-employee relationship. In the sale-of-a-business context, the restrictive covenant must only be reasonable with respect to time, geographical scope, and activity restrictions. Arcor, Inc. v. Haas, 363 Ill.App.3d 396, 842 N.E.2d 265, 299 Ill.Dec. 526 (1st Dist. 2005). On the other hand, restrictive covenants that derive from employment relationships are intended to protect a different set of interests. In the employment context, restrictive covenants are intended to protect the employer from an employee’s misuse of proprietary information and from potential loss of customers with whom the employer had near-permanent relationships. Id. Generally, there is very little if any bargaining power on the part of the employee, who often is required to sign the agreement as a condition to commencing his or her employment.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 33
§15.36
INTELLECTUAL PROPERTY LAW
Because of the unequal bargaining power, restrictive covenants that derive out of an employment relationship are more closely scrutinized by the courts. Thus, an employer seeking to enforce a restrictive covenant must demonstrate not only that the restrictions are reasonable with respect to time, geographical scope, and activity restrictions, but also that the employer has a protectable interest, such as near-permanent customer relationships or confidential information. Arcor, supra, 842 N.E.2d at 274. H. [15.36] Employee Patent Act It is important for employers and employees to be aware of the rights afforded to employees under the Employee Patent Act, 765 ILCS 1060/1, et seq., which basically codifies the work-forhire doctrine. Under the Act, employees are entitled to retain rights to inventions for which no equipment, supplies, facilities, or trade secret information of the employer was used and that were developed on the employee’s own time, unless the invention relates to the employer’s business or research or resulted from work performed for the employer. 765 ILCS 1060/2. Specifically, §2(3) of the Act provides that if an employment agreement contains a provision requiring an employee to assign any of the employee’s rights in an invention to the employer, the employer must also provide a written notification to the employee that the agreement does not apply to an invention for which no equipment, supplies, facility, or trade secret information of the employer was used and which was developed entirely on the employee’s own time, unless (a) the invention relates (i) to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer. 765 ILCS 1060/2(3). It is important to note that no Illinois court has held that an invention-assignment provision that does not contain the language stated above is unenforceable. I. [15.37] Whistleblower Act One limitation to the enforcement of a nondisclosure or confidentiality provision is the Whistleblower Act, 740 ILCS 174/1, et seq. The Act, which took effect January 1, 2004, prevents an employer from retaliating against an employee “for disclosing information to a government or law enforcement agency, where the employee has reasonable cause to believe that the information discloses a violation of a State or federal law, rule, or regulation.” 740 ILCS 174/15(b). In addition, the Act prohibits an employer from retaliating against an employee for refusing to participate in an activity that would result in a violation of a state or federal law, rule, or regulation. 740 ILCS 174/20. A violation of the Act is a Class A misdemeanor. 740 ILCS 174/25. In addition, a violation of the Act will also give rise to civil damages. Specifically, if an employer violates the Act, the employee may bring a civil action against the employer for “all relief necessary to make the employee whole,” including but not limited to
15 — 34
WWW.IICLE.COM
RESTRICTIVE COVENANTS AND POST-EMPLOYMENT RESTRAINTS
§15.38
(1) reinstatement with the same seniority status that the employee would have had, but for the violation; (2) back pay, with interest; and (3) compensation for any damages sustained as a result of the violation, including litigation costs, expert witness fees, and reasonable attorney’s fees. 740 ILCS 174/30. J. [15.38] Restrictive Covenants Entered Post-Employment Increasingly, employers are including restrictive covenants in post-employment agreements such as severance, separation, or release agreements. Illinois has not considered the enforceability of restrictive covenants that are entered into in post-employment agreements. However, most other states that have considered this issue have enforced restrictive covenants entered into in post-employment agreements by slightly modifying the requirements set forth in §§15.8 – 15.22 above. For example, restrictive covenants entered into in post-employment agreements must still be supported by adequate consideration. West Publishing Corp. v. Stanley, 20 I.E.R.Cas. (BNA) 1463 (D.Minn. 2004); Cranston Print Works Co. v. Pothier, 848 A.2d 213 (R.I. 2004). However, what constitutes adequate consideration in the post-employment context may be different from the pre- or mid-employment context. Continued employment can no longer be adequate consideration since the employment relationship has ended. Nevertheless, the key concept is still that the consideration must be something to which the employee is not otherwise already entitled, such as payment under a severance plan based on the Employee Retirement Income Security Act of 1974, Pub.L. No. 93-406, 88 Stat. 829, or accrued but unpaid bonuses. Kenneth J. Vanko, “You’re Fired! And Don’t Forget Your Non-Compete . . .”: The Enforceability of Restrictive Covenants in Involuntary Discharge Cases, 1 DePaul Bus. & Comm.L.J. 1, 44 (2002). Other forms of adequate consideration may include stock options, office equipment such as a computer, or a neutral reference or recommendation. Courts that have addressed the consideration issue in the post-employment context generally agree that the best consideration is money or severance pay. West Publishing, supra; Complete Business Solutions, Inc. v. Mauro, 58 U.S.P.Q.2d (BNA) 1399, 2001 WL 290196 (N.D.Ill. 2001).
PRACTICE POINTER
Employers, employees, and their counsel who are considering the use of restrictive covenants in post-employment agreements should examine the laws of the particular state in which the agreement is sought to determine how the state has, if at all, modified the requirements set forth in §§15.8 – 15.22 above. In addition, although courts may enforce restrictive covenants entered into in post-employment agreements, employers should not rely on such restrictions to replace covenants entered into in pre- or mid-employment.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
15 — 35
§15.39
INTELLECTUAL PROPERTY LAW
VI. [15.39] CONCLUSION A restrictive covenant, if reasonably drafted, can be a useful tool in protecting an employer’s legitimate business interests. The legal standards for drafting and enforcing restrictive covenants are not difficult to find. There are numerous published state and federal cases that examine the legal standards for restrictive covenants under Illinois law. In fact, the cases are so plentiful that parties on either side of a restrictive covenant dispute can find almost any legal proposition supporting their respective positions. However, these cases are ultimately decided on the particular facts at issue. Thus, it is important (but sometimes difficult) to find cases that are factually similar to the case at issue. It is critical at the preliminary injunction stage of the case to provide the court with a complete factual record of the dispute through affidavits, documents, and live testimony, as well as with caselaw that is factually similar to the case at issue. Because restrictive covenant cases are often initially decided on an expedited basis through a temporary restraining order or a preliminary injunction hearing, the court often must rule from the bench without issuing a written opinion. It can be difficult and sometimes impractical to appeal an interim order without a written opinion. Even though the court’s ruling on a preliminary injunction motion is only an interim order, it determines the plaintiff’s likelihood of success on the merits and is therefore a strong indication of how the court will rule on the permanent injunction after a full hearing. As a result, the parties often settle or otherwise resolve restrictive covenant cases after a preliminary injunction hearing. Thus, it is critical at the outset of the case to provide the court with a complete factual record and factually similar caselaw.
15 — 36
WWW.IICLE.COM
Part V: Intellectual Property, Technology, and the Internet
16
Jurisdiction in the Information Age
MATTHEW F. PREWITT Schiff Hardin LLP Chicago
MATTHEW W. CALLAHAN Schiff Hardin LLP San Francisco, CA
The contribution of André C. Frieden to previous editions of this chapter is gratefully acknowledged.
®
©COPYRIGHT 2017 BY IICLE .
16 — 1
INTELLECTUAL PROPERTY LAW
I. [16.1] Introduction II. [16.2] Traditional Concepts of Jurisdiction A. [16.3] General Jurisdiction B. [16.4] Specific Jurisdiction III. [16.5] Early Internet Jurisdiction Cases: Application of Traditional Jurisdictional Concepts to the Internet A. B. C. D.
[16.6] [16.7] [16.8] [16.9]
Purposeful Availment for in Personam Jurisdiction Arising Out of the Forum-Related Activities Requirement of Reasonableness State Long-Arm Jurisdiction
IV. [16.10] Setting the Standards in Internet Jurisdiction Cases A. [16.11] The Zippo Test B. [16.12] The Impact of Zippo 1. [16.13] Courts Following Zippo 2. [16.14] Courts Refusing To Follow or De-Emphasizing Zippo C. [16.15] Post-Zippo Cases D. [16.16] In Rem Jurisdiction V. Cases in Illinois and the Seventh Circuit A. [16.17] General Jurisdiction B. Specific Jurisdiction Cases 1. [16.18] Cases Concerning Website Operators 2. [16.19] Internet Cases Other than Website Operators VI. [16.20] Transnational Issues Facing U.S. Businesses
16 – 2
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.2
I. [16.1] INTRODUCTION The Internet’s broad connectivity and the difficulty of locating users continue to cause much debate over how to apply jurisdictional limitations to cyberspace. Indeed, the borderless nature of the Internet can, in theory, lead to substantial overlap of laws and ambiguity in their application. So what laws should govern an Internet user? What jurisdiction should apply to disputes arising from the use of the Internet, particularly at a time when local, state, national, and foreign authorities are claiming more expansive roles and asserting broader reach across cyberspace? Despite the development of substantial caselaw on this issue since the early boom years of the Internet, these questions continue to be critically important when we consider that the protections afforded to intellectual property still vary among jurisdictions. With new technological tools such as software-as-a-service solutions, cloud computing, and mobile applications — and the relatively slow pace of digital rights management standards — the ease with which intellectual property rights are infringed or misappropriated, and the increasing stealthiness of infringers, give added urgency to answering these questions with more certainty than in the past. For U.S. industries most dependent on copyright protection, there is a lot at stake. According to a report prepared for the International Intellectual Property Alliance by Stephen E. Siwek of Economists Inc., these industries added $1.9 trillion in value to the U.S. economy in 2013 alone. See Copyright Industries in the U.S. Economy: The 2014 Report, p.2 (2014), www.riaa.com/wpcontent/uploads/2015/09/2014_CopyrightIndustries_USReport.pdf (case sensitive). In the United States, the basis of determining jurisdiction is tied to constitutional guarantees, state and federal law, and the application of specific facts about the conduct of the parties both on and off the Internet. Should a company that operates a passive website to describe its products or services be brought into a court of any jurisdiction merely because its website is accessible from any computer worldwide? Can a website owner preempt this problem by selecting a jurisdiction as part of its online terms and conditions? Can the website owner segment the web-based content in such a way as to reduce risks of liability in certain jurisdictions? These are but a few of the jurisdictional issues arising from the different levels of interactivity between parties on the Internet.
II. [16.2] TRADITIONAL CONCEPTS OF JURISDICTION Early notions of jurisdiction were based on the idea that a sovereign has authority over everyone and everything found within its borders; a corollary to that, of course, was that a sovereign has no authority over anyone or anything outside its borders. In the United States, this understanding was reflected in Pennoyer v. Neff, 95 U.S. 714, 24 L.Ed. 565 (1877), in which the court restricted a state’s assertion of personal jurisdiction over a nonconsenting noncitizen primarily to those situations in which the defendant was personally served with process in the forum, and in Foley Bros., Inc. v. Filardo, 336 U.S. 281, 93 L.Ed. 680, 69 S.Ct. 575 (1949), in which the court noted that acts of Congress are presumed to apply only to conduct undertaken in the United States.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 3
§16.3
INTELLECTUAL PROPERTY LAW
Responding to the need for a broader understanding of the constitutional scope of state jurisdictional authority, the U.S. Supreme Court in 1945 decided International Shoe Co. v. State of Washington, 326 U.S. 310, 90 L.Ed. 95, 66 S.Ct. 154 (1945). Because the Full Faith and Credit Clause in Article IV, §1, of the U.S. Constitution compels every state to enforce the judgments of a sister state if the judgment comports with due process, it is not necessary to describe jurisdictional constraints based on the ability of the state rendering the judgment to enforce it — a basis for limiting jurisdiction to those situations in which a state has physical power over the defendant. Instead, due process requires a focus on fairness to the defendant, a focus the Court defined as the determination of whether the defendant had “minimum contacts” with the forum such that its assertion of jurisdiction did not offend “traditional notions of fair play and substantial justice.” 66 S.Ct. at 158, quoting Milliken v. Meyer, 311 U.S. 457, 85 L.Ed. 278, 61 S.Ct. 339, 343 (1940). The existence of such contacts, in turn, depends on the “quality and nature” of the defendant’s acts in the forum “in relation to the fair and orderly administration of the laws which it was the purpose of the due process clause to insure.” 66 S.Ct. at 160. The International Shoe Court envisioned jurisdiction based on the past presence of a defendant in the forum. In Hanson v. Denckla, 357 U.S. 235, 2 L.Ed.2d 1283, 78 S.Ct. 1228, 1240 (1958), the Court formulated the inquiry as whether the defendant had “purposefully avail[ed] itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” Jurisdiction remained tied to geography. The choice of the defendant to enter and act within the territory and, by virtue of the defendant’s presence there, to be protected by its laws made it fair to insist that the defendant return to the territory to answer claims arising out of the defendant’s past presence. However, it is not always necessary that an individual be physically present in a state to invoke its laws, interact with its citizens, or cause effects within its territory. Whether actions undertaken outside the state may justify the assertion of jurisdiction by it has been addressed by courts, both before and after the explosion of new technologies. Under International Shoe, supra, there are two ways to find the sufficient minimum contacts for jurisdiction. First, the nonresident defendant may have so many contacts with the forum jurisdiction that personal jurisdiction is allowed in general, known as “general jurisdiction.” See §16.3 below. More commonly, the nonresident defendant does not have enough contacts to warrant general jurisdiction for all matters but does have sufficient contacts related to the subject of the lawsuit so that jurisdiction over this specific matter is allowed, known as “specific jurisdiction.” See §16.4 below. A. [16.3] General Jurisdiction General jurisdiction exists when a defendant is domiciled in the forum state or his or her activities there are “substantial” or “continuous and systematic.” Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 80 L.Ed.2d 404, 104 S.Ct. 1868, 1872 – 1873 (1984). This type of jurisdiction requires that the defendant has actively and purposefully engaged in numerous and frequent transactions in the forum state. Id. The standard for general jurisdiction is very difficult, and the Supreme Court has upheld it only once. See Perkins v. Benguet Consolidated Mining Co., 342 U.S. 437, 96 L.Ed. 485, 72 S.Ct. 413 (1952) (president of
16 — 4
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.5
Philippine mining company kept files in Ohio office, had Ohio bank accounts, and paid salaries from Ohio). No court has ever, to date, found general jurisdiction as a result of an Internet website or communication. See, e.g., IDS Life Insurance Co. v. SunAmerica, Inc., 958 F.Supp. 1258 (N.D.Ill. 1997), aff’d in part, vacated in part on other grounds, 136 F.3d 537 (7th Cir. 1998); McDonough v. Fallon McElligott, Inc., 40 U.S.P.Q.2d ( BNA) 1826, 1996 WL 753991 (S.D.Cal. 1996). B. [16.4] Specific Jurisdiction The critical pre-Internet specific jurisdiction case is Calder v. Jones, 465 U.S. 783, 79 L.Ed.2d 804, 104 S.Ct. 1482 (1984), in which a California plaintiff brought a libel action against the author and editor of an article about her published by the National Enquirer. The corporation did not dispute jurisdiction; its papers were sold in the state. The individual defendants, however, argued that they had never been present in any jurisdictionally relevant way in California and that, therefore, the state could not constitutionally assert jurisdiction over them. The Court disagreed because the article for which they were responsible had targeted the plaintiff in California. She lived in the state, her career was based in the state, and the activities the article reported had allegedly occurred in the state. Specific jurisdiction is generally applied using a three-part test: 1. The nonresident defendant engaged in an activity or consummated a transaction with the forum by which the defendant purposefully availed itself of the privilege of conducting activities in that forum, thereby invoking the benefits and protections of its laws. 2. A claim must arise out of or result from the defendant’s forum-related activities. 3. The exercise of jurisdiction must be reasonable. The U.S. Supreme Court affirmed the importance of specific personal jurisdiction by unanimously affirming the dismissal of a case in which the court’s jurisdiction was based on the defendant’s conduct. See Walden v. Fiore, ___ U.S. ___, 188 L.Ed.2d 12, 134 S.Ct. 1115, 1124 (2014) (finding Nevada court had no personal jurisdiction over police officer who seized plaintiff’s property in Georgia, even when officer knew that plaintiff was headed to Nevada).
III. [16.5] EARLY INTERNET JURISDICTION CASES: APPLICATION OF TRADITIONAL JURISDICTIONAL CONCEPTS TO THE INTERNET The Supreme Court began to recognize how the effect of communications technology in modern commerce changed the old equations of jurisdiction in Burger King Corp. v. Rudzewicz, 471 U.S. 462, 85 L.Ed.2d 528, 105 S.Ct. 2174, 2184 (1985): [I]t is an inescapable fact of modern commercial life that a substantial amount of business is transacted solely by mail and wire communications across state lines,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 5
§16.6
INTELLECTUAL PROPERTY LAW
thus obviating the need for physical presence within a State in which business is conducted. However, the courts were still not prepared for the sudden explosion of the Internet — not only the way that it changed the jurisdictional analysis, but also the incredible speed with which it did so. Thus, the first cases involving Internet-related jurisdiction relied quite heavily on analogies to earlier communications technologies. The court in Maritz, Inc. v. CyberGold, Inc., 947 F.Supp. 1328, 1332 (E.D.Mo. 1996), acknowledged the difficulties in applying analogies to mail and telephone cases to answer Internet jurisdiction questions yet used these types of cases anyway: Because the internet is an entirely new means of information exchange, analogies to cases involving the use of mail and telephone are less than satisfactory in determining whether defendant has “purposefully availed” itself to this forum. Unlike use of the mail, the Internet, with its electronic mail, is a tremendously more efficient, quicker, and vast means of reaching a global audience. By simply setting up, and posting information at, a website in the form of an advertisement or solicitation, one has done everything necessary to reach the global internet audience. A. [16.6] Purposeful Availment for in Personam Jurisdiction The first specific jurisdiction requirement is purposeful availment, which ensures that nonresident defendants will not be hauled into court based on random or fortuitous contacts with the forum state. This requirement is satisfied if the defendant has taken some deliberate action toward the forum state, but a defendant is not required to be physically present in or have physical contacts with the forum, as long as such actions are purposefully directed toward forum residents. The Sixth Circuit Court of Appeals found jurisdiction in CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996). A Texas resident who had advertised his product via CompuServe, a computer information service located in Ohio, was subject to personal jurisdiction in Ohio because the Texas resident had taken direct actions that created a connection with Ohio. He subscribed to CompuServe, uploaded his software onto the CompuServe system for others to use, and advertised his software on the CompuServe system. Another early case, this time dealing with a trademark dispute relating to “cybersquatting” (i.e., registering a domain name similar to a name that is a registered trademark of another owner), was Panavision International, L.P. v. Toeppen, 141 F.3d 1316 (9th Cir. 1998). The plaintiff, Panavision International, a maker of cinematography that owns the trademark “Panavision,” attempted to register a website on the Internet with the domain name “Panavision.com” but discovered that it had already been taken as a website by Dennis Toeppen, perhaps the most infamous cybersquatter. Toeppen had suffered a number of early, quick court defeats for grabbing the website names for well-known companies because he had never actually used the names in a website. This time, however, he had a new trick up his sleeve: a site that
16 — 6
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.6
displayed a real-time video feed of the City of Pana, Illinois, (hence, “Pana – vision”) and so actually “used” the website name. When Panavision sent a cease-and-desist letter, Toeppen claimed that he had the right to use the domain name but would be willing to sell it to Panavision for $13,000. He also said that if Panavision agreed to his offer, he would not acquire additional Internet addresses alleged by Panavision Corporation to be its property. The district court’s decision to exercise personal jurisdiction over Toeppen rested on its determination that the purposeful availment requirement was satisfied by the “effects doctrine” under California law, and the Ninth Circuit agreed. In tort cases, jurisdiction may attach if a defendant’s conduct is aimed at or has an effect in the forum state, the court reasoned, stating that under Calder v. Jones, 465 U.S. 783, 79 L.Ed.2d 804, 104 S.Ct. 1482 (1984), personal jurisdiction can be based on (1) intentional actions (2) expressly aimed at the forum state (3) causing the majority of the harm in the forum state. 141 F.3d at 1321. The Panavision court determined that because the trademark dilution case was akin to a tort case, the same principles applied. Therefore, Toeppen purposefully registered Panavision’s trademarks as his domain names on the Internet to force Panavision to pay him money. The brunt of the harm to Panavision was felt in California because its principal place of business was in California and the heart of the motion picture and television industry is located there. In addition, the court found that Toeppen had done something more to demonstrate that he directed his activity toward the forum state by engaging in a scheme to register Panavision’s trademarks as his domain names for the purpose of extorting money from Panavision. 141 F.3d at 1322. Not all of the early Internet jurisdiction cases showed such careful consideration. In Inset Systems, Inc. v. Instruction Set, Inc., 937 F.Supp. 161 (D.Conn. 1996), the court found that a static website created jurisdiction in a trademark infringement claim against a Massachusetts corporation that had no other significant contacts in Connecticut. The court reasoned that the website was the deliberate solicitation of business under the Connecticut long-arm statute because it represented a permanent advertisement that could be viewed again and again through over 10,000 links in Connecticut (proof alone of how “early” this case was). The logic of the Inset Systems opinion would have subjected owners of websites to universal jurisdiction, which has been rejected numerous times by the U.S. Supreme Court. As a result, Inset Systems has been directly criticized in later cases. See, e.g., Fix My PC, L.L.C. v. N.F.N. Associates, Inc., 48 F.Supp.2d 640, 644 (N.D.Tex. 1999). Another incongruous result can be found in Gary Scott International, Inc. v. Baroudi, 981 F.Supp. 714 (D.Mass. 1997). Like Inset Systems, this case involved trademark infringement and related claims, this time by a Massachusetts humidor manufacturing corporation against a California resident with his own small humidor business. Unlike Inset Systems, the website was not the only form of contact with the forum state, though those other contacts were relatively weak. Just like the Inset Systems court, however, the Gary Scott International court seemed to find that any form of website product advertising was sufficient to create jurisdiction virtually anywhere. Without proof of any customers actually solicited in Massachusetts by the site, the court held that the website was part of a “nationwide marketing” scheme that solicited customers within the forum state. 981 F.Supp. at 716.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 7
§16.7
INTELLECTUAL PROPERTY LAW
B. [16.7] Arising Out of the Forum-Related Activities Connecting the Internet activities to the complained-of conduct (i.e., “targeting”) is critical not only to assertions of personal jurisdiction but also to the authority of a forum to regulate conduct. The United States requires a reasonable connection between the forum and the conduct, a requirement that is met easily. The intent to cause substantial effects in the forum is sufficient. Physical presence in the forum is not required. Targeting, of course, satisfies that requirement. The court in Panavision International, L.P. v. Toeppen, 141 F.3d 1316 (9th Cir. 1998), also tackled the second requirement for specific, personal jurisdiction, which is that the claim asserted in the litigation arises out of the defendant’s forum-related activities. The court stated that it “must determine if the plaintiff Panavision would not have been injured ‘but for’ the defendant Toeppen’s conduct directed toward Panavision in California.” 141 F.3d at 1322. This requirement was satisfied, the court said, by Toeppen’s registration of Panavision’s trademarks because, but for Toeppen’s conduct, this injury would not have occurred, and Panavision’s claims arose out of Toeppen’s California-related activities. C. [16.8] Requirement of Reasonableness In addition to the first two factors, due process requires that a nonresident defendant have minimum contacts so that the defendant could “reasonably anticipate being haled into court there.” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 62 L.Ed.2d 490, 100 S.Ct. 559, 567 (1980). When a defendant who has purposefully directed its activities at forum residents seeks to defeat jurisdiction, the defendant must present a compelling case that the presence of other considerations would render jurisdiction unreasonable. The requirement of reasonableness is the weakest of the three legs of specific jurisdiction, and the Supreme Court has denied jurisdiction solely for lack of reasonableness in only one instance. Asahi Metal Industry Co. v. Superior Court of California, Solano County, 480 U.S. 102, 94 L.Ed.2d 92, 107 S.Ct. 1026 (1987). Citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 85 L.Ed.2d 528, 105 S.Ct. 2174 (1985), the court in Panavision International, L.P. v. Toeppen, 141 F.3d 1316, 1323 (9th Cir. 1998), articulated seven factors to determine reasonableness: 1. the extent of a defendant’s purposeful interjection; 2. the burden on the defendant in defending in the forum; 3. the extent of conflict with the sovereignty of the defendant’s state; 4. the forum state’s interest in adjudicating the dispute; 5. the most efficient judicial resolution of the controversy;
16 — 8
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.9
6. the importance of the forum to the plaintiff’s interest in convenient and effective relief; and 7. the existence of an alternative forum. These factors are equally weighed and must be considered together. One rare case involving Internet jurisdiction in which a reasonableness argument was successful in defeating jurisdiction is Expert Pages v. Buckalew, No. C-97-2109-VRW, 1997 WL 488011 (N.D.Cal. Aug. 6, 1997). Expert Pages was a California business that posted consulting and expert witness information on the Internet. The pro se defendant, a Virginia resident, created a similar site, allegedly by copying the plaintiff’s database. The defendant also allegedly used the copied information to create a mailing list. The plaintiff brought copyright infringement, unfair trade practices, breach of contract, trespass, and misappropriation claims in California. While the court found that the defendant directed his activities toward California residents so that he should have anticipated being subject to jurisdiction there, the court nevertheless declined to exercise jurisdiction. The court believed that the burden for the defendant to defend himself in such a faraway jurisdiction would effectively deprive him of any defense. Moreover, the plaintiff possessed far greater resources than the defendant, and the burden on it to bring suit in Virginia would have been correspondingly much smaller. D. [16.9] State Long-Arm Jurisdiction Even if proper jurisdiction is found, in many cases, the state long-arm jurisdiction statute must still be considered. Many state long-arm statutes are more restrictive than the boundaries of federal due process. This was the case in Illinois until the 1989 adoption of 735 ILCS 5/2-209(c), which provides: A court may also exercise jurisdiction on any other basis now or hereafter permitted by the Illinois Constitution and the Constitution of the United States. In some states, however, the long-arm limitations still exist and may affect Internet-related jurisdiction cases. In Bensusan Restaurant Corp. v. King, 937 F.Supp. 295 (S.D.N.Y. 1996), aff’d, 126 F.3d 25 (2d Cir. 1997), the owner of a jazz club in Missouri named the Blue Note created a website hosted on a server located in Missouri. The website offered information on upcoming events and how to order tickets, which were mailed only to Missouri addresses. The plaintiff, owner of the registered trademark “The Blue Note,” under which name it operated a well-known establishment in New York, brought the trademark infringement action in New York and asserted that the jurisdiction was premised on the accessibility of the site to New York computer operators via the Internet, but the court held that the defendant had not purposefully availed himself of the benefits of New York. Creating a website that could be viewed by residents of the United States, including New York, was not sufficient to establish personal jurisdiction when the website was not intended to sell products to forum residents.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 9
§16.10
INTELLECTUAL PROPERTY LAW
Long-arm jurisdiction can also serve to expand normal jurisdictional concepts. In McRae’s, Inc. v. Hussain, 105 F.Supp.2d 594 (S.D.Miss. 2000), a New Jersey cybersquatter grabbed the domain name www.carsonpiriescott.com and then tried to sell it for profit back to a Mississippi company that owned the Carson Pirie Scott department store trademark. The defendant had no other contact with Mississippi, and the domain name was not registered or maintained in Mississippi. The court found that under the Mississippi long-arm statute, the defendant had jurisdiction if the harm was committed partly or completely in-state. Normally, in trademark infringement cases jurisdiction occurs where the infringement occurs and not where the trademark owner is located, so jurisdiction would not have been proper in Mississippi. However, because of the intent to harm the trademark owner, the location of the injury determined jurisdiction, so jurisdiction in Mississippi was proper.
IV. [16.10] SETTING THE STANDARDS IN INTERNET JURISDICTION CASES Panavision International, L.P. v. Toeppen, 141 F.3d 1316 (9th Cir. 1998), Bensusan Restaurant Corp. v. King, 937 F.Supp. 295 (S.D.N.Y. 1996), aff’d, 126 F.3d 25 (2d Cir. 1997), CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996), and the other cases mentioned in §§16.5 – 16.9 above all represent the early days of the Internet: cybersquatters, a lack of effective search engines, and only a few commercial sites (which, because of the limitations of Internet technology at the time, were little more than static sales brochures anyway). Courts largely relied on the effects test of Calder v. Jones, 465 U.S. 783, 79 L.Ed.2d 804, 104 S.Ct. 1482 (1984). It is important to note that some courts, despite the development of a more Internet-focused standard, still do rely primarily on Calder. See §16.14 below. Two cases that began to formulate a standard for Internet jurisdiction apart from the effects test and that are still cited today are CompuServe, supra, and Maritz, Inc. v. CyberGold, Inc., 947 F.Supp. 1328 (E.D.Mo. 1996). In CompuServe, the court of appeals affirmed an Ohio district court’s finding of jurisdiction over an online service user from Texas. The Texas user had subscribed to the online service, based in Ohio, and negotiated a contract to market his software through the service. The court found this level of targeting the forum state of Ohio, in that he reached out from Texas to Ohio and originated and maintained contacts in Ohio, sufficient to provide jurisdiction. In Maritz, supra, a California company that operated a free e-mail service in exchange for answering surveys, found itself brought into Missouri court by a competitor, claiming trademark violation and unfair competition against a similar service that the plaintiff had first created. The defendant claimed that its site was merely passive, but the court rejected this, finding that the defendant had chosen to transmit advertising messages to all Internet users, including 131 e-mails to Missouri residents: Clearly, CyberGold has obtained the website for the purpose of, and in anticipation that, internet users, searching the internet for websites, will access CyberGold’s website and eventually sign up on CyberGold’s mailing list. 947 F.Supp. at 1333.
16 — 10
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.11
A. [16.11] The Zippo Test The first case to establish an independent test for how the Internet affects personal jurisdiction was Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997). Zippo was one of the first cases to examine the new reality of e-commerce, in which companies can do more than just advertise, buying and selling products and services online from and to customers around the world. The Zippo court found personal jurisdiction over the out-of-state defendant in a domain name dispute case, holding that electronic commerce it specifically transacted with Pennsylvania residents was sufficient to constitute doing business in Pennsylvania for purposes of the state’s long-arm statute. The defendant’s Internet news website had the infringing domain names “zippo.com,” “zipponet,” and “zipponews.com.” The defendant had 140,000 paying subscribers worldwide. About two percent of those subscribers lived in Pennsylvania. The defendant had entered into agreements with seven Internet access providers in Pennsylvania. Most of the cases before this point took either an ad hoc approach or tried to ignore the nature of the Internet altogether, instead seeking, sometimes desperately, to find the proper pre-Internet form of communication to which an analogy could be drawn. This often led to inconsistent and incongruous results, such as Inset Systems, Inc. v. Instruction Set, Inc., 937 F.Supp. 161 (D.Conn. 1996), in which the holding could be justified to find universal jurisdiction over any website. The Zippo court resisted falling into these traps and instead articulated a standard by which the jurisdictional effect of e-commerce could be assessed: At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper. . . . At the opposite end are situations where a defendant has simply posted information on an Internet Web site which is accessible to users in foreign jurisdictions. A passive Web site that does little more than make information available to those who are interested in it is not grounds for the exercise [of] personal jurisdiction. . . . The middle ground is occupied by interactive Web sites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and the commercial nature of the exchange of information that occurs on the Web site. [Citations omitted.] 952 F.Supp. at 1124.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 11
§16.12
INTELLECTUAL PROPERTY LAW
Many of the cases coming after Zippo have adopted its sliding scale approach: Likelihood of Jurisdiction Characterization of Website Active
“Middle Ground”
Passive
Certain
Possible
Unlikely
Thus, websites that are passive, being generally nothing more than advertising materials, are unlikely to create jurisdiction. In contrast, interactive e-commerce sites on which goods and services can be directly bought or sold on the Internet will very likely lead to jurisdiction being found. The main issues, post-Zippo, are in the middle ground. However, differing visions of what level of commercial activity is sufficient to be “active” has led to conflicting precedents.
PRACTICE POINTER
The determination of what is sufficient to take Internet activity out of the middle ground and into either the “active”/jurisdiction or the “passive”/non-jurisdiction side of the scale is an intensely fact-driven matter. The number of communications from in-forum residents through or as a result of the site, the number of in-forum visitors to the site, and the number of any commercial transactions made through the site by in-forum residents are all often examined by the courts.
B. [16.12] The Impact of Zippo Panavision International, L.P. v. Toeppen, 141 F.3d 1316 (9th Cir. 1998), CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996), and particularly Maritz v. CyberGold, Inc., 947 F.Supp. 1328 (E.D.Mo. 1996), are still occasionally cited for setting the standard in Internet jurisdiction cases. Yet it is Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997), that ultimately became directly associated with the three-level sliding scale, the “Zippo test.” 1. [16.13] Courts Following Zippo Most of the federal circuits have expressly adopted the Zippo test of Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997): Third Circuit: Toys “R” Us, Inc. v. Step Two, S.A., 318 F.3d 446 (3d Cir. 2003).
16 — 12
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.13
Fourth Circuit: ALS Scan, Inc. v. Digital Service Consultants, Inc., 293 F.3d 707 (4th Cir. 2002). Fifth Circuit: Revell v. Lidov, 317 F.3d 467 (5th Cir. 2002); Mink v. AAAA Development LLC, 190 F.3d 333 (5th Cir. 1999). Sixth Circuit: Bird v. Parsons, 289 F.3d 865 (6th Cir. 2002); Neogen Corp. v. Neo Gen Screening, Inc., 282 F.3d 883 (6th Cir. 2002). Eighth Circuit: Lakin v. Prudential Securities, Inc., 348 F.3d 704 (8th Cir. 2003). Ninth Circuit: Northwest Healthcare Alliance Inc. v. Healthgrades.com, Inc., 50 Fed.Appx. 339 (9th Cir. 2002); Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414 (9th Cir. 1997). Tenth Circuit: Intercon, Inc. v. Bell Atlantic Internet Solutions, Inc., 205 F.3d 1244 (10th Cir. 2000); Soma Medical International v. Standard Chartered Bank, 196 F.3d 1292 (10th Cir. 1999). D.C. Circuit: Gorman v. Ameritrade Holding Corp., 293 F.3d 506 (D.C.Cir. 2002). Those circuits that have not adopted the Zippo test at the circuit-wide level have still adopted the test either expressly or implicitly throughout many of their district courts. In the Seventh Circuit, it has been noted a number of times that the test was adopted by the Northern District of Illinois. See, e.g., Publications International, Ltd. v. Burke/Triolo, Inc., 121 F.Supp.2d 1178 (N.D.Ill. 2000). See also Hy Cite Corp. v. Badbusinessbureau.com, L.L.C., 297 F.Supp.2d 1154 (W.D.Wis. 2004); Caterpillar Inc. v. Miskin Scraper Works, Inc., 256 F.Supp.2d 849 (C.D.Ill. 2003). However, three recent decisions discussed below have shown the Seventh Circuit’s reluctance to embrace the Zippo test. See State of Illinois v. Hemi Group LLC, 622 F.3d 754 (7th Cir. 2010); Tamburo v. Dworkin, 601 F.3d 693 (7th Cir. 2010); Jennings v. AC Hydraulic A/S, 383 F.3d 546 (7th Cir. 2004). Many states have adopted the Zippo test as well: California: Pavlovich v. Superior Court of Santa Clara County, 29 Cal.4th 262, 58 P.3d 2, 127 Cal.Rptr.2d 329 (2002). Minnesota: Croix Retail, Inc. v. Logiciel, Inc., No. A03-220, 2003 WL 22181537 (Min.App. Sept. 23, 2003). New York: Zurakov v. Register.Com, Inc., 304 A.D.2d 176, 760 N.Y.S.2d 13 (2003). Texas: W. Gessmann, GmbH v. Stephens, 51 S.W.3d 329 (Tex.App. 2001). Washington: Precision Laboratory Plastics, Inc. v. Micro Test, Inc., 96 Wash.App. 721, 981 P.2d 454 (1999).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 13
§16.14
INTELLECTUAL PROPERTY LAW
2. [16.14] Courts Refusing To Follow or De-Emphasizing Zippo It would be easy to believe that all courts have hailed Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997), as the end of the discussion in Internet jurisdiction issues. However, there are some courts that have, for various reasons, refused to employ the Zippo test as dispositive. The First Circuit has expressed concern over the applicability of the Zippo test, without directly adopting or abandoning it. See Cossaboon v. Maine Medical Center, 600 F.3d 25, 36 (1st Cir. 2010) (dismissing case for lack of personal jurisdiction when defendant’s website was available to forum residents but not aimed at them). The court noted that the Zippo sliding scale is ill-suited to the general personal jurisdiction inquiry and that the Zippo inquiry was unhelpful when a website fell into the intermediate category. 600 F.3d at 36 n.5. However, the First Circuit’s rejection of the Zippo test is not complete; without explicitly adopting the test, the First Circuit did subsequently hold that “the mere availability of a passive website . . . cannot, standing alone . . . subject a defendant to personal jurisdiction in the forum.” [Footnote omitted.] A Corp. v. All American Plumbing, Inc., 812 F.3d 54, 61 (1st Cir. 2016). This language suggests that the interactivity of a website can still be a factor in the First Circuit’s analysis even if it is not dispositive. Similarly, the Eleventh Circuit has found the Zippo test unnecessary when considering personal jurisdiction based on a website. Louis Vuitton Malletier, S.A. v. Mosseri, 736 F.3d 1339, 1355 n.10 (11th Cir. 2013) (recognizing existence of Zippo test but noting criticism of it and concluding “the traditional, three-prong test works just fine in this Internet case where the website was commercial and fully interactive”). For the Seventh Circuit’s rejection of the Zippo test, see §16.18 below. C. [16.15] Post-Zippo Cases Since Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997), a larger number of courts have gained experience with jurisdictional issues relating to the Internet and e-commerce transactions. Consequently, many courts are less swayed by plaintiffs’ jurisdictional claims. For example, in Pebble Beach Co. v. Caddy, 453 F.3d 1151 (9th Cir. 2006), the plaintiff owned and operated a golf resort in California and discovered a passive website with the domain name www.pebblebeach-uk.com, registered by a United Kingdom-based owner of a bed and breakfast, whose property was located on England’s southern coast. The plaintiff sued the overseas defendant in the district court in California, claiming that the golf resort’s name had acquired distinctiveness. However, the defendant’s site only informed users of the accommodations and did not provide any interactive features, such as online reservations. Consequently, the circuit court affirmed the district court’s finding that the defendant had not performed some act or consummated some transaction within the forum or otherwise purposefully availed himself of the privileges of conducting activities in the forum. Therefore, without more active conduct directed at California, the court could not exercise personal jurisdiction over the U.K. defendant. The plaintiff also tried to establish that jurisdiction was
16 — 14
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.16
proper in a U.S. federal district court by claiming that the owner intended to advertise in the United States by obtaining a “.com” top level domain and because its clientele was mainly American. The court disagreed, finding that the fact of obtaining a “.com” domain alone was not sufficient to establish that the defendant directed its activities at the United States. In 2006, the Supreme Court of Utah in Fenn v. Mleads Enterprises, Inc., 137 P.3d 706 (Utah 2006), held that courts in the state cannot exercise personal jurisdiction over a foreign defendant who sends only one e-mail to a state resident without knowing the residence or location of the email’s recipient. In Fenn, defendant Mleads’ business activities focused on contracting with thirdparty marketing companies who advertised Mleads’ services to customers through e-mail solicitations. Mleads maintained an office solely in Arizona and conducted most of its business in Arizona. Although its business activity within Utah produced a very small portion its revenue, Mleads was not licensed to conduct business in Utah, did not employ or recruit any Utah-based employees or agents, and did not advertise in any Utah newspapers, magazines, or other forms of Utah-based media. Its advertisement to residents of Utah was strictly through unsolicited e-mail over the Internet. Mleads had no bank accounts in Utah and was not subject to taxation in Utah. However, in Deutsche Bank Securities, Inc. v. Montana Board of Investments, 7 N.Y.3d 65, 850 N.E.2d 1140, 1142, 818 N.Y.S.2d 164 (2006), the New York Court of Appeals held that “proof of one transaction in New York is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted.” Quoting Kreutter v. McFadden Oil Corp., 71 N.Y.2d 460, 522 N.E.2d 40, 43, 527 N.Y.S.2d 195 (1988). The court recognized that “the growth of national markets for commercial trade, as well as technological advances in communication, enable a party to transact enormous volumes of business within a state without physically entering it” and thereby could circumvent jurisdiction if the law were not sufficiently flexible. 850 N.E.2d at 1142 – 1143. In Grimbaldi v. Guinn, 72 A.D.3d 37, 895 N.Y.S.2d 156 (2010), the Second Department of the Appellate Division of the New York Supreme Court supported Zippo, supra, as a basis for analyzing a party’s online presence and found that based solely on this test the defendant’s passive website alone was insufficient to provide a basis for asserting personal jurisdiction over him. However, the court focused on the totality of the circumstances, holding that “in light of the number, nature, and timing of all of the contacts involved, including the numerous telephone, fax, e-mail, and other written communications with the plaintiff in New York that Guinn initiated . . . as well as the manner in which Guinn employed his decidedly passive Web site for commercial access, Guinn must be deemed to have sufficient contacts with this state.” 72 A.D.3d at 51. D. [16.16] In Rem Jurisdiction As seen in Panavision International, L.P. v. Toeppen, 141 F.3d 1316 (9th Cir. 1998), cybersquatting became one of the most common abusive practices over the Internet. The problem has gotten worse, with typosquatting and other conduct using domain names identical or confusingly similar to those of legitimate trademark owners. This is exacerbated by the fact that
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 15
§16.16
INTELLECTUAL PROPERTY LAW
domain name registrations are relatively inexpensive and can be obtained by almost any online user across the globe, making it difficult for U.S. plaintiffs to locate such registrants. In 1999, the Anticybersquatting Consumer Protection Act (ACPA), Pub.L. No. 106-113, Div. B, §1000(a)(9), 113 Stat. 1536 (1999), came into effect, providing plaintiffs with the ability to take legal action against the property rights in an offending domain name. The law specifically provides that trademark owners can file an in rem action against the disputed domain name “in the judicial district in which the domain name registrar, domain name registry, or other domain name authority that registered or assigned the disputed domain name is located.” 15 U.S.C. §1125(d)(2)(A). The action can be filed if the plaintiff “is not able to obtain in personam jurisdiction over a person who would have been a defendant” in a civil action. 15 U.S.C. §1125(d)(2)(A)(ii)(I). The plaintiff must also show that service of process was perfected under the notice requirements of the ACPA. Since the law came into effect, a fairly large number of cases have been brought, many in the Eastern District of Virginia, where Verisign is located (Verisign acquired Network Solutions, the largest registrar in the United States). There have been many successful cases brought to date. In Atlas Copco AB v. Atlascopcoiran.com, 533 F.Supp.2d 610 (E.D.Va. 2008), the plaintiff discovered that several domain names that incorporated its trademark were used in phishing scams. Atlas Copco tried unsuccessfully to locate the registrants of the domain names, who were likely somewhere in the Middle East or southern Asia. Furthermore, there were insufficient contacts to exercise jurisdiction based on the state’s long-arm statute. Therefore, the plaintiff filed an in rem action for relief under the ACPA in the jurisdiction in which the registries of the domain names were located, Virginia. After the defendants failed to respond to the complaint, the plaintiff moved for summary judgment, and the court granted the motion and ordered that the domain names be transferred to the plaintiff. The Seventh Circuit has also found that allegations of cybersquatting justified specific personal jurisdiction over a defendant with a national business, even when the forum was not specifically targeted by the defendant. See uBID, Inc. v. GoDaddy Group, Inc., 623 F.3d 421, 427 – 429 (7th Cir. 2010). Other uses of intellectual property online have similarly been used to subject a defendant to specific personal jurisdiction. See IPOX Schuster, LLC v. Nikko Asset Management Co., Case No. 15 C 9955, 2016 WL 3194445, *5 (N.D.Ill. June 9, 2016) (“As a matter of policy, the law ought not require a holder of intellectual property . . . in these circumstances to go to the home forum of one who has, in effect, reached into the holder's home forum to take its property.”), quoting Ariel Investments, LLC v. Ariel Capital Advisors LLC, No. 15 C 3717, slip op. at 5 (N.D.Ill. Oct. 29, 2015) (finding specific personal jurisdiction in Illinois when defendant allegedly violated trademark knowing it would harm reputation of Illinois company). An additional benefit of the ACPA is that the in rem action is not exclusive but rather can occur in addition to any other jurisdiction that may exist in other civil actions relating to the same disputed domain.
16 — 16
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.17
For more information on substantive rights under the ACPA, see Chapter 8 of this handbook.
V. CASES IN ILLINOIS AND THE SEVENTH CIRCUIT A. [16.17] General Jurisdiction The Seventh Circuit has announced that “[w]e have been clear that maintaining a public website is not sufficient, by itself, to establish general jurisdiction.” Kipp v. Ski Enterprises Corporation of Wisconsin, Inc., 783 F.3d 695, 699 (7th Cir. 2015), citing Tamburo v. Dworkin, 601 F.3d 693, 701 (7th Cir. 2010). The court did say that “[t]here is nothing wrong with taking the website into account,” but held that the act of maintaining a website, without more, lacks the continuous and systematic contacts with a state that are necessary for a court to exercise general jurisdiction. 783 F.3d at 699 (denying general jurisdiction based on website available in Illinois that advertised ski lift tickets). See also Snodgrass v. Berklee College of Music, 559 Fed.Appx. 541, 543 (7th Cir.) (finding no general personal jurisdiction in Illinois for music school in Massachusetts whose students had thousands of “online contacts” each day without further reason to tie those contacts to forum state), reh’g denied (May 1, 2014), cert. denied, 135 S.Ct. 451 (2014), reh’g denied, 135 S.Ct. 1035 (2015). Most general jurisdiction cases in the Seventh Circuit continue to follow this line and deny general jurisdiction claims when the operation of a website is providing the main grounds for the claim of general jurisdiction. See, e.g., Industrial Models, Inc. v. SNF, Inc., Case No. 14 C 8340, 2015 WL 2399089, *4 (N.D.Ill. May 18, 2015) (finding no general jurisdiction when defendant’s website directed consumers to dealers in Illinois, even when defendant’s revenues from Illinois market approached $80 million); Shrum v. Big Lots Stores, Inc., Case No. 3:14-cv-03135-CSBDGB, 2014 WL 6888446, *8 (C.D.Ill. Dec. 8, 2014) (finding no general personal jurisdiction for website “primarily designed to provide information”). In particular, courts do not exercise general personal jurisdiction over websites that advertise their services throughout the United States rather than being targeted directly at the forum. See Hayward v. Taylor Truck Line, Inc., Case No. 15-cv-00866, 2015 WL 5444787, *7 n.3 (N.D.Ill. Sept. 14, 2015) (finding no general personal jurisdiction when website stated it provided “services to the lower 48 states”); United States Securities & Exchange Commission v. Brown, No. 14 C 6130, 2015 WL 1010510, *3 (N.D.Ill. Mar. 4, 2015) (finding no general personal jurisdiction when website stated defendant provided financial services “throughout the United States”). See also Johnson v. Barrier, No. 15-cv-03928, 2016 WL 3520157, *5 (N.D.Ill. June 28, 2016) (dismissing for lack of personal jurisdiction because “Plaintiff offers no evidence of geographically-focused targeting that could subject [Defendant] to personal jurisdiction on the basis of its alleged online sales”). Many district court decisions are in line with this reasoning. The court in Search Force, Inc. v. Dataforce International Inc., 112 F.Supp.2d 771 (S.D.Ind. 2000), quickly rejected the plaintiff’s broad-based claims of general jurisdiction. Likewise, in LaSalle National Bank v.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 17
§16.17
INTELLECTUAL PROPERTY LAW
Vitro, Sociedad Anonima, 85 F.Supp.2d 857, 862 (N.D.Ill. 2000), involving a passive website, the court cited with favor the defendant’s statement that no court has ever found general jurisdiction based on the operation of a web site that does not provide for direct sales. [Emphasis in original.] Even an interactive website is unlikely to result in a favorable finding for the plaintiff. For example, InfoSys Inc. v. Billingnetwork.com, Inc., No. 03 C 3047, 2003 WL 22012687 (N.D.Ill. Aug. 27, 2003), involved a patent infringement declaratory judgment action between two companies with Internet-based medical billing systems. Such Internet-based systems would appear to be a prime example of a defendant clearly doing business over the Internet that would create jurisdiction under Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997). Despite this, the court gave short shrift to the plaintiff’s jurisdictional arguments: [T]here is no case where general jurisdiction was conferred on the basis of an interactive website in the absence of non-website factors evidencing intent for a defendant’s product or website to reach a particular state. 2003 WL 22012687 at *4. Due to the lack of such non-website factors, the court dismissed the matter for lack of personal jurisdiction. The first case in the Seventh Circuit to deal with a claim of general jurisdiction in this context, IDS Life Insurance Co. v. SunAmerica, Inc., 958 F.Supp. 1258 (N.D.Ill. 1997), aff’d in part, vacated in part on other grounds, 136 F.3d 537 (7th Cir. 1998), was an action alleging that the defendants were wrongfully inducing the plaintiffs’ sales agents to switch to the defendants’ products. The principal defendant was incorporated in Maryland, with its principal place of business in California. The plaintiffs argued that the defendants’ aggressive national advertising, toll-free number, and Internet site created not specific jurisdiction, but general jurisdiction. The court most definitely disagreed: Plaintiffs ask this court to hold that any defendant who advertises nationally or on the Internet is subject to its jurisdiction. It cannot plausibly be argued that any defendant who advertises nationally could expect to be haled into court in any state, for a cause of action that does not relate to the advertisements. Such general advertising is not the type of “purposeful activity related to the forum that would make the exercise of jurisdiction fair, just or reasonable.” 958 F.Supp. at 1268, quoting Rush v. Savchuk, 444 U.S. 320, 62 L.Ed.2d 516, 100 S.Ct. 571, 577 (1980). One rare example of a finding supporting general jurisdiction in this context is Publications International, Ltd. v. Burke/Triolo, Inc., 121 F.Supp.2d 1178 (N.D.Ill. 2000). In this breach-ofcontract and unfair-competition case involving misuse of cookbook photographs, the court found that catalogs sent to Illinois in combination with the hiring of a Chicago sales representative were sufficient intentional and continuous contacts to create general jurisdiction.
16 — 18
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.18
B. Specific Jurisdiction Cases 1. [16.18] Cases Concerning Website Operators Very few courts have expressly rejected the Zippo test discussed in §16.11 above. Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997). However, the Seventh Circuit has expressed deep concerns about the Zippo test and does not apply it in its jurisdiction jurisprudence. A 2010 case, Tamburo v. Dworkin, 601 F.3d 693 (7th Cir. 2010), provided insight into the Seventh Circuit’s weighing of Zippo, supra, and Calder v. Jones, 465 U.S. 783, 79 L.Ed.2d 804, 104 S.Ct. 1482 (1984), when an Illinois software developer sought a declaratory judgment that he did not misappropriate dog pedigree information from free, publicly available websites and claimed the foreign website owners had retaliated and harmed his reputation. The court acknowledged that other circuits had followed Zippo in connection with contacts over the Internet, but it stated: We have not specifically done so, although we have considered a website’s degree of interactivity in at least one personal-jurisdiction case. 601 F.3d at 703 n.7, citing Jennings v. AC Hydraulic A/S, 383 F.3d 546, 549 – 550 (7th Cir. 2004). Furthermore, the court was reluctant to “fashion a special jurisdictional test for Internet-based cases,” favoring the application of Calder, supra, at least as it relates to intentional tort cases. Id. The court held that “the whole of the injury was suffered in Illinois, and the individual defendants knew that would be the case.” 601 F.3d at 706 n.9. The Seventh Circuit has been consistent in its disapproval of Zippo. See State of Illinois v. Hemi Group LLC, 622 F.3d 754, 759 (7th Cir. 2010) (declining to apply Zippo test because “Zippo’s sliding scale was always just short-hand for determining whether a defendant had established sufficient minimum contacts” and “the traditional due process inquiry . . . is not so difficult to apply to cases involving Internet contacts”). In 2014, the Seventh Circuit reaffirmed this and stated: “The interactivity of a website is . . . a poor proxy for adequate in-state contacts.” Advanced Tactical Ordnance Systems, LLC v. Real Action Paintball, Inc., 751 F.3d 796, 803 (7th Cir. 2014) (finding no specific personal jurisdiction over defendant operating website accused of trademark infringement). The court noted that the term “interactive website” “hardly rules out anything in 2014” and would thus subject defendant website operators to personal jurisdiction anywhere. Id. “[I]n resolving questions about personal jurisdiction involving online contacts[, courts should] ensure that a defendant is not haled into court simply because the defendant owns or operates a website that is accessible in the forum state, even if it is interactive.” Id., quoting be2 LLC v. Ivanov, 642 F.3d 555, 558 (7th Cir. 2011). However, not all Illinois courts have followed the Seventh Circuit’s disapproval of the Zippo test, and interactivity is still considered in some decisions on personal jurisdiction over website operators. See Dolemba v. Citizens Information Associates, LLC, No. 13 C 6939, 2014 WL 1646942, **2 – 3 (N.D. Ill. Apr. 24, 2014). The court in Dolemba stated:
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 19
§16.18
INTELLECTUAL PROPERTY LAW
Courts in this district have adopted a “sliding scale” approach that divides Internet activities into three categories: (1) those in which the defendant clearly transacts business in foreign jurisdictions over the Internet; (2) those in which a defendant has posted information on the internet, but has no further communication with potential customers via the Internet; and (3) those in which the defendant operates an interactive website that allows defendant and potential customers in foreign jurisdictions to communicate regarding defendant's goods or services. Id. (collecting cases). Very few courts have expressly rejected the Zippo test discussed in §16.11 above. Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997). However, the Seventh Circuit has expressed deep concerns about the Zippo test and does not apply it in its jurisdiction jurisprudence. A 2010 case, Tamburo v. Dworkin, 601 F.3d 693 (7th Cir. 2010), provided insight into the Seventh Circuit’s weighing of Zippo, supra, and Calder v. Jones, 465 U.S. 783, 79 L.Ed.2d 804, 104 S.Ct. 1482 (1984), when an Illinois software developer sought a declaratory judgment that he did not misappropriate dog pedigree information from free, publicly available websites and claimed the foreign website owners had retaliated and harmed his reputation. The court acknowledged that other circuits had followed Zippo in connection with contacts over the Internet, but it stated: We have not specifically done so, although we have considered a website’s degree of interactivity in at least one personal-jurisdiction case. 601 F.3d at 703 n.7, citing Jennings v. AC Hydraulic A/S, 383 F.3d 546, 549 – 550 (7th Cir. 2004). Furthermore, the court was reluctant to “fashion a special jurisdictional test for Internet-based cases,” favoring the application of Calder, supra, at least as it relates to intentional tort cases. 601 F.3d at 703 n.7. The court held that “the whole of the injury was suffered in Illinois, and the individual defendants knew that would be the case.” 601 F.3d at 706 n.9. The Seventh Circuit has been consistent in its disapproval of Zippo. See State of Illinois v. Hemi Group LLC, 622 F.3d 754, 759 (7th Cir. 2010) (declining to apply Zippo test because “Zippo’s sliding scale was always just short-hand for determining whether a defendant had established sufficient minimum contacts” and “the traditional due process inquiry . . . is not so difficult to apply to cases involving Internet contacts”). In 2014, the Seventh Circuit reaffirmed this and stated: “The interactivity of a website is . . . a poor proxy for adequate in-state contacts.” Advanced Tactical Ordnance Systems, LLC v. Real Action Paintball, Inc., 751 F.3d 796, 803 (7th Cir. 2014) (finding no specific personal jurisdiction over defendant operating website accused of trademark infringement). The court noted that the term “interactive website” “hardly rules out anything in 2014” and would thus subject defendant website operators to personal jurisdiction anywhere. Id. “[I]n resolving questions about personal jurisdiction involving online contacts[, courts should] ensure that a defendant is not haled into court simply because the defendant owns or operates a website that is accessible in the forum state, even if it is interactive.” Id., quoting be2 LLC v. Ivanov, 642 F.3d 555, 558 (7th Cir. 2011).
16 — 20
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.18
However, not all Illinois courts have followed the Seventh Circuit’s disapproval of the Zippo test, and interactivity is still considered in some decisions on personal jurisdiction over website operators. See Dolemba v. Citizens Information Associates, LLC, No. 13 C 6939, 2014 WL 1646942, **2 – 3 (N.D.Ill. Apr. 24, 2014). The court in Dolemba stated: Courts in this district have adopted a “sliding scale” approach that divides Internet activities into three categories: (1) those in which the defendant clearly transacts business in foreign jurisdictions over the Internet; (2) those in which a defendant has posted information on the internet, but has no further communication with potential customers via the Internet; and (3) those in which the defendant operates an interactive website that allows defendant and potential customers in foreign jurisdictions to communicate regarding defendant's goods or services. Id. (collecting cases). Applying this test, the court in Dolemba found that operating a website from which Illinois residents could purchase mugshots provided sufficient minimum contacts with the State of Illinois for the Illinois court to exercise specific personal jurisdiction over the defendant. The court noted that the defendant had originally obtained the plaintiff’s mugshot from law enforcement officials in Illinois, as well. Instead of the Zippo test’s focus on interactivity, the Seventh Circuit looks to whether the website operator’s conduct targets the forum. “If the defendant merely operates a website, even a ‘highly interactive’ website, that is accessible from, but does not target, the forum state, then the defendant may not be haled into court in that state without offending the Constitution.” be2 LLC, supra, 642 F.3d at 559. See also Timberstone Management LLC v. Idaho Golf Partners, Inc., No. 2014-CV-5502, 2014 WL 5821720, **5 – 6 (N.D.Ill. Nov. 6, 2014) (“The mere fact that [defendant] operated an interactive website that could be accessed by Illinois customers is not enough for the Court to exercise jurisdiction over [defendant]. [Plaintiff] has not established that [defendant] purposefully directed its activities towards Illinois.”). Thus, it seems clear that operating a website that makes no attempt to target or do business with Illinois users does not subject the operator to specific personal jurisdiction in Illinois. See Mobile Anesthesiologists Chicago, LLC v. Anesthesia Associates of Houston Metroplex, P.A., 623 F.3d 440, 446 (7th Cir. 2010) (existence of website that allegedly infringed plaintiff’s trademark, but was aimed only at Texas residents rather than forum state, was not sufficient to support specific personal jurisdiction). What showing must be made to show that a defendant targeted a forum with its website is unclear, however. Some courts seem to say that having a purely national focus, without making special efforts to reach out to Illinois, is not sufficient for specific personal jurisdiction. For instance, in Gullen v. Facebook.com, Inc., No. 15 C 7681, 2016 WL 245910 (N.D.Ill. Jan. 21, 2016), the plaintiff attempted to sue Facebook on the basis that its facial recognition software violated an Illinois law prohibiting the for-profit collection of certain biometric information. The court noted that its research had “not found a case analyzing specific jurisdiction over a social media website” but dismissed for lack of jurisdiction because Facebook’s conduct occurred
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 21
§16.18
INTELLECTUAL PROPERTY LAW
toward all users, not just Illinois users, and that the plaintiff could not allege that Facebook knew Illinois users would use its product. 2016 WL 245910 at **2 – 3. Similarly, merely having customers in Illinois is not usually sufficient to subject a defendant website operator to specific personal jurisdiction. For instance, in Industrial Models, Inc. v. SNF, Inc., Case No. 14 C 8340, 2015 WL 2399089, *4 (N.D.Ill. May 18, 2015), the plaintiff based its claim of jurisdiction on allegations that the defendant’s website directed website users to dealers in Illinois and that the defendant had one percent of its customers in Illinois, but, given the defendant’s annual revenues of $80 million, the substantial revenue earned in Illinois was sufficient to create minimum contacts. The court found this did not indicate any attempt by the defendant to “purposefully exploit” the Illinois market. Id., citing Advanced Tactical, supra, 751 F.3d at 803. In addition, the court found that the claims, which were based in antitrust and tortious business interference, did not arise out of the contacts of the website customers with the defendant’s website. Id. However, a number of courts have held that having the option to ship goods to Illinois — even if the user also has the option to ship to the other 49 states as well and Illinois is not singled out — is sufficient for specific personal jurisdiction. See Illinois v. Hemi Group, LLC, 622 F.3d 754, 758 (7th Cir.2010) (finding Illinois had specific personal jurisdiction over defendant who operated website selling cigarettes to all 50 states because defendant “stood ready and willing to do business with Illinois residents”); uBID, Inc. v. GoDaddy Group, Inc., 623 F.3d 421, 428 (7th Cir. 2010) (finding specific personal jurisdiction in cybersquatting case because “it is easy to infer that GoDaddy’s national marketing campaign is intended to reach as large an audience as possible, including the 13 million potential customers in the nation’s fifth most populous state [(Illinois)]”); Monster Energy Co. v. Wensheng, 136 F.Supp.3d 897, 904 – 909 (N.D.Ill. 2015) (finding that operator of website selling “Monster Energy” drinks to Illinois residents in violation of plaintiff’s trademark was subject to specific personal jurisdiction in Illinois because operator shipped the products to Illinois and because Illinois had an interest in protecting its citizens from counterfeit products). Advertising or linking to a third-party website has been found not to subject the advertiser or linker to personal jurisdiction. The Seventh Circuit found a chain of causation too attenuated to support specific personal jurisdiction when a hotel in Spain was being sued in Illinois for injuries that occurred during the plaintiff’s stay in Spain, based only on the fact that the plaintiff had made the reservation through a third-party website (the travel site Orbitz). See Noboa v. Barceló Corporación Empresarial, SA, 812 F.3d 571, 572 (7th Cir. 2016) (Easterbrook, J.). In Neomedia Technologies, Inc. v. AirClic, Inc., No. 04 C 566, 2004 WL 848181 (N.D.Ill. Apr. 16, 2004), after quickly disposing of general jurisdiction claims, the court examined specific jurisdiction claims in a patent infringement action between three makers of Internet-based bar code scanning systems. The court found that listing information on the website of the first defendant (AirClic) was not a sufficient level of commercial activity to support jurisdiction. The site of the second defendant (Scanbuy) presented a more difficult question. The plaintiff claimed that Scanbuy’s site was a “portal” similar to the one at issue in LFG, LLC v. Zapata Corp., 78 F.Supp.2d 731 (N.D.Ill. 1999), because, while it did not allow for the purchase of products over
16 — 22
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.19
the site, it linked to a site that did. 2004 WL 848181 at *5. The court distinguished LFG because the site at issue was not meant to make money as a stand-alone venture. The court also distinguished the non-Internet contacts in LFG from the lack of such contacts by Scanbuy. Finally, the court was concerned about the potentially overbroad effect of finding Scanbuy’s site to be sufficiently interactive to create jurisdiction: [I]f we were to confer personal jurisdiction based on Scanbuy’s hyperlink to a nonforum “active” website, it would establish as precedent that any website owner who hyperlinks to a website that conducts business online would be susceptible to personal jurisdiction in every state and district. 2004 WL 848181 at *6. Consequently, the court granted both defendants’ motions to dismiss. 2. [16.19] Internet Cases Other than Website Operators The Seventh Circuit has approached sending emails to a party in-state using the same minimum contacts analysis as it would for a party sending letters to an in-state party. See Felland v. Clifton, 682 F.3d 665, 675 – 676 (7th Cir. 2012) (holding that e-mails sent to victim of fraud in forum state were relevant in finding specific personal jurisdiction over defendant). However, the Seventh Circuit has held that maintaining an e-mail list that compiles user’s e-mail addresses does not subject the defendant to specific personal jurisdiction. See Advanced Tactical Ordnance Systems, LLC v. Real Action Paintball, Inc., 751 F.3d 796, 803 (7th Cir. 2014). The court depended partly on the fact that “email does not exist in any location at all” because it “bounces from one server to another” and “winds up wherever the recipient happens to be at that instant.” Id. The court did note that the analysis might be different “if there were evidence that a defendant in some way targeted residents of a specific state, perhaps through geographically-restricted online ads.” Id. Circulating allegedly libelous statements over the Internet about a company headquartered in Illinois was found insufficient to subject the speaker to specific personal jurisdiction in Illinois. See United Airlines, Inc. v. Zaman, 152 F.Supp.3d 1041, 1051 (N.D.Ill. 2015) (noting that statements themselves did not mention forum state and that defendant was not alleged to have taken actions singling out forum state). See also Bittman v. Fox, No. 14 C 08191, 2016 WL 2851566, **5 – 8 (N.D.Ill. May 16, 2016) (finding no personal jurisdiction based on allegations of publishing hyperlinks to offending blog posts on websites with large readership in forum state, noting that “the interactive nature of online communication — which by its nature can be pursued from almost any location at any time — diminishes the jurisdictional import of these communications.”). One Illinois court found that committing copyright infringement traceable to Internetprotocol addresses registered in the forum was sufficient for the court to exercise specific personal jurisdiction over the alleged infringer. See Cobbler Nevada, LLC v. Does 1-28, No. 15 C 7538, 2016 WL 193408, *5 (N.D.Ill. Jan. 15, 2016).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 23
§16.20
INTELLECTUAL PROPERTY LAW
VI. [16.20] TRANSNATIONAL ISSUES FACING U.S. BUSINESSES The transnational characteristics of the Internet add to the complexity of determining applicable jurisdictional limitations. This has been a particularly important issue for companies attempting to protect their intellectual property rights from online piracy and counterfeiting of digital media, the perpetrators of which have been active in jurisdictions with limited legal protections. In addition, the illegal manufacture and distribution of pirated music and video have become considerably easier in recent years due to advances in computer technology, the low cost of duplicating materials and equipment, and the insufficient availability of sophisticated antipiracy measures, such as advanced encryption systems. The cost of all forms of digital piracy is staggering. There have been, for example, more than an estimated $63.4 billion in losses from pirated software (see Ninth Annual BSA 2011 Global Software Piracy Study, http://globalstudy.bsa.org/2011/#) and $12.5 billion in annual losses from illegally downloaded music (see Stephen E. Siwek, Institute for Policy Innovation, The True Cost of Sound Recording Piracy to the U.S. Economy (Aug. 21, 2007), www.ipi.org/doclib/20120515_soundrecording piracy.pdf. Fortunately, international collaboration is on the increase. The European Union and several countries in South America and Asia have enacted tougher and more innovative laws allowing more effective enforcement of civil and criminal liability for those trading in pirated digital media, much of which takes place via the Internet. In mid-2012, Japan passed controversial new legislation increasing the criminal sanctions for the illegal downloading of copyrighted material. In 2009, France enacted the so-called HADOPI law (Haute Autorité pour la diffusion des œuvres et la protection des droits sur internet), which provides for a graduated response to alleged online copyright infringers that may lead to the individual being banned from Internet access as well as other penalties. In late 2011, Spain enacted the Sinde Law (Ley Sinde), which provides a fasttrack legal procedure to shut down websites trading in pirated content. These actions are also in line with bilateral agreements between the United States and other countries in which intellectual property protections and antipiracy action form important elements. The end effect is to create a more transparent and collaborative approach to antipiracy measures regionally and globally and remove some of the jurisdictional obstacles that have so far allowed illicit trade to flourish. Courts in the United States are exercising jurisdiction over foreign defendants in more creative ways to provide relief to U.S. plaintiffs who might be unfairly burdened by litigating in foreign courts. In Dudnikov v. Chalk & Vermilion Fine Arts, Inc., 514 F.3d 1063 (10th Cir. 2008), an online retailer brought a declaratory judgment action against a British copyright owner. The plaintiffs were eBay members who used the Internet auction site to sell various fabrics from their home in Colorado. This case arose from two of the plaintiffs’ prints that are inspired by famous images by the artist Erté, the image rights of which were owned by the defendants. The defendants provided eBay in California with a notice of claimed infringement (NOCI), as provided under the Digital Millennium Copyright Act, Pub.L. No. 105-304, 112 Stat. 2860 (1998), which led to the suspension of the plaintiffs from the auction site. Via e-mail, the defendants also threatened the plaintiffs with a copyright infringement lawsuit, but before the defendants could carry out that threat, the plaintiffs filed suit in federal district court in Colorado seeking a declaratory judgment that their images did not infringe the copyrights. The defendants
16 — 24
WWW.IICLE.COM
JURISDICTION IN THE INFORMATION AGE
§16.20
responded with a motion to dismiss based on lack of personal jurisdiction over them, to which the district court agreed. However, the Tenth Circuit disagreed, holding that the plaintiffs’ lawsuit arose from, and was an effort to reverse, the consequences of the NOCI that the plaintiffs incurred in Colorado and that the defendants must have known that the plaintiffs’ business was located in Colorado. One issue currently being litigated is the scope of the government’s power to compel a domestic party to produce data accessible in cloud storage on the Internet but physically housed on servers in other countries. The Second Circuit has ruled that the government cannot compel the production of such information with a warrant issued under 18 U.S.C. §2703, added by the Stored Communications Act, Pub.L. No. 99-508, Title II, §201[a], 100 Stat. 1860 (1986). See In re Warrant to Search Certain E-mail Account Controlled & Maintained by Microsoft Corp., 829 F.3d 197 (2d Cir. 2016). The decision has attracted much attention in the press, and a concurring opinion explicitly called for legislation to address the issue. 829 F.3d at 222 (Lynch, J., concurring in judgment). The landscape for international criminal jurisdiction over Internet data may thus change in the near future.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
16 — 25
17
Licensing Online
2017 Update Author: SETH I. APPEL Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP Chicago
2013 Author: D. JAMES NAHIKIAN Nahikian Global Intellectual Property & Technology Law Group
®
©COPYRIGHT 2017 BY IICLE .
17 — 1
INTELLECTUAL PROPERTY LAW
I. [17.1] Scope of Chapter II. [17.2] Why License Online? A. [17.3] One-to-Many Business Model B. [17.4] Many-to-Many Business Model III. [17.5] Pitfalls of Licensing Online A. B. C. D.
[17.6] [17.7] [17.8] [17.9]
Problem with Control Downstream Burden of Personally Identifiable Information Open Source Components Exposure to Hostile Jurisdictions
IV. [17.10] Key Considerations for Licensor A. B. C. D. E. F. G. H. I. J. K. L. M.
[17.11] [17.12] [17.13] [17.14] [17.15] [17.16] [17.17] [17.18] [17.19] [17.20] [17.21] [17.22] [17.23]
Assent Offer Acceptance Consideration Parol Evidence Rule Capacity Mistake Adhesion, Unconscionability, and Modification Disclaimers and Releases Liquidated Damages Arbitration and Mediation Consent to Jurisdiction Retention and Use of Personally Identifiable Information
V. [17.24] Enforceability A. [17.25] General Considerations 1. [17.26] Notice 2. [17.27] Access 3. [17.28] Opportunity To Reject B. Browsewrap Licenses 1. [17.29] Attributes 2. [17.30] Cases
17 — 2
WWW.IICLE.COM
LICENSING ONLINE
C. Clickwrap Licenses 1. [17.31] Attributes 2. [17.32] Cases VI. [17.33] Sample Hybrid Browsewrap and Clickwrap Agreement for a Streaming Multimedia Service Provider with Practice Pointers
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 3
§17.1
INTELLECTUAL PROPERTY LAW
I. [17.1] SCOPE OF CHAPTER The online license is a hybrid of law and rapidly evolving digital technologies. Never before in our history has technology empowered licensors to exploit products, expressive works, brands, and intellectual property rights with the reach and efficiency that can be accessed today. Unfortunately, technology has made it all too easy for licensors to undermine their intellectual property rights inadvertently and expose themselves to economic loss and legal liability. This chapter supplements the material found elsewhere in this handbook by discussing practical aspects of online licenses, setting out key legal considerations for licensors, and examining the two most common types of online contracts: browsewrap and clickwrap agreements. In addition, a sample hybrid browsewrap and clickwrap agreement for a streaming multimedia service provider is appended to the chapter.
II. [17.2] WHY LICENSE ONLINE? The question of why to license online is answered indirectly by an illustrative (not so) hypothetical. An independent musician has conceived a new form of ensemble music that fails to interest both recording industry labels and potential ensemble members alike. Undeterred, the musician forges ahead with her plan to become the next “Beatles” of her unique music genre and reap due personal reward. A Grammy Award awaits, she is convinced. Previously, our hypothetical musician would have stood very little chance of fulfilling her goals, in part because she possesses modest capital and has no industry support. However, the resources available to innovators such as the musician have been advanced by the deployment of inexpensive website technologies. These enable new business models for licensing-in intellectual property as well as for licensing it out. A. [17.3] One-to-Many Business Model A “one-to-many” model is a term of art. It refers to a website that is operated by a single point of contact, typically a business, and is designed to foster transactions between the contact and numerous Internet users who are not targeted as individuals but rather as a class. Instead of mailing solicitations to known prospects, whether by paper advertisement or by email, the proprietor of a one-to-many website can promote licensable properties simply by publishing a site that displays the pertinent marketing information and communicates an offer to license. If a visitor to the website decides to avail himself or herself of something being offered there, the visitor may be compelled to take under license in order to consummate the transaction. The point of contact may also attempt to bind website visitors to a license agreement whenever they simply access the site. B. [17.4] Many-to-Many Business Model Another term of art to know is the “many-to-many” model. This describes a website that is operated as a portal or conduit through which licensors unaffiliated with the site proprietor can
17 — 4
WWW.IICLE.COM
LICENSING ONLINE
§17.7
market and transact their licensable properties to other Internet users at the site with little or no direct involvement on the part of the proprietor. The many-to-many website functions similar to a mercantile exchange, except that orders do not necessarily involve sales of goods but may contemplate only licenses. Typically, the website proprietor requires registration or else a paid subscription in order to access the site and thus attempts to bind those who use the site to licenses governing use of the proprietor’s intellectual property and the rights of those who transact through the many-to-many website.
III. [17.5] PITFALLS OF LICENSING ONLINE Before online presence became commonplace, licensing arrangements tended to involve parties who knew one another and expected to form long-term commercial relationships. Today, online licensing situations frequently obtain between parties who have little, if any, actual knowledge about the other and do not necessarily share a mutual interest in cultivating an ongoing relationship. As a consequence, valid reasons exist why not all licensable intellectual properties should be made available through online means. A. [17.6] Problem with Control Downstream Though federal courts have sent mixed signals, under certain circumstances, a fully paid-up, perpetual copyright license can be construed as a sale of a protected work rather than a license. See UMG Recordings, Inc. v. Augusto, 628 F.3d 1175, 1180 (9th Cir. 2011) (“[M]ere labeling of an arrangement as a license rather than a sale . . . [is] not by itself dispositive of the issue.”). This distinction between license and sale is significant in part due to the copyright first-sale doctrine, codified at 17 U.S.C. §109(a): [T]he owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord. If a licensee is deemed an owner of a copy of the work, then he or she may be free to sell or transfer the copy to others pursuant to the first-sale doctrine. In this fashion, a licensor might lose control over the copy and, moreover, may not hold a right to terminate the purported license grant even when a licensee has materially breached the terms. In the software context, the Ninth Circuit has held that a software user is a licensee, rather than an owner of a copy, when the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions. Vernor v. Autodesk, Inc., 621 F.3d 1102, 1111 (9th Cir. 2010), cert. denied, 132 S.Ct. 105 (2011). B. [17.7] Burden of Personally Identifiable Information Online license fees are usually transmitted via electronic payment mechanisms that require a licensee to furnish personally identifiable information such as name and financial accounts data.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 5
§17.8
INTELLECTUAL PROPERTY LAW
This imposes a duty on the licensor to safeguard the information under Federal Trade Commission regulations, federal statutes, and various state security breach notification laws that are becoming increasingly stringent. In the event personally identifiable information is lost, or in some states merely accessed without a person’s authorization, the licensor may be obligated to place each and every affected person on notice regarding the event, and, in turn, the licensor can expect to be sued for damages. C. [17.8] Open Source Components On occasion, software engineers, professionals in the creative arts, and other online licensors or their employees may incorporate into their works materials made available by other entities pursuant to an open source license. The terms and conditions of such licenses can subject the licensee’s end product to unanticipated “free,” “open,” or “commons” obligations that prohibit any use of the open source components for commercial gain or otherwise restrict use. Open source licenses also may require a licensee to make its proprietary material free for use by the public. Accordingly, it is important to review and understand the relevant terms before using open source content. D. [17.9] Exposure to Hostile Jurisdictions Easy access to the courts and perceived pro-plaintiff bias may encourage a motivated licensee to challenge a license agreement irrespective of any consent-to-jurisdiction provisions that it contains. An online licensor thus may have to defend against an opportunistic lawsuit in a hostile jurisdiction and bear the unforeseen expense, distraction from core business operations, and uncertainty that can accompany litigation.
IV. [17.10] KEY CONSIDERATIONS FOR LICENSOR Sections 17.11 – 17.23 below address contractual considerations that frequently arise in the drafting and interpretation of online licenses. The discussion assumes that the licensor holds a proprietary interest, either as owner or exclusive licensee from a third party, in the intellectual property that is the subject of the license agreement. The topics covered below are key contract principles as they relate to licensing in general and to intellectual property licenses specifically as the Illinois courts should construe them. A. [17.11] Assent As with any contract, manifestation of assent by the parties to online license terms and conditions is a necessary element in the formation of a valid license agreement. See generally Steinberg v. Chicago Medical School, 69 Ill.2d 320, 371 N.E.2d 634, 639 – 640, 13 Ill.Dec. 699 (1977). The Illinois courts would focus on this basic question: Did the parties to an online license comprehend their arrangement? The parties must arrive at a mutual understanding. Fries v. United Mine Workers of America, 30 Ill.App.3d 575, 333 N.E.2d 600 (4th Dist. 1975). If they did not, purported license terms and conditions are mere statements by the licensor and not a binding agreement.
17 — 6
WWW.IICLE.COM
LICENSING ONLINE
§17.13
The Illinois courts look at objective manifestations of assent rather than the subjective intentions of a party. Federal Trade Commission v. Cleverlink Trading Ltd., 519 F.Supp.2d 784, 796 (N.D.Ill. 2007). However, when the objective indications of assent are unclear, the courts may look to the subjective understandings of the parties for guidance. Caporale v. Mar Les, Inc., 656 F.2d 242 (7th Cir. 1981) (no mutual assent as between employer and union given that former had no opportunity to review terms that had not been made available to it). Assent to license terms and conditions may be demonstrated by words or acts. See generally Bank Computer Network Corp. v. Continental Illinois National Bank & Trust Company of Chicago, 110 Ill.App.3d 492, 442 N.E.2d 586, 591, 66 Ill.Dec. 160 (1st Dist. 1982). If assent has been properly evidenced, Illinois courts will uphold a license agreement even though unusual and extraordinary terms and conditions suggest that a person would be unlikely to agree to take such a license. See generally Brooks v. Gates, 8 Ill.App. 428 (1st Dist. 1881). In practice, a website should display all proposed terms and conditions before the prospective licensee can indicate his or her assent to the agreement. The assent mechanism should show affirmative words such as “I Agree” and not ambiguous ones like “Continue On.” The license should be rejectable, and the effects of rejecting the agreement should be described within the terms offered. The full text of the license should be re-reviewable up until the point where assent is possible. Ideally, the identifying information provided by a prospective licensee should be linked to the assent mechanism and stored as a permanent record in case the assent is ever contested. B. [17.12] Offer Once published online, license terms and conditions give rise to an offer that empowers a website visitor to create a binding agreement if the visitor accepts the license provisions without modification. See generally Crackel v. State Farm Insurance Co., 2014 IL App (5th) 130366, ¶13, 16 N.E.3d 409, 384 Ill.Dec. 313; McCarty v. Verson Allsteel Press Co., 89 Ill.App.3d 498, 411 N.E.2d 936, 943, 44 Ill.Dec. 570 (1st Dist. 1980). Such an offer must be communicated to a website visitor, express the clear intention to form an agreement, and be certain and definite as to the terms contained in the license. Academy Chicago Publishers v. Cheever, 144 Ill.2d 24, 578 N.E.2d 981, 983, 161 Ill.Dec. 335 (1991). A party making an offer is “master of the offer,” and, accordingly, if these elements are present and the offer has not terminated, the licensor conveys to a website visitor the power to accept and bind the parties to their agreement. McAnelly v. Graves, 126 Ill.App.3d 528, 467 N.E.2d 377, 379, 81 Ill.Dec. 677 (5th Dist. 1984). C. [17.13] Acceptance Assuming terms and conditions of an online license constitute a valid offer, a website visitor holds the legal power to bind the parties to their license agreement by communicating the visitor’s assent to the licensor. Acceptance requires that the website visitor knows of the offer and intends to accept it, and only a visitor of the type to whom the offer was made can accept it. See generally Forest Preserve District of DuPage County v. Brookwood Land Venture, 229
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 7
§17.14
INTELLECTUAL PROPERTY LAW
Ill.App.3d 978, 595 N.E.2d 136, 140 – 141, 172 Ill.Dec. 73 (2d Dist. 1992). Moreover, acceptance must be affirmative and not alter the original terms of the license else the purported acceptance does not bind the online licensor. “[N]o contract can be modified [or amended] in ex parte fashion by one of the contracting parties without the knowledge and consent of the remaining party to the agreement.” Schwinder v. Austin Bank of Chicago, 348 Ill.App.3d 461, 809 N.E.2d 180, 189, 284 Ill.Dec. 58 (1st Dist. 2004). Under the Illinois mailbox rule, acceptance binds the parties immediately once it has been transmitted unless the offer has specifically provided otherwise, the offeree has rejected the offer already, the acceptance was communicated via unauthorized means, or the stated time period for acceptance has lapsed. See Liquorama, Inc. v. American National Bank & Trust Company of Chicago, 86 Ill.App.3d 974, 408 N.E.2d 373, 376, 41 Ill.Dec. 951 (1st Dist. 1980). Accordingly, Illinois law recognizes a binding acceptance when website visitors click on an “acceptance” icon made visible through their web browsers. Shaw v. Hyatt International Corp., 461 F.3d 899, 901 (7th Cir. 2006). See also G.M. Sign, Inc. v. Franklin Bank, S.S.B., No. 06 C 949, 2006 WL 2666289 (N.D.Ill. Sept. 14, 2006) (website indemnity agreement “signed” electronically by account manager was valid acceptance forming enforceable agreement for indemnification). So-called “pop-ups” should never be enabled on a webpage when acceptance of a license agreement has been invited. These may present differently depending on the type of device used by a prospective licensee and either interfere with the acceptance mechanism or obscure the acceptance text, placing into question whether a prospective licensee actually intended to accept the agreement. D. [17.14] Consideration An online license, like any other agreement, requires consideration in order to be binding. Doyle v. Holy Cross Hospital, 289 Ill.App.3d 75, 682 N.E.2d 68, 224 Ill.Dec. 507 (1st Dist. 1997), aff’d, 186 Ill.2d 104 (1999). “Consideration” is the benefit or right for which the parties to a license bargained, and the license is founded on an exchange of one form of consideration for another. Hartbarger v. SCA Services, Inc., 200 Ill.App.3d 1000, 558 N.E.2d 596, 604, 146 Ill.Dec. 633 (5th Dist. 1990). In other words, “consideration” must be something of value to the people who are making the contract. When an attempted contract fails for lack of consideration, courts sometimes apply the equitable doctrine of promissory estoppel to avoid an unfair result. This doctrine renders gratuitous promises enforceable when the recipient reasonably changed position to his or her detriment and the promisor should have anticipated that this might occur. See generally Newton Tractor Sales, Inc. v. Kubota Tractor Corp., 233 Ill.2d 46, 906 N.E.2d 520, 523, 329 Ill.Dec. 322 (2009). Consideration may be found when an agreement binds one party to submit contractual disputes to arbitration and at the same time permits the other party to choose between arbitration or the courts for resolution. Quid pro quo mutuality is not a requirement of the test for
17 — 8
WWW.IICLE.COM
LICENSING ONLINE
§17.16
consideration under Illinois law. Dorsey v. H.C.P. Sales, Inc., 46 F.Supp.2d 804, 807 (N.D.Ill. 1999) (“Illinois law is quite clear that contracts need not be reciprocal to be enforceable.”). E. [17.15] Parol Evidence Rule The parol evidence rule has significant potential for impact on the enforceability of online licenses. Under this rule of contract interpretation, when an agreement is integrated, courts generally may not consider “evidence of understandings not reflected in the contract, reached before or at the time of its execution, which would vary or modify its terms.” Walters v. DHL Express, 500 F.Supp.2d 1007, 1011 (C.D.Ill. 2007). Agreements are integrated if the parties intended a writing to comprise the whole of their agreement. However, unless an agreement contains an explicit integration clause, Illinois courts often will provisionally consider parol evidence to determine whether it contains ambiguities. 500 F.Supp.2d at 1012. Thus, integration may be evidenced by means of incorporating a merger clause into the online license. Wording that states that the agreement is to be construed as being the final written understanding of all terms and conditions in the license should operate to prevent extrinsic evidence from being weighed to supplement the agreement. Previously, there was uncertainty as to whether an online form or exchange of electronic communications constituted a “writing” that is subject to the parol evidence rule. The Electronic Commerce Security Act, 5 ILCS 175/1-101, et seq., addressed this issue in favor of according electronic records the same force and effect as paper writings. 5 ILCS 175/5-115(a). F. [17.16] Capacity In the past, persons without the legal capacity to contract (e.g., minors, incompetent persons, and the intoxicated) seldom were in a position to induce others into relying on their nonbinding assent to a license. Today, nearly every person in the United States, irrespective of legal capacity, is able to communicate apparent assent easily through online technologies under circumstances in which a recipient may reasonably take action on the communication. The general rule for dealing with incapacitated persons, including emancipated minors, is that they hold absolute power to repudiate a license or other agreement by showing, through words or conduct, their intention not to abide by the agreement. See, e.g., Iverson v. Scholl, 136 Ill.App.3d 962, 483 N.E.2d 893, 897, 91 Ill.Dec. 407 (1st Dist. 1985) (“The exercise of a minor’s right to disaffirm his contract may operate injuriously and sometimes unjustly against the other party, but the right exists for the protection of the infant against his own improvidence and may be exercised entirely in his discretion.”). This general rule is subject to exceptions, e.g., if voiding a contract would be inconsistent with public policy. Sheller v. Frank’s Nursery & Crafts, Inc., 957 F.Supp. 150 (N.D.Ill. 1997) (arbitration agreement enforced against minor). Thus, in most cases, a minor may disaffirm an online license until he or she reaches the age of majority, or within a reasonable time following, after which he or she may ratify the agreement expressly, implicitly by conduct, or by continuing to receive a benefit from the agreement.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 9
§17.17
INTELLECTUAL PROPERTY LAW
As a practical matter, the minimum age of a likely licensee should be evaluated before a website is launched. If the nature of the site is such that is likely to attract minors, or the risks presented in the event a minor does access the site are considerable, then a mechanism should be enabled that appears before acceptance is possible and certifies the prospective licensee is beyond the threshold age. Provision also may be made for parents or legal guardians to accept the license terms and conditions on behalf of their minor charge. Although not ironclad, these mechanisms should help mitigate losses in which a purported licensee causes damages as a minor. G. [17.17] Mistake Holding a unilateral belief that does not square with the actual facts seldom operates to relieve a party from its obligations under an online license agreement even though it concerns a material license term or condition. Exceptions apply when the other party knew or had reason to know of the mistake and took advantage of the situation or when the non-mistaken party created the erroneous belief. Fisher v. State Bank of Annawan, 163 Ill.2d 177, 643 N.E.2d 811, 814, 205 Ill.Dec. 520 (1994). Nonetheless, Illinois courts may deem a party to have assumed the risk of mistakes occurring in a licensing arrangement given one of three scenarios: (1) when the license agreement expressly allocates the risk of mistake between the parties; (2) when a party chooses to proceed deliberately knowing that he or she is missing facts to which the mistake relates; or (3) when the court determines that it is reasonable under the circumstances to allocate the burden to one party. RESTATEMENT (SECOND) OF CONTRACTS §154 (1981). See Suburban Bank of HoffmanSchaumburg v. Bousis, 144 Ill.2d 51, 578 N.E.2d 935, 939 – 940, 161 Ill.Dec. 289 (1991). Mutual mistake, on the other hand, renders a license agreement voidable by a party if the object of the mistake was a basic assumption on which the agreement was made, the party would be adversely affected by enforcement, and the party did not assume the risk of mistake. Hagenbuch v. Chapin, 149 Ill.App.3d 572, 500 N.E.2d 987, 990 – 991, 102 Ill.Dec. 886 (3d Dist. 1986). H. [17.18] Adhesion, Unconscionability, and Modification Illinois courts will invalidate a contract when it is determined that the purported agreement is one of adhesion. Star Finance Corp. v. McGee, 27 Ill.App.3d 421, 326 N.E.2d 518, 522 (1st Dist. 1975). An “adhesion” contract is a nonnegotiated standardized list of terms and conditions imposed on a “take it or leave it” basis when a website visitor cannot obtain a license unless he or she acquiesces to the list. There can be no bargaining or mutuality. By their nature, online licensing situations rarely present an opportunity for negotiation between the parties. Due to the medium, they are “take it or leave it” propositions and, at least superficially, resemble the classic contracts of adhesion. Given this absence of real bargaining power on the part of licensees, online licenses that are comprised of lengthy boilerplate provisions appearing in a tiny font and containing a lot of jargon may trigger a heightened level of judicial scrutiny given the appearance of adhesion.
17 — 10
WWW.IICLE.COM
LICENSING ONLINE
§17.18
Nonetheless, it is rare for an online user to establish an unenforceable adhesion contract. In DeJohn v. The .TV Corporation Int’l, 245 F.Supp.2d 913, 919 (N.D.Ill. 2003), for example, the court enforced the terms of a domain registration agreement; it rejected the plaintiff’s argument that the registrar’s “superior bargaining power left him with no choice but to agree to the dictated terms of the agreement without negotiation.” The court explained that the plaintiff clicked “I agree” to indicate that he read, understood, and agreed to the terms of the agreement. Moreover, the court noted, the plaintiff had the option to reject the registrar’s contract and obtain domain name registration services elsewhere. By contrast, the court declined to enforce the forum-selection clause in an online user license agreement, insofar as the link was “obscured” and the terms were not “reasonably available” to users. Harris v. comScore, Inc., 825 F.Supp.2d 924, 927 (N.D.Ill. 2011). In other instances, a court may decline to enforce license provisions that are unconscionable; such unconscionability may be based on either procedural unconscionability or substantive unconscionability, or a combination of both. Trujillo v. Apple Computer, Inc., 578 F.Supp.2d 979 (N.D.Ill. 2008) (declining to enforce arbitration clause in which consumer had no access to agreement until following purchase). Procedural unconscionability concerns the negotiation process and looks to both inequality of bargaining power and “submarine” terms or unreasonable surprises. Substantive unconscionability focuses on lack of mutuality and the presence of grossly unfair provisions, such as unjust cost shifting and extreme foreclosure of contractual remedies. Razor v. Hyundai Motor America, 222 Ill.2d 75, 854 N.E.2d 607, 305 Ill.Dec. 15 (2006). A determination of unconscionability may obtain when a prospective licensee has only a limited time by which to review the online terms and conditions before the website compels him or her to begin the licensing process anew. Such “time-outs” serve no helpful purpose for the website proprietor typically and should be avoided or at least occupy an interval appropriate for the length and complexity of the license text. “Modification of a contract is a change in one or more respects that introduces new elements into the details of the contract and cancels others, but leaves the general purpose and effect undisturbed.” Nebel, Inc. v. Mid-City National Bank of Chicago, 329 Ill.App.3d 957, 769 N.E.2d 45, 50 – 51, 263 Ill.Dec. 843 (1st Dist. 2002). “[N]o contract can be modified [or amended] in ex parte fashion by one of the contracting parties without the knowledge and consent of the remaining party to the agreement.” Schwinder v. Austin Bank of Chicago, 348 Ill.App.3d 461, 809 N.E.2d 180, 189, 284 Ill.Dec. 58 (1st Dist. 2004). A valid modification must satisfy all criteria essential for a valid contract, including offer, acceptance, and consideration. Nebel, supra, 769 N.E.2d at 51; Doyle v. Holy Cross Hospital, 186 Ill.2d 104, 708 N.E.2d 1140, 1145, 237 Ill.Dec. 100 (1999). In the online context, modification may be attempted by setting forth the date and version of a particular license text together with conspicuous notice that “this agreement may be modified at any time and licensee should revisit this website regularly to check for revised terms.” Additional notice may be transmitted to licensees by e-mail messages containing hyperlinks to the modified terms and conditions. This combination approach is most likely to be enforceable. Publication of the modification notice without e-mail notification, especially when an attempted modification
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 11
§17.19
INTELLECTUAL PROPERTY LAW
appears retroactive in effect, may render the agreement illusory and thus unenforceable. See generally Harris v. Blockbuster Inc., 622 F.Supp.2d 396, 399 (N.D.Tex. 2009) (declining to enforce arbitration provision when “there is nothing in the Terms and Conditions that prevents Blockbuster from unilaterally changing any part of the contract other than providing that such changes will not take effect until posted on the website”). I. [17.19] Disclaimers and Releases Attempted disclaimers appear quite commonly in the online licensing context, as do express releases, and this mode of consensual discharge, therefore, is worth examining. Illinois courts generally will uphold disclaimers provided they are conspicuous and properly phrased. See Wood v. Wabash County, 309 Ill.App.3d 725, 722 N.E.2d 1176, 1180, 243 Ill.Dec. 107 (5th Dist. 1999). The implied warranties, such as implied warranties of noninfringement and fitness for a particular purpose, can be disclaimed by the display of phrases such as “as is” and “with all faults” bundled with other conspicuous wording that identifies the specific warranties to be excluded. A disclaimer of the warranty of merchantability also must expressly reference the term “merchantability.” 810 ILCS 5/2-316. See Bell Fuels, Inc. v. Lockheed Electronics Co., 130 Ill.App.3d 940, 474 N.E. 2d 1312, 1316 – 1317, 86 Ill.Dec. 115 (1st Dist. 1985). A typical provision would read as follows: EXCEPT AS EXPRESSLY STATED OTHERWISE IN THIS SECTION, COMPANY DOES NOT MAKE ANY REPRESENTATIONS OR PROVIDE ANY WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF NONINFRINGEMENT, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE FOR ITS PRODUCTS (INCLUDING BUT NOT LIMITED TO DATA, SOFTWARE, COMPUTATIONAL TOOLS, OR ANY OTHER DOWNLOADABLE PRODUCTS) DELIVERED TO CUSTOMER UNDER THIS AGREEMENT. In the less common case in which an online licensor deems it commercially valuable to offer some sort of warranty for a defined product associated with the online license, there may be tightly worded language that would help minimize risks that warranties will be unreasonably misconstrued or relied on by a customer or licensee. Such a provision may read as follows: SUBJECT TO THE LIMITATIONS SET FORTH IN THIS WARRANTY SECTION, COMPANY WARRANTS THAT THE PRODUCTS AT TIME OF DELIVERY TO CUSTOMER SHALL SUBSTANTIALLY CONFORM TO THE TECHNICAL SPECIFICATIONS RELATING TO SUCH PRODUCTS, THE APPLICABLE SPECIFICATIONS OF WHICH COMPANY MAY ISSUE FROM TIME TO TIME. COMPANY ALSO WARRANTS THAT THE HARDWARE OF THE PRODUCTS SHALL BE FREE FROM DEFECTS IN MATERIAL AND WORKMANSHIP AND THAT THE PRODUCTS MEET COMPANY’S PUBLISHED SPECIFICATIONS UNDER NORMAL USE AND WITH PROPER MAINTENANCE AND SERVICE, FOR A PERIOD OF [number of months] FROM THE DATE OF DELIVERY TO CUSTOMER.
17 — 12
WWW.IICLE.COM
LICENSING ONLINE
§17.19
Of particular concern to commercial licensees is the risk that the online license includes data, software, or functionality that may become the subject of a claim of infringement or misappropriation, thereby putting the licensee at risk of being directly or contributorily liable. For this reason, licensees are best protected with two forms of warranties in an online license: (1) a warranty of ownership and/or authorization; and (2) a warranty of noninfringement. A warranty of ownership (also called “warranty of title”) or authorization typically states that the licensor has a good-faith belief that it is the legitimate owner of the materials or services that are provided under the online license (including, but not limited to, the data, software, and other content) and/or that it is authorized to use, distribute, sublicense, or copy such content, if this right is obtained by license from another party. In respect to attempted disclaimers of title, a licensor should clearly state that he or she is able to convey only such right or title as the licensor might hold. A warranty of ownership provision may appear separately or in conjunction with a “no transfer” provision, as follows: COMPANY WARRANTS THAT IT HOLDS ALL RIGHTS, TITLE, AND INTEREST IN AND TO THE [subject matter of the transaction], AND NOTHING IN THIS AGREEMENT SHALL IN ANY WAY BE CONSTRUED AS A TRANSFER OF SUCH RIGHTS, TITLE, AND INTEREST. A warranty of noninfringement typically states that a licensor or owner represents to the best of its knowledge that the information, materials, or services it offers under the online license do not infringe a third party’s intellectual property rights. On the other hand, a licensor may want to expressly disclaim any warranties of noninfringement, particularly if the products or services could be easily modified or may include content that is not easily identifiable as proprietary to the licensor. Along with a noninfringement warranty, a commercial licensee may wish to have an indemnification provision in the event it is sued for infringement or misappropriation of intellectual property rights. A disclaimer of noninfringement, typically, will be of less significance for individual consumer licenses but very significant for a commercial licensee. Another form of disclaimer often found in online licenses is an express limitation of various liabilities, the scope of which depends on the type of subject matter offered by the licensor. In general, licensors seek to limit all types of liabilities, whether in tort, contract, or other legal theories, to the maximum extent allowable by law. The scope of liabilities may be very different, particularly for licensees that offer complex products and services online. For example, a provider of online trading services risks not only liabilities under contract or tort, but also a variety of risks associated with regulatory compliance with securities law, data protection requirements, funds transfer regulations, and the like. Other online providers may risk liabilities relating to intellectual property rights infringement not only for their own conduct, but also resulting from the conduct of licensees. For these reasons, licensors typically offer broad limitations of liability and hope that the provisions survive any possible legal challenge should a dispute arise. The following is a typical, broad limitation-of-liability provision that might benefit online information content providers, particularly those that use or disseminate third-party content under license: COMPANY (INCLUDING ITS DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS) SHALL NOT BE LIABLE TO THE CUSTOMER FOR INDIRECT,
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 13
§17.20
INTELLECTUAL PROPERTY LAW
INCIDENTAL, CONSEQUENTIAL, PUNITIVE, SPECIAL, OR EXEMPLARY DAMAGES (WHETHER ARISING UNDER BREACH OF CONTRACT, TORT, STRICT LIABILITY, BREACH OF WARRANTY, FAILURE OF ESSENTIAL PURPOSE, OR OTHERWISE), ARISING FROM THE SUPPLY OR USE OF, OR INABILITY TO SUPPLY OR USE, COMPANY PRODUCTS AND/OR SERVICES PROVIDED UNDER THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOSS OF REVENUE OR ANTICIPATED PROFITS, LOSS OF GOODWILL, OR LOST BUSINESS, EVEN IF COMPANY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ANY CASE, COMPANY SHALL IN NO WAY BE LIABLE FOR ANY DAMAGES EXCEEDING THE TOTAL AMOUNT PAID BY CUSTOMER FOR A COMPANY PRODUCT OR SERVICE FROM WHICH A DISPUTE ARISES. COMPANY, IN ITS CAPACITY AS AN INTERNET-BASED INFORMATION CONTENT PROVIDER, SHALL ALSO BE ENTITLED TO ALL OTHER IMMUNITIES AND OTHER LIMITATIONS OF LIABILITY AVAILABLE UNDER APPLICABLE LAW. COMPANY SHALL NOT BE LIABILE FOR ANY LOSS OF DATA OR FOR CUSTOMER’S INABILITY TO DOWNLOAD, UPLOAD, OR OTHERWISE COMMUNICATE ELECTRONICALLY WITH COMPANY’S SERVERS OR WEBSITE, OR FOR ANY DISRUPTION IN COMMUNICATION BETWEEN COMPANY AND CUSTOMER. Irrespective of their nature, disclaimers should be presented in a conspicuous manner, reasonably sufficient to draw attention to them. J. [17.20] Liquidated Damages Liquidated damages provisions can facilitate an award in the event of a licensee’s breach and can also limit liability in the event the licensor breaches its own warranty representations. Such provisos specify some fixed dollar amount that is based on a reasonable forecast of the damages predicted to result if a breach occurs. In Illinois, a liquidated damages clause is valid and enforceable when (1) actual damages are difficult to measure at the time of the contract, and (2) the specific amount of damages is reasonable in light of the anticipated or actual loss caused by the breach. Energy Plus Consulting, LLC v. Illinois Fuel Co., 371 F.3d 907, 909 (7th Cir. 2004). Illinois courts will set them aside as an improper penalty, however, when the liquidated amount is not reasonably related to the probable loss. See, e.g., Medstrategies Consulting Group, Ltd. v. Schmiege, 382 Ill.App.3d 505, 888 N.E.2d 667, 321 Ill.Dec. 148 (2d Dist. 2008); Med+Plus Neck & Back Pain Center, S.C. v. Noffsinger, 311 Ill.App.3d 853, 726 N.E.2d 687, 693, 244 Ill.Dec. 712 (2d Dist. 2000). K. [17.21] Arbitration and Mediation Licensors often include in the license agreement a mandatory arbitration requirement to avoid drawn-out litigation and to stave off the threat of nuisance lawsuits. Since it typically is conducted in private, controlled publicity is yet another advantage of binding arbitration for the licensor. Illinois courts will generally enforce properly drafted arbitration provisions, since arbitration clauses reflect the parties’ intended preference for nonjudicial dispute resolution, which is
17 — 14
WWW.IICLE.COM
LICENSING ONLINE
§17.21
presumed to save time and money for all. Sloan Electric v. Professional Realty & Development Corp., 353 Ill.App.3d 814, 819 N.E.2d 37, 289 Ill.Dec. 125 (3d Dist. 2004). However, licensors sometimes take actions that undermine the alternative dispute resolution process, thereby eroding the protections available. A typical arbitration provision in a license reads as follows: If the dispute is not resolved within [number of days], either Party may demand arbitration administered by the American Arbitration Association (AAA) under its applicable rules. Arbitrators appointed in such arbitration proceeding must be impartial and independent, as set forth under the rules of the AAA. Nothing contained herein shall prevent a Party from seeking temporary injunctive relief with respect to a dispute or to enforce the contractual obligation to compel arbitration of any dispute. Arbitration shall be held in [jurisdiction]. In a business-to-business license, the above language often is preceded by pre-arbitration negotiations, whereby each party first seeks to resolve the dispute amicably through meetings and telephone conferences by senior managers during a period not exceeding a specified number of days or weeks. Parties to a license agreement should not be surprised if arbitration proceedings do not go as smoothly as anticipated, as was the case in Hasbro, Inc. v. Catalyst USA, Inc., 367 F.3d 689 (7th Cir. 2004), in which the parties waited two years for a final award from an arbitration panel in a dispute over a software license. However, as in Hasbro, an arbitration ruling will rarely be set aside by subsequent judicial proceedings. “The Federal Arbitration Act [9 U.S.C. §1, et seq.] makes arbitration agreements enforceable to the same extent as other contracts.” Sphere Drake Insurance Ltd. v. All American Life Insurance Co., 307 F.3d 617, 620 (7th Cir. 2002). Courts will enforce an arbitration award as long as the arbitrator does not exceed his or her delegated authority, even if the arbitrator’s award contains a serious error of law or fact. See Butler Manufacturing Co. v. United Steelworkers of America, AFL-CIO-CLC, 336 F.3d 629, 632 (7th Cir. 2003); National Wrecking Co. v. International Brotherhood of Teamsters, Local 731, 990 F.2d 957, 960 (7th Cir. 1993). For these reasons, placing an arbitration provision in a license must be a calculated decision, based on a consideration of the conveniences and risks of such a process. In Hasbro, although the court found systemic problems during the arbitration proceedings, the court ultimately found that “[w]hatever errors with respect to deadlines may have been committed were either waived or harmless.” 367 F.3d at 690. A key consideration in deciding whether to include an arbitration clause is that a licensor may experience substantial harm, perhaps without knowing the full extent of such harm, if some material breach of the license takes place. This problem may be significantly greater if the online content, data, or other information provided under the license is particularly sensitive or has substantial value. Arbitration may provide an excuse for the licensee to continue to breach, either willingly or negligently, and to feel less pressure to resolve the problem. Therefore, the advantages and disadvantages of providing an arbitration provision should be considered carefully. Mediation presents greater risks to the licensor given the non-binding nature of the process. In many cases it serves only to increase the costs of resolving a dispute since, ultimately, the matter may wind up being litigated in the courts.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 15
§17.22
INTELLECTUAL PROPERTY LAW
L. [17.22] Consent to Jurisdiction A forum-selection clause is an express assent to resolve a dispute in a particular court or pursuant to specified law or procedures arising under contract. In M/S Bremen v. Zapata OffShore Co., 407 U.S. 1, 32 L.Ed.2d 513, 92 S.Ct. 1907 (1972), the U.S. Supreme Court ruled that forum-selection clauses are pima facie valid. Courts in Illinois now recognize that a forumselection clause should be enforced “unless the opposing party shows that enforcement would contravene the strong public policy of the State.” English Co. v. Northwest Envirocon, Inc., 278 Ill.App.3d 406, 663 N.E.2d 448, 451, 215 Ill.Dec. 437 (2d Dist. 1996). Thus, in most instances, a forum-selection clause will be enforced, even when part of a standard form agreement. See Dace International, Inc. v. Apple Computer, Inc., 275 Ill.App.3d 234, 655 N.E.2d 974, 211 Ill.Dec. 591 (1st Dist. 1995). Illinois courts recognize that a contractual forum-selection clause is enforceable unless such enforcement “will be so gravely difficult and inconvenient that [the opposing party] will for all practical purposes be deprived of [its] day in court.” Brandt v. MillerCoors, LLC, 2013 IL App (1st) 120431, ¶13, 993 N.E.2d 116, 373 Ill.Dec. 116, quoting Calanca v. D & S Manufacturing Co., 157 Ill.App.3d 85, 510 N.E.2d 21, 23, 109 Ill.Dec. 400 (1997). Courts are particularly disinclined to set aside forum-selection clauses when the parties are sophisticated business entities. Brandt, supra. Nonetheless, a court may be unwilling to enforce a forum-selection clause that was not reasonably communicated to the licensee. See Electroplated Metal Solutions, Inc. v. American Services, Inc., 500 F.Supp.2d 974, 976 (N.D.Ill. 2007) (“Although a strong presumption of enforceability attaches to forum selection clauses, . . . ‘[t]he legal effect of a forum-selection clause depends in the first instance upon whether its existence was reasonably communicated to the plaintiff.’ ”), quoting Effron v. Sun Line Cruises, Inc., 67 F.3d 7, 9 (2d Cir. 1995). In the online licensing context, a court should consider whether the nature of a website reasonably communicates the existence of the forum-selection provision and whether the circumstances surrounding a website visitor’s use of the site enabled the visitor to become meaningfully informed of the provision. M. [17.23] Retention and Use of Personally Identifiable Information Like many other states, Illinois provides special security treatment for certain personally identifiable information under the Personal Information Protection Act (PIPA), 815 ILCS 530/1, et seq. “Personal information” is defined as an individual’s name — last and first or first initial — in combination with a government or financial institution identification code such as a social security number, driver’s license number, state identification card number, or financial accounts information. 815 ILCS 530/5. Pursuant to amendments effective January 1, 2017, this definition will be expanded to include additional types of information, such as medical information and health insurance information. Further, as of January 1, 2017, “personal information” will include a user name or e-mail address, in combination with a password or security question and answer that would permit access to an online account. See H.B. 1260, 99th Gen.Assem. (2016). Under PIPA, a duty to safeguard personally identifiable information applies to any “data collector,” which includes any entity that, “for any purpose, handles, collects, disseminates, or otherwise deals with nonpublic personal information.” 815 ILCS 530/5. This includes online
17 — 16
WWW.IICLE.COM
LICENSING ONLINE
§17.25
licensors. PIPA provides that any waiver of its provisions is contrary to public policy and is void and unenforceable. 815 ILCS 530/15. Among other obligations imposed by PIPA, in the event of a security breach involving personally identifiable information, a data collector has an affirmative duty to promptly notify and provide certain information to the affected individuals. See 815 ILCS 530/10(a) – 530/10(c). Failure to provide such notice and information constitutes an unlawful practice pursuant to the Illinois Consumer Fraud and Deceptive Practices Act. 815 ILCS 530/20. The 2017 amendments to PIPA place significant new obligations on such data collectors.
V. [17.24] ENFORCEABILITY For many holders of intellectual property rights, license provisions that protect their intellectual property are vital to the continuation of their businesses. These provisions may facilitate a licensor’s ability to detect or prevent infringement and control unauthorized reproduction and distribution. Great care, therefore, should be taken to ensure that online license terms and conditions are published in a manner that will increase the likelihood that they will be enforced in Illinois as well as in other jurisdictions. Some practical guidance follows in §§17.25 – 17.32 below. A. [17.25] General Considerations Every online licensor should consider whether its website is likely to attract persons who lack the legal capacity to enter into binding agreements, such as minors. If the risk is high, a licensor should post conspicuous language stating that the site is intended for use only by adults. A pop-up box should be implemented that requires each website visitor who chooses to access internal webpages to provide his or her full name, age, and e-mail address. Domains from commonly abused e-mail hosts should be blocked from further website access. Depending on the nature of the business, an online licensor could be well-served by sending an automatically-generated e-mail message to the visitor’s e-mail address that requires affirmative steps, such as clicking on an “acceptance” icon before further internal access to the licensor’s website will be granted. This would help avoid any uncertainty as to whether the user intended to visit the site and at least held himself or herself out as an appropriate visitor. A licensor should narrowly tailor its express remedies to the nature of the online transaction at hand. Is a particular remedy proportionate to the materiality of a license breach in the majority of jurisdictions? Does a remedy impose excessive costs on a website visitor in the event of dispute? Is there a rational nexus between the jurisdiction imposed by a choice-of-law provision and the subject matter of the transaction? These questions must be addressed prior to publication and thought should also be given to whether to expressly relinquish control over disputes to consumer organizations such as the Better Business Bureau. If possible, representations that state that the licensor is permitted to make unilateral modifications to the license provisions without further notice should be avoided. Such statements deprive website visitors of the three crucial elements of a binding website agreement, as discussed in §§17.26 – 17.28 below.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 17
§17.26
INTELLECTUAL PROPERTY LAW
1. [17.26] Notice The license terms and conditions should be published to a conspicuous page within the website, and hyperlinks labeled with “terms and conditions” leading to that page should be visible on every other page that is material to the transaction, such as those that describe characteristics of the licensed subject matter. By providing such notice, the licensor strengthens its claim that there actually was a bargained-for exchange that resulted in the licensee’s assent to the published agreement. 2. [17.27] Access Small print, hidden text, and below-the-fold placement should be avoided. Check boxes adjacent to key terms and conditions might be implemented to verify that a licensee did have opportunity to review them. A pop-up box urging a prospective licensee to print and retain a hard copy of the license terms and conditions should be considered as well. 3. [17.28] Opportunity To Reject A website visitor should be afforded an opportunity to abandon a transaction at any stage up to the instant he or she undertakes some final action that signifies unambiguous acceptance of the license terms and conditions. Clicking on an “I agree” button may be upheld as such an act. A more comprehensive approach would add an “I do not agree” button checked by default, and thus a licensee would have to unclick a button prior to clicking another button and thereby affirm acceptance by multiple actions. B. Browsewrap Licenses 1. [17.29] Attributes A browsewrap agreement is one of the two basic forms of online license. It is the easiest to publish, as the licensor simply displays its terms and conditions on webpages that are linked to other pages at the website. In theory, this provides a website visitor with an opportunity to assent to online terms and conditions merely by using a web browser to access a site. The manifestation of assent on the part of the visitor is essentially by acquiescence insofar as continued presence at the site constitutes acceptance of the terms and conditions. Due to the technology used to build many websites, a browsewrap license may be the only practical means by which a licensor is able to claim rights against visitors to the licensor’s website. 2. [17.30] Cases The courts will enforce browsewrap agreements, but only under circumstances in which a licensor has met the notice, access, and opportunity-to-reject requirements discussed in §§17.25 – 17.28 above. In 2016, the Seventh Circuit Court of Appeals observed: “In Illinois, as in many states, the law governing the formation of contracts on the Internet is still in the early stages of development. But there is no reason to think that Illinois’s general contract principles do not apply.” Sgouros v. TransUnion Corp., 817 F.3d 1029, 1034 (7th Cir. 2016).
17 — 18
WWW.IICLE.COM
LICENSING ONLINE
§17.30
Often an online licensor may be unable to satisfy these requirements in the case of a browsewrap agreement. “[I]n order to state a plausible claim for relief based upon a browsewrap agreement, the website user must have had actual or constructive knowledge of the site’s terms and conditions, and have manifested assent to them.” Cvent, Inc. v. Eventbrite, Inc., 739 F.Supp.2d 927, 937 (E.D.Va. 2010). In Cvent, the court found unenforceable terms of use that were accessible on a website “via a link buried at the bottom of the first page,” which customers were not required to read or assent to in order to use the website or access the content. Id. “Conditions of use” likewise were held unenforceable when they appeared only within the internal “customer service” pages of a website and a prospective customer was required to navigate through a series of inconspicuous hyperlinks to see them. Van Tassell v. United Marketing Group, LLC, 795 F.Supp.2d 770 (N.D.Ill. 2011). The court noted that the browsewrap conditions were not made accessible from the home page of the website or from the pages on which a transaction was to be consummated. 795 F.Supp.2d at 792. In Douglas v. United States District Court for Central District of California., 495 F.3d 1062 (9th Cir. 2007) (per curiam), cert. denied, 128 S.Ct. 1472 (2008), the plaintiff complained against a long-distance telephone service provider because the provider had revised its online arbitration terms and conditions on its website without contacting the plaintiff directly. The Ninth Circuit ruled in favor of the plaintiff, finding that the telephone service provider had failed to furnish the plaintiff with adequate notice regarding the arbitration changes. The revised online agreement was unenforceable since the plaintiff had no reason to visit the provider’s website to learn of the revisions. Thus, the provider had attempted to modify the parties’ agreement unilaterally, and the plaintiff’s continued use of the telephone service and website was not tantamount to informed assent. 495 F.3d at 1066. The Second Circuit declined to enforce a browsewrap agreement in Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002). The terms and conditions at issue were not displayed on the same webpage as the download button; rather, near the bottom of the download page was an invitation to visit a separate website at which the agreement terms were published. The court held that “in circumstances such as these, where consumers are urged to download free software at the immediate click of a button, a reference to the existence of license terms on a submerged screen is not sufficient to place consumers on inquiry or constructive notice of those terms.” 306 F.3d at 32. By contrast, in Register.com, Inc. v. Verio, Inc., 356 F.3d 393 (2d Cir. 2004), the Second Circuit held that a browsewrap agreement was enforceable. The facts disclosed that the defendant or its agents had visited Register.com’s website every day to mine data that was available there. “Verio admitted that, in entering Register[.com’s] computers to get the data, it was fully aware of the terms on which Register[.com] offered this access.” 356 F.3d at 402. Thus, the defendant had actual knowledge regarding the online terms and conditions at the time it chose to access the plaintiff’s website. See also Southwest Airlines Co. v. BoardFirst, L.L.C., No. 3:06-CV-0891-B, 2007 WL 4823761 (N.D.Tex. Sept. 12, 2007) (browsewrap choice-of-law provision held to be enforceable since defendant had actual knowledge of online terms and conditions published to plaintiff’s website).
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 19
§17.31
INTELLECTUAL PROPERTY LAW
In 2014, the Ninth Circuit (applying New York law) found an arbitration agreement contained in the defendant’s terms of use unenforceable. Nguyen v. Barnes & Noble Inc., 763 F.3d 1171 (9th Cir. 2014). Even though the terms of use were available via a link on the bottom corner of every page of the Barnes & Noble website, the plaintiff was never prompted to assent to the terms of use and did not in fact read them. The court denied the defendant’s motion to compel arbitration under the circumstances. It explained that when “there is no evidence that the website user had actual knowledge of the agreement, the validity of the browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract.” 763 F.3d at 1777. In this case, it did not. [W]here a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on — without more — is insufficient to give rise to constructive notice. While failure to read a contract before agreeing to its terms does not relieve a party of its obligations under the contract . . . the onus must be on website owners to put users on notice of the terms to which they wish to bind consumers. Given the breadth of the range of technological savvy of online purchasers, consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound. 763 F.3d at 1178 – 1179. C. Clickwrap Licenses 1. [17.31] Attributes The other basic type of online license is the clickwrap agreement. As its name suggests, a clickwrap license implements some functionality that requires a prospective licensee to confirm acceptance, generally by clicking on a specific part of a site. This in turn transmits a signal to the licensor’s computer, which enables the licensee to access the subject matter of the parties’ transaction only after receipt of the signal. The clicks constitute the requisite manifestation of assent by the licensee and forms a binding agreement. Note that technical issues may arise, such as interference by a prospective licensee’s antivirus software, and, thus, a clickwrap license may be difficult or even impossible to consummate. 2. [17.32] Cases While cases are fact-specific, generally speaking, courts are more likely to find the clickwrap form of online license agreement enforceable as compared to the browsewrap variety. Representative is Shaw v. Hyatt International Corp., 461 F.3d 899 (7th Cir. 2006). In Shaw, a resident of London was held to have accepted adjudication of a dispute in the Illinois courts when he clicked on a website icon that signified acceptance of an online choice-of-forum provision. The Seventh Circuit affirmed that such action can communicate assent and, therefore, give rise to a binding agreement pursuant to Illinois law. 461 F.3d at 901. Likewise, in Jallali National Board of Osteopathic Medical Examiners, Inc., 908 N.E.2d 1168, 1173 (Ind.App. 2009), the court found
17 — 20
WWW.IICLE.COM
LICENSING ONLINE
§17.32
enforceable under Indiana law a forum-selection clause in a clickwrap agreement, where the user had to click “Accept” under a dialogue box that contained an “ACKNOWLEDGMENT AND AGREEMENT.” See also Hancock v. American Telephone & Telegraph Co., 701 F.3d 1248, 1257 (10th Cir. 2012) (finding agreement valid when customers could not complete purchase without clicking “I Agree”); Feldman v. Google, Inc., 513 F.Supp.2d 229, 236 – 237 (E.D.Pa. 2007) (finding agreement valid when it was “immediately visible” and required “affirmative action” by clicking “Yes”). The courts generally look favorably on scrollable text boxes that contain online terms and conditions, at least when a user must scroll through the entire contents, as well as a “complete registration box” pre-checked with “I do not agree” or the like. If a prospective licensee must uncheck the registration box and click separately to communicate acceptance, it is hard for him or her to claim lack of assent. In some cases, courts have found that the prospective licensee need not actually scroll through the terms and conditions. The Eastern District of New York explained: “A person who checks the box agreeing to the terms and conditions of a purchase on an internet site without scrolling down to read all of the terms and conditions is in the same position as a person who turns to the last page of a paper contract and signs it without reading the terms — namely, the clause is still valid.” Scherillo v. Dun & Bradstreet, Inc., 684 F.Supp.2d 313, 322 (E.D.N.Y. 2010). However, the Seventh Circuit found no binding contract in Sgouros v. TransUnion Corp., 817 F.3d 1029 (7th Cir. 2016). In Sgouros, the defendant’s website contained a scroll window with the words “Service Agreement” and the first two-and-a-half lines of text visible underneath; beneath the scroll window was a button with the words “I Accept.” 817 F.3d at 1033. The court noted that a user was not required to click on the scroll window or view its complete contents before proceeding. Moreover, between the scroll window and the “I Accept” box was a statement, in bold print, that the user authorized the defendant to obtain information from his or her credit profile. The Northern District of Illinois denied the defendant’s motion to compel arbitration based on an arbitration provision in the services agreement, and the Seventh Circuit affirmed. It explained that “[c]ourts around the country have recognized that this type of electronic ‘click’ can suffice to signify the acceptance of a contract,” and that “[t]here is nothing automatically offensive about such agreements,” as long as the layout and language of the site give the user reasonable notice that a click will manifest assent to the agreement.” 817 F.3d at 1033 – 1034. The court noted, however, that whether a user had adequate notice is a “fact-intensive inquiry” (817 F.3d at 1034 – 1035), and, in the case at hand, the user did not. It emphasized that there was nothing on the site to ensure that a user would see the critical language before proceeding, and in fact, the pages on which the plaintiff completed his purchase “contained no clear statement that his purchase was subject to any terms and conditions of sale.” 817 F.3d at 1035. Moreover, it found that the arrangement of the website was misleading, due to the statement between the services agreement and the “I Accept” box, authorizing the defendant to obtain personal information: “That text distracted the purchaser from the Service Agreement by informing him that clicking served a particular purpose unrelated to the Agreement.” 817 F.3d at 1036.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 21
§17.33
INTELLECTUAL PROPERTY LAW
VI. [17.33] SAMPLE HYBRID BROWSEWRAP AND CLICKWRAP AGREEMENT FOR A STREAMING MULTIMEDIA SERVICE PROVIDER WITH PRACTICE POINTERS The following is a sample agreement. Please note that certain provisions may not be enforceable in all jurisdictions. Terms of Use [month/day/year] [Licensor’s welcome message] To access and use [Licensor’s services], you must agree to, and follow, the terms and conditions set forth in these Terms of Use. By registering an account through the [Licensor’s website] or using any of the [Licensor’s] Services (including accessing any Content, as defined below), you are agreeing to these Terms. Please carefully read through these Terms. DESCRIPTION AGREEMENT
OF
SERVICE
AND
ACCEPTANCE
OF
BINDING
LEGAL
[Licensor company identifier] (“[Licensor],” “we,” or “us”) provides online audio and video storage and broadcasting services offering a selection of online content (collectively, the “Content”). Our service, the Content, our player for viewing the Content (the “Player”) and any other features, tools, applications, materials, or other services offered from time to time by [Licensor] in connection with its business, however accessed, are referred to collectively as the “[Licensor] Services.” The Content is available for permissible viewing on or through the following (collectively, the “Properties”): the [Licensor].com website (the “[Licensor] Site”); [Licensor’s] affiliate and distributor websites; other websites where users or website operators are permitted to embed the Player; and [Licensor] authorized applications, features, or devices. Use of the [Licensor] Services (including access to the Content) on the Properties is subject to compliance with these Terms of Use (“Terms of Use” or “Terms”) and any end user license agreement that might accompany a [Licensor] application, feature, or device. Certain [Licensor] Services are provided to you free of charge. There are some other [Licensor] Services that, if you are interested in accessing, will require payment by you. The [Licensor] Services that may be accessed after payment are referred to currently as “[Licensor] Premium.” You can learn more about [Licensor] Premium by clicking here [hyperlink]. There is certain information in these Terms that relates only to [Licensor] Premium, and those specific provisions are set forth in [section number] below. Accordingly, if you choose to subscribe to [Licensor] Premium, then please familiarize yourself with [section number], in addition to all of the other provisions in these Terms (please note that references to “[Licensor] Services” throughout these Terms of Use are intended to include [Licensor] Premium). If you are not a subscriber of [Licensor] Premium, then [section number] does not apply to you.
17 — 22
WWW.IICLE.COM
LICENSING ONLINE
§17.33
PRACTICE POINTER
The preamble sets the tone for the body of the license agreement. It should clearly indicate that it is a binding legal instrument. By defining key terms at the beginning of the agreement, the license can be compacted and made apprehensible, thereby avoiding questions of “submarine” terms used later on. Commonly, preservation of the “homefield advantage” is the most important objective for publishing an online license agreement, and some drafters choose to place the jurisdiction and controlling law provisions near the preamble so these actually will be read.
CHANGES TO THE TERMS OF USE BY [LICENSOR] [Licensor] may amend these Terms of Use at any time by posting the amended Terms of Use on the [Licensor’s website]. If we make a material amendment to these Terms of Use, we will notify you by posting notice of the amendment on the [Licensor’s website]. Any material amendment to these Terms of Use shall be effective automatically 30 days after it is initially posted or, for users who register or otherwise provide opt-in consent during this 30-day period, at the time of registration or consent, as applicable.
PRACTICE POINTER
The licensee must be placed on notice regarding how modifications to the online agreement, which are inevitable, are to be disseminated. Modifications should always be published using prospective constructions, not retroactive-sounding ones. Provide a date certain when an updated agreement will be effective.
ACCESS AND USE OF THE [LICENSOR] SERVICES Age Limitations. If you are under the age of 13, then you are not permitted to register with [Licensor] or use any feature or other part of the [Licensor] Services that requires registration. In order to subscribe to [Licensor] Premium, you must be at least 18 years of age. You represent that you are at least 13 years of age if you are registering an account and, if you are a [Licensor] Premium user, that you are at least 18 years of age.
PRACTICE POINTER
Certain business models for websites expose their licensors to greater risks due to legal incapacity than others. Consider whether the nature of the client’s website merits the use of a separate checkbox attesting to a purported licensee’s age. Even if the law fails the licensor, the equities may not, provided there is a reasonable certification mechanism that has been triggered by the other party and the licensor has kept a record. The remote, impersonal aspect of websites can operate to the licensor’s advantage, too.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 23
§17.33
INTELLECTUAL PROPERTY LAW
Your License. [Licensor] is pleased to grant you a nonexclusive limited license to use the [Licensor] Services on the Properties, including accessing and viewing the Content on a streaming-only basis through the Player, for personal, noncommercial purposes as set forth in these Terms. The Content. You may only access and view the Content personally and for a noncommercial purpose in compliance with these Terms. You may not either directly or through the use of any device, software, Internet site, web-based service, or other means remove, alter, bypass, avoid, interfere with, or circumvent any copyright, trademark, or other proprietary notices marked on the Content or any digital rights management mechanism, device, or other content protection or access control measure associated with the Content, including geo-filtering mechanisms. You may not either directly or through the use of any device, software, Internet site, web-based service, or other means copy, download, stream capture, reproduce, duplicate, archive, distribute, upload, publish, modify, translate, broadcast, perform, display, sell, transmit, or retransmit the Content unless expressly permitted by [Licensor] in writing. You may not incorporate the Content into, or stream or retransmit the Content via, any hardware or software application or make it available via frames or in-line links unless expressly permitted by [Licensor] in writing. Furthermore, you may not create, recreate, distribute, or advertise an index of any significant portion of the Content unless authorized by [Licensor]. You may not build a business utilizing the Content, whether or not for profit. The Content covered by these restrictions includes without limitation any text, graphics, layout, interface, logos, photographs, audio and video materials, and stills. In addition, you are strictly prohibited from creating derivative works or materials that otherwise are derived from or based on in any way the Content, including montages, mash-ups and similar videos, wallpaper, desktop themes, greeting cards, and merchandise, unless it is expressly permitted by [Licensor] in writing. This prohibition applies even if you intend to give away the derivative materials free of charge. The Player. You may not modify, enhance, remove, interfere with, or otherwise alter in any way any portion of the Player, its underlying technology, any digital rights management mechanism, device, or other content protection or access control measure incorporated into the Player. This restriction includes, without limitation, disabling, reverse engineering, modifying, interfering with, or otherwise circumventing the Player in any manner that enables users to view the Content without (1) displaying visibly both the Player and all surrounding elements (including the graphical user interface, any advertising, copyright notices, and trademarks) of the webpage where the Player is located; and (2) having full access to all functionality of the Player, including, without limitation, all video quality and display functionality and all interactive, elective, or click-through advertising functionality. Embedding Digital Files Using the Player. Where [Licensor] has incorporated an embed option in connection with Content on the [Licensor] Services, you may embed digital files using the Player, provided you do not embed the Player on any website or other location that (1) contains or hosts content that is unlawful, infringing, pornographic, obscene, defamatory, libelous, threatening, harassing, vulgar, indecent, profane, hateful, racially or ethnically offensive, encourages criminal conduct, gives rise to civil liability, violates any
17 — 24
WWW.IICLE.COM
LICENSING ONLINE
§17.33
law, rule, or regulation, infringes any right of any third party including intellectual property rights, or is otherwise inappropriate or objectionable to [Licensor] (in [Licensor’s] sole discretion), or (2) links to infringing or unauthorized content (collectively, “Unsuitable Material”). You may not embed the Player into any hardware or software application, even for noncommercial purposes. [Licensor] reserves the right to prevent embedding to any website or other location that [Licensor] finds inappropriate or objectionable (as determined by [Licensor] in its sole discretion). Ownership. You agree that [Licensor] owns and retains all rights to the [Licensor] Services. You further agree that the Content you access and view as part of the [Licensor] Services is owned or controlled by [Licensor] and [Licensor’s] licensors. The [Licensor] Services and the Content are protected by copyright, trademark, and other intellectual property laws.
PRACTICE POINTER
The licensor should expressly set forth its title claims before carving out the license grants, restrictions, and licensee’s duties. A significant portion of the online community has come to believe that if material has been published to a website, the material is in the public domain.
Your Responsibilities. In order for us to keep the [Licensor] Services safe and available for everyone to use, we all have to follow the same rules. You and other users must use the [Licensor] Services for lawful, noncommercial, and appropriate purposes only. Your commitment to this principle is critical. You agree to observe the [Licensor] Services, Content, Player, and embedding restrictions detailed above, and further agree that you will not access the [Licensor] Site or use the [Licensor] Services in a way that (1)
violates the rights of others, including patent, trademark, trade secret, copyright, privacy, publicity, or other proprietary rights;
(2)
uses technology or other means to access, index, frame, or link to the [Licensor] Services (including the Content) that is not authorized by [Licensor] (including by removing, disabling, bypassing, or circumventing any content protection or access control mechanisms intended to prevent the unauthorized download, stream capture, linking, framing, reproduction, or distribution of, or access to, the [Licensor] Services);
(3)
involves accessing the [Licensor] Services (including the Content) through any automated means, including “robots,” “spiders,” or “offline readers” (other than by individually performed searches on publicly accessible search engines for the sole purpose of, and solely to the extent necessary for, creating publicly available search indices — but not caches or archives — of the [Licensor] Services and excluding those search engines or indices that host, promote, or link primarily to infringing or unauthorized content);
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 25
§17.33
INTELLECTUAL PROPERTY LAW
(4)
introduces viruses or any other computer code, files, or programs that interrupt, destroy, or limit the functionality of any computer software or hardware or telecommunications equipment;
(5)
damages, disables, overburdens, impairs, or gains unauthorized access to the [Licensor] Services, including [Licensor’s] servers, computer network, or user accounts;
(6)
removes, modifies, disables, blocks, obscures, or otherwise impairs any advertising in connection with the [Licensor] Services (including the Content);
(7)
uses the [Licensor] Services to advertise or promote services that are not expressly approved in advance in writing by [Licensor];
(8)
collects personally identifiable information in violation of [Licensor’s] Privacy Policy;
(9)
encourages conduct that would constitute a criminal offense or give rise to civil liability;
(10) violates these Terms or any guidelines or policies posted by [Licensor]; (11) interferes with any other party’s use and enjoyment of the [Licensor] Services; or (12) attempts to do any of the foregoing. If [Licensor] determines in its sole discretion that you are violating any of these Terms, we may (1) notify you and (2) use technical measures to block or restrict your access or use of the [Licensor] Services. In either case, you agree to immediately stop accessing or using in any way (or attempting to access or use) the [Licensor] Services, and you agree not to circumvent, avoid, or bypass such restrictions, or otherwise restore or attempt to restore such access or use. No Spam/Unsolicited Communications. No one may use the [Licensor] Services to harvest information about users for the purpose of sending, or to facilitate or encourage the sending of, unsolicited bulk or other communications. You understand that we may take any technical remedies to prevent spam or unsolicited bulk or other communications from entering, utilizing, or remaining within our computer or communications networks. If you Post (as defined below in [section number]) or otherwise send spam, advertising, or other unsolicited communications of any kind through the [Licensor] Services, you acknowledge that you will have caused substantial harm to [Licensor] and that the amount of such harm would be extremely difficult to measure. As a reasonable estimation of such harm, you agree to pay [Licensor] $100 (one hundred dollars) for each such unsolicited communication you send through the [Licensor] Services, in addition to any other appropriate remedies.
17 — 26
WWW.IICLE.COM
LICENSING ONLINE
§17.33
PRACTICE POINTER
Liquidated damages provisions should be based on a reasonable forecast determined according to accepted methods of calculation. Liquidated damages awards can put “teeth” into default judgments obtained against spammers and online pirates.
Downloads. In order to participate in certain [Licensor] Services or access certain Content, you may be notified that it is necessary to download software or other materials or agree to additional terms and conditions. Unless otherwise provided by these additional terms and conditions, they are hereby incorporated into these Terms. Suspension/Discontinuation. We hope not to, but we may, change, suspend, or discontinue — temporarily or permanently — some or all of the [Licensor] Services (including the Content and the devices through which the [Licensor] Services are accessed), with respect to any or all users, at any time without notice. You acknowledge that [Licensor] may do so in [Licensor’s] sole discretion. You also agree that [Licensor] will not be liable to you for any modification, suspension, or discontinuance of the [Licensor] Services, although if you are a [Licensor] Premium subscriber and [Licensor] suspends or discontinues the [Licensor] Premium service, [Licensor] may, in its sole discretion, provide you with a credit, refund, discount, or other form of consideration (for example, we may credit additional days of service to your account) in accordance with [section number] below. However, if [Licensor] terminates your account or suspends or discontinues your access to [Licensor] Services due to your violation of these Terms, then you will not be eligible for any such credit, refund, discount, or other consideration. [Licensor] Premium Subscriptions and Billing While it is our mission to provide users with as many viewing choices as possible, sometimes this involves giving users the choice of paying a fee in order to view Content that [Licensor] would not otherwise be able to make available without charging a fee. As part of that, access to the Content in [Licensor] Premium requires payment by you of a subscription fee. You can find the specific details regarding your subscription to [Licensor] Premium at any time by clicking on Your Account [hyperlink]. You agree that your [Licensor] Premium account is for individual use only and your [Licensor] Premium account is limited to only one simultaneous stream at a time. Additionally, you agree that for various reasons, such as restrictions from content licensors and other limitations or considerations from third parties, certain Content that may be accessible through one Property may not be accessible through other Properties. Because the [Licensor] Service is offered in multiple time zones, for consistency, a “day” for purposes of these Terms of Use begins at [12:00 a.m. Central Standard Time and ends at 11:59 p.m. Central Standard Time of that same calendar day].
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 27
§17.33
INTELLECTUAL PROPERTY LAW
Billing. By signing up for your [Licensor] Premium subscription, you are expressly agreeing that we are authorized to charge you a monthly subscription fee, any other fees for additional services you may purchase, and any applicable taxes in connection with your use of [Licensor] Premium to the credit card or other payment method accepted by [Licensor] (“Payment Method”) that you provided during registration. If you want to use a different Payment Method than the one you signed up for during registration, or if there is a change in your credit card validity or expiration date, you may edit your Payment Method information by clicking on Your Account. If your Payment Method expires and you do not edit your Payment Method information or cancel your account, you authorize us to continue billing, and you will remain responsible for any uncollected amounts. As used in these Terms of Use, “billing” shall indicate either a charge or debit, as applicable, against your Payment Method. The subscription fee will be billed at the beginning of your subscription or expiration of your free trial period, if any, whichever is earlier, and on each monthly renewal thereafter unless and until you cancel your subscription or the account or service is otherwise suspended or discontinued pursuant to these Terms. To see the commencement date for your next renewal period, go to the billing information section on Your Account page. We automatically bill your Payment Method each month on the calendar day corresponding to the commencement of your subscription. However, if you change your Payment Method, this could result in changing the calendar day on which you are billed. In the event your subscription began on a day not contained in a given month, we bill your Payment Method on the last day of such month. For example, if you became a paying subscriber on January 31, your Payment Method would next be billed on February 28. You acknowledge that the amount billed each month may vary due to promotional offers, changes in your subscription plan, and changes in applicable taxes, and you authorize us to charge your Payment Method for the corresponding amounts. If [Licensor] changes the subscription fee or other charges for [Licensor] Premium from time to time, we will give you advance notice of these changes by e-mail. However, we will not be able to notify you of changes in any applicable taxes. All fees and charges are nonrefundable except in connection with your early cancellation of the account as further described in “Ongoing Subscription and Cancellation” below. Very rarely, if there are special circumstances in which [Licensor] determines it is appropriate (e.g., the [Licensor] Premium service is unavailable for days due to technical difficulties), we may provide credits to affected subscribers. The amount and form of such credits, and the decision to provide them, are at [Licensor’s] sole and absolute discretion, and the provision of credits in one instance does not entitle anyone to credits in the future under similar or different circumstances. Ongoing Subscription and Cancellation. Your [Licensor] Premium subscription will continue in effect on a month-to-month basis unless and until you cancel your subscription or the account or service is otherwise
17 — 28
WWW.IICLE.COM
LICENSING ONLINE
§17.33
suspended or discontinued pursuant to these Terms. You must cancel your subscription before it renews each month in order to avoid the next month’s billing. We will bill the monthly subscription fee Premium any applicable taxes to the Payment Method you provide to us during registration (or to a different Payment Method if you change your account information). If you cancel your subscription during the first month, you will not receive a refund for that first month but, unless you elect to cancel your subscription using the “Cancel Today” option, you will continue to have access to [Licensor] Premium for the remainder of that month. If you cancel your subscription after the first month, then your access to [Licensor] Premium will cease for the remainder of that month, and you will receive a refund prorated for the number of days remaining in the month during which you cancelled. You can cancel your account by going to Your Account, choosing to “edit” your subscription under “Billing Information,” and clicking on the “cancel” option. Unpaid Amounts. In order to sustain the [Licensor] Premium service, it is important that each user of the [Licensor] Premium service honor the payment obligations to which the user agreed. Accordingly, we reserve the right to pursue any amounts you fail to pay in connection with [Licensor] Premium. You will remain liable to [Licensor] for all such amounts and all costs we incur in connection with the collection of these amounts, including, without limitation, collection agency fees, reasonable attorneys’ fees, and arbitration or court costs. ACCOUNTS AND REGISTRATION We may from time to time offer various features that require registration or the creation of an account with [Licensor]. If at any time you choose to register or create an account with us, the additional terms and conditions set forth below also will apply. All registration information you submit must be accurate and updated. Please keep your password confidential. You will not have to reveal it to any [Licensor] representative. You are responsible for all use on your account, including unauthorized use by any third party, so please be very careful to guard the security of your password. Please notify us by clicking HERE [hyperlink] and completing the form as soon as you know of, or suspect, any unauthorized use of your account. Please also make sure to notify us if your registration information changes, in case we need to contact you. You may terminate your account by going to Your Account and choosing the “delete my account” option. Please identify your account and provide a valid reply e-mail address in the event we require additional information to terminate your account. Please note that if you are a [Licensor] Premium subscriber, you must first cancel your [Licensor] Premium subscription before you will be able to terminate your account. Please see the section “Ongoing Subscription and Cancellation” above for instructions on how to cancel your [Licensor] Premium subscription. We reserve the right to immediately terminate or restrict your account or your use of the [Licensor] Services or access to Content at any time, without notice or liability, if [Licensor]
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 29
§17.33
INTELLECTUAL PROPERTY LAW
determines in its sole discretion that you have breached these Terms of Use, violated any law, rule, or regulation, or engaged in other inappropriate conduct, or for any other business reason. We also reserve the right to terminate your account or your use of the [Licensor] Services or access to Content if such use places an undue burden on our networks or servers. Of course, we would prefer to avoid such termination; therefore, we may use technology to limit activities, such as the number of calls to the [Licensor] servers being made or the volume of User Material (as defined below in [section number]) being Posted, and you agree to respect these limitations and not take any steps to circumvent, avoid, or bypass them. COLLECTION AND USE OF PERSONAL INFORMATION For information about [Licensor’s] policies and practices regarding the collection and use of your personally identifiable information, please read the [Licensor] Privacy Policy located HERE [hyperlink]. The Privacy Policy is incorporated by reference and made part of these Terms of Use. Thus, by agreeing to these Terms of Use, you agree that your presence on the [Licensor] Site and use of the [Licensor] Services on any of the Properties are governed by the [Licensor] Privacy Policy in effect at the time of your use.
PRACTICE POINTER
It is common practice to publish privacy policies to websites as stand-alone documents. If you are adopting this approach, the licensor should provide conspicuous notice in all related documents, including the terms and conditions of service, together with a prominent hyperlink to the privacy policy.
USER REVIEWS, COMMENTS, AND OTHER MATERIAL Your Posts. As part of the [Licensor] Services, users may have an opportunity to publish, transmit, submit, or otherwise post (collectively, “Post”) reviews, comments, or other materials (collectively, “User Material”). In order to keep the [Licensor] Services enjoyable for all of our users, you must adhere to the rules below. Please choose carefully the User Material that you Post. Please limit yourself to User Material directly relevant to the [Licensor] Services. Moreover, you must not Post User Material that (1) contains Unsuitable Material (as defined above in [section number] or (2) improperly claims the identity of another person. Please note that we use your first and last name as your user ID and therefore your first and last name will appear to the public each time you Post. We advise that you do not, and you should also be careful if you decide to, Post additional personally identifiable information, such as your e-mail address, telephone number, or street address. You must be, or have first obtained permission from, the rightful owner of any User Material you Post. By submitting User Material, you represent and warrant that you own the User Material or otherwise have the right to grant [Licensor] the license provided below.
17 — 30
WWW.IICLE.COM
LICENSING ONLINE
§17.33
You also represent and warrant that the Posting of your User Material does not violate any right of any party, including privacy rights, publicity rights, and intellectual property rights. In addition, you agree to pay for all royalties, fees, and other payments owed to any party by reason of your Posting User Material. [Licensor] will remove all User Material if we are properly notified that such User Material infringes on another person’s rights. You acknowledge that [Licensor] does not guarantee any confidentiality with respect to any User Material. By Posting User Material, you are not forfeiting any ownership rights in such material to [Licensor]. After Posting your User Material, you continue to retain all of the same ownership rights you had prior to Posting. By Posting your User Material, you grant [Licensor] a limited license to use, display, reproduce, distribute, modify, delete from, add to, prepare derivative works of, publicly perform, and publish such User Material through the [Licensor] Services worldwide, including on or through any Property, in perpetuity, in any media formats and any media channels now known or hereinafter created. The license you grant to [Licensor] is nonexclusive (meaning you are not prohibited by us from licensing your User Material to anyone else in addition to [Licensor]), fully paid, royalty-free (meaning that [Licensor] is not required to pay you for the use of your User Material), and sub-licensable (so that [Licensor] is able to use its affiliates, subcontractors, and other partners, such as Internet content delivery networks, to provide the [Licensor] Services). By Posting your User Material, you also hereby grant each user of the [Licensor] Services a nonexclusive, limited license to access your User Material, and to use, display, reproduce, distribute, and perform such User Material as permitted through the functionality of the [Licensor] Services and under these Terms of Use. LINKED DESTINATIONS AND ADVERTISING Third-Party Destinations. If we provide links or pointers to other websites or destinations, you should not infer or assume that [Licensor] operates, controls, or is otherwise connected with these other websites or destinations. When you click on a link within the [Licensor] Services, we will not warn you that you have left the [Licensor] Services and are subject to the terms and conditions (including privacy policies) of another website or destination. In some cases, it may be less obvious than others that you have left the [Licensor] Services and reached another website or destination. Please be careful to read the terms of use and privacy policy of any other website or destination before you provide any confidential information or engage in any transactions. You should not rely on these Terms to govern your use of another website or destination. [Licensor] is not responsible for the content or practices of any website or destination other than the [Licensor] Site, even if it links to the [Licensor] Site and even if the website or destination is operated by a company affiliated or otherwise connected with [Licensor]. By using the [Licensor] Services, you acknowledge and agree that [Licensor] is not responsible or liable to you for any content or other materials hosted and served from any website or destination other than the [Licensor] Site.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 31
§17.33
INTELLECTUAL PROPERTY LAW
Advertisements. [Licensor] takes no responsibility for advertisements or any third-party material Posted on any of the Properties, nor does it take any responsibility for the products or services provided by advertisers. Any dealings you have with advertisers found while using the [Licensor] Services are between you and the advertiser, and you agree that [Licensor] is not liable for any loss or claim that you may have against an advertiser. TRADEMARKS [Licensor], the [Licensor] logo, www.[Licensor].com, and other [Licensor] marks, graphics, logos, scripts, and sounds are trademarks of [Licensor]. None of the [Licensor] trademarks may be copied, downloaded, or otherwise exploited. DISCLAIMER OF WARRANTIES, LIMITATION OF LIABILITY, AND INDEMNITY WHILE WE DO OUR BEST TO PROVIDE THE OPTIMAL PERFORMANCE OF THE [LICENSOR] SERVICES, YOU AGREE THAT USE OF THE [LICENSOR] SERVICES IS AT YOUR OWN RISK. THE [LICENSOR] SERVICES, INCLUDING THE [LICENSOR] SITE AND THE OTHER PROPERTIES, THE CONTENT, THE PLAYER, USER MATERIAL, AND ANY OTHER MATERIALS CONTAINED ON OR PROVIDED THROUGH THE PROPERTIES, ARE PROVIDED “AS IS” AND, TO THE FULLEST EXTENT PERMITTED BY LAW, ARE PROVIDED WITHOUT WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. WITHOUT LIMITING THE FOREGOING, [LICENSOR] DOES NOT MAKE ANY WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, TITLE, MERCHANTABILITY, COMPLETENESS, AVAILABILITY, SECURITY, COMPATIBILITY OR NONINFRINGEMENT; OR THAT THE [LICENSOR] SERVICES WILL BE UNINTERRUPTED, FREE OF VIRUSES AND OTHER HARMFUL COMPONENTS, ACCURATE, ERROR FREE, OR RELIABLE. IN NO EVENT SHALL [LICENSOR] OR ITS AFFILIATES, SUCCESSORS, AND ASSIGNS, AND EACH OF THEIR RESPECTIVE INVESTORS, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, AND SUPPLIERS (INCLUDING DISTRIBUTORS AND CONTENT LICENSORS) (COLLECTIVELY, THE “[LICENSOR] PARTIES”), BE LIABLE FOR ANY DIRECT, INDIRECT, PUNITIVE, INCIDENTAL, SPECIAL, CONSEQUENTIAL, OR OTHER DAMAGES, INCLUDING LOSS OF PROFITS, ARISING OUT OF OR IN ANY WAY RELATED TO THE USE OF THE [LICENSOR] SERVICES (INCLUDING ANY INFORMATION, PRODUCTS, OR SERVICES ADVERTISED IN, OBTAINED ON, OR PROVIDED THROUGH THE PROPERTIES), WHETHER BASED IN CONTRACT, TORT, STRICT LIABILITY, OR OTHER THEORY, EVEN IF THE [LICENSOR] PARTIES HAVE BEEN ADVISED OF THE POSSIBILITY OF DAMAGES. CERTAIN STATE LAWS DO NOT ALLOW LIMITATIONS ON IMPLIED WARRANTIES OR THE EXCLUSION OR LIMITATION OF CERTAIN DAMAGES. IF THESE LAWS APPLY TO YOU, SOME OR ALL OF THE ABOVE DISCLAIMERS, EXCLUSIONS, OR LIMITATIONS MAY NOT APPLY TO YOU. IN NO EVENT SHALL OUR TOTAL LIABILITY TO YOU FOR ALL DAMAGES,
17 — 32
WWW.IICLE.COM
LICENSING ONLINE
§17.33
LOSSES, AND CAUSES OF ACTION, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE, EXCEED THE AMOUNT PAID BY YOU TO US, IF ANY, FOR ACCESSING OR PARTICIPATING IN ANY ACTIVITY RELATED TO USE OF THE [LICENSOR] SERVICE OR $50 (WHICHEVER IS LESS). YOU AGREE TO DEFEND, INDEMNIFY, AND HOLD HARMLESS THE [LICENSOR] PARTIES FROM AND AGAINST ANY AND ALL LIABILITIES, CLAIMS, DAMAGES, EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES AND COSTS), AND OTHER LOSSES ARISING OUT OF OR IN ANY WAY RELATED TO YOUR BREACH OR ALLEGED BREACH OF THESE TERMS OR YOUR USE OF THE [LICENSOR] SERVICES (INCLUDING YOUR USE OF THE CONTENT). [LICENSOR] RESERVES THE RIGHT, AT OUR OWN EXPENSE, TO EMPLOY SEPARATE COUNSEL AND ASSUME THE EXCLUSIVE DEFENSE AND CONTROL OF ANY MATTER OTHERWISE SUBJECT TO INDEMNIFICATION BY YOU. ARBITRATION OF CLAIMS PLEASE READ THIS CAREFULLY. WE WANT YOU TO KNOW IT AFFECTS YOUR RIGHTS. At [Licensor], we expect that our world-class customer service team will be able to resolve most issues you may have using the [Licensor] Services. In the unlikely event that we do not meet your satisfaction, we prefer to specify now what each of us should expect in order to avoid any confusion later. Accordingly, you and [Licensor] agree to the following resolution process. Any claim that you might have against [Licensor] regarding these Terms of Use, the [Licensor] Services, or the Properties must be resolved through binding arbitration before the American Arbitration Association using its Commercial Arbitration Rules. It is important to us that we address any issues you might have promptly. To help us do that, you agree to begin any arbitration within one year after your claim arose; otherwise, your claim is waived. Because we prefer to resolve our issues with you directly, you agree to arbitrate with [Licensor] only in your individual capacity, not as a representative or member of a class. As such, your claims may not be joined with any other claims and there shall be no authority for any dispute to be arbitrated on a class action basis or brought by a purported class representative. Rather than force everyone to visit us in [state], if you can demonstrate that arbitration in [state] would create an undue burden to you, you are free to initiate the arbitration in your home state. Otherwise, the arbitration hearings will be held in [county, state]. The arbitrator’s decision will be binding and may be entered as a judgment in any court of competent jurisdiction. Regardless of how the arbitrator rules, each party is responsible for its own attorneys’ fees and costs.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 33
§17.33
INTELLECTUAL PROPERTY LAW
Since we always prefer to find ways to satisfy you as quickly and efficiently as possible, before initiating any arbitration proceeding, you agree to first discuss the matter informally with [Licensor] for at least 30 days. To do that, please send your full name and contact information, your concern, and your proposed solution by mail to us at: [Licensor’s physical address].
PRACTICE POINTER
Recall that some court decisions have held that the licensor is entitled to carve out materially different dispute resolution treatment for itself and for its licensees. The licensor, therefore, may choose to draft the online license agreement with a “cooling off” period that applies only to licensees while the licensor reserves its rights to pursue formal legal action and seek emergency relief without delay.
GENERAL INFORMATION International Use. We are a company based in the United States. [Licensor’s] goal is to bring you as much Content as is legally available. That said, we are limited by the rights that our content licensors grant to us. Using technologies to access the Content from territories where [Licensor] does not have rights or does not offer services is prohibited. [Licensor] Premium is not accessible through any devices from outside the United States. Choice of Law and Forum. These Terms of Use are governed by, and construed in accordance with, the laws of [Licensor’s preferred state] without giving effect to principles of conflict of laws. In the event of a claim by [Licensor] against you, you agree to submit to the jurisdiction of the courts located where [Licensor] pursues its claim against you, which may include courts in [county, state].
PRACTICE POINTER
Choice-of-law and governing-law provisions are important components of any online agreement. Not only may such provisions be enforced to further contractual obligations, but the courts also apply them to resolve extra-contractual matters like tort claims. The licensor should take advantage of this opportunity to choose a favorable forum.
No Waiver/Reliance. If you see other parties violating these Terms, we would appreciate it if you would let us know at [Licensor’s e-mail address] (subject line: “TOU Violation”). Precisely how [Licensor] responds to a party that is violating these Terms will be determined after carefully analyzing all of the facts and circumstances of a particular case. You may not rely on [Licensor’s] precise response with respect to one party or one situation as any indication of what [Licensor] might do with respect to another party or another situation, even if the parties or situations appear to you to be similar. Similarly, if we fail to act in response to a violation of these Terms of Use, you should not assume that we do not object to the violation or even that we are aware of it. In addition, you may not construe a waiver
17 — 34
WWW.IICLE.COM
LICENSING ONLINE
§17.33
of any provision of these Terms of Use with respect to any party as a waiver of that provision (or any other provision) with respect to either that party or any other party. Further, [Licensor’s] decision to delay exercising or enforcing any right or remedy under these Terms of Use shall not constitute a waiver of such right or remedy. Even if [Licensor] acts in a way that appears to you to be inconsistent with these Terms of Use, [Licensor’s] action shall not be deemed a waiver or constructive amendment of these Terms. Integration, Amendment, and Severability. Please note that these Terms of Use, including [Licensor’s] Privacy Policy that is incorporated in these Terms and any end user license agreement that might accompany [Licensor] authorized applications, features, and devices, constitute the entire legal agreement between you and [Licensor] and govern your use of the [Licensor] Services (including your use of the Content) (but excluding any services, if any, that [Licensor] may provide to you under a separate signed written agreement), and completely replaces any prior agreements between you and [Licensor] in relation to the [Licensor] Services. Except as set forth in [section number] above, these Terms may not be amended or varied except in a writing signed by [Licensor]. Although we understand that electronic or digital signatures are frequently viewed as the equivalent of traditional written signatures these days, for these purposes a signature or “signed” writing or written agreement may not include an electronic or digital signature. These Terms of Use operate to the fullest extent permissible by law. If any provision of these Terms is held to be unlawful, void, or unenforceable, you and we agree that the provision will be deemed severable from these Terms and will not affect the validity and enforceability of any remaining provisions. [clickwrap acceptance mechanisms]
PRACTICE POINTER
Online license agreements should always enable licensees and prospective licensees to print the complete document to paper. Pop-ups should be avoided in online agreements since the various web browsers and platforms may display pop-ups in a manner that obscures important text. Scroll boxes may be used to hide clickwrap acceptance mechanisms until a prospective licensee has actually scrolled through all terms and conditions. It should be self-evident that legal counsel for the licensor needs to work actively with the licensor’s website developers prior to and after the license agreement and any related documents are published online.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
17 — 35
18
Business Method Patents
TIMOTHY W. LOHSE BLAKE W. JACKSON DLA Piper LLP (US) East Palo Alto, CA
®
©COPYRIGHT 2017 BY IICLE .
18 — 1
INTELLECTUAL PROPERTY LAW
I. [18.1] Scope of Chapter II. [18.2] Caselaw History Regarding the Patentability of Software A. [18.3] Computer-Related Invention/Software Patent Caselaw B. [18.4] Business Method Patent Caselaw C. [18.5] Abstract Idea Patent Caselaw 1. [18.6] Court Cases Finding Ineligible Claims Under Alice 2. [18.7] Court Cases Finding Eligible Claims Under Alice 3. [18.8] United States Patent and Trademark Office’s Handling of Alice Caselaw a. [18.9] January 2015 Addendum to December 2014 Memorandum b. [18.10] July 2015 Update and Appendix III. The Business Method Patent A. [18.11] Definition of “Business Method Patent” 1. [18.12] Authors’ Definition 2. [18.13] Public’s Definition B. [18.14] Drafting of Claims in a Business Method Patent 1. [18.15] Means-Plus-Function Claims 2. [18.16] Apparatus/System Claims 3. [18.17] Beauregard Claims 4. [18.18] Method Claims C. [18.19] Statutes Applicable to Business Method Patents 1. [18.20] Enablement and Best Mode 2. [18.21] Statutory Subject Matter 3. [18.22] Novelty and Obviousness 4. [18.23] The Leahy-Smith America Invents Act a. [18.24] Post-Grant Review b. [18.25] Transitional Program for Covered Business Method Patents c. [18.26] Tax Strategies d. [18.27] Best Mode IV. [18.28] United States Patent and Trademark Office Guidelines for Business Method Patents A. [18.29] United States Patent and Trademark Office Update on Business Methods B. [18.30] Prior Art for Business Method Patents C. [18.31] Other Training Materials
18 — 2
WWW.IICLE.COM
BUSINESS METHOD PATENTS
V. [18.32] National and Regional Patent Office Guidelines for Handling Business Method Patents A. [18.33] Trilateral Offices Group Report B. [18.34] European Patent Office Guidelines for Business Method Patents C. [18.35] Japanese Patent Office Guidelines for Business Method Patents VI. [18.36] Examples of Business Method Patents VII. [18.37] Litigation Effects of Business Method Patents A. [18.38] Business Effects of Business Method Patents B. [18.39] Safe Harbor for Business Method Patent Infringement Claim VIII. [18.40] Checklist for Business Method Inventions in the United States IX. [18.41] Alice Abstract Idea Flowchart in the United States
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 3
§18.1
INTELLECTUAL PROPERTY LAW
I. [18.1] SCOPE OF CHAPTER This chapter is intended as a primer on business method patents — a unique type of patent directed to a unique subject matter — and includes examples and practice tips for business method patents. Business method patents are typically software-type patents that are directed to and claim a particular method of doing business, such as a method for online, single-action shopping and checkout. This chapter discusses (a) the origins of software patents and business method patents (see §§18.2 – 18.10 below), (b) the definitions of, drafting of, and statutes applicable to business method patents (see §§18.11 – 18.27), (c) the guidelines used by various national and regional patent offices to handle business method patents (see §§18.28 – 18.35), (d) examples of “famous” business method patents (see §18.36), and (e) the effects of these business method patents (see §§18.37 – 18.39). Section 18.40 contains a checklist for business method inventions in the United States, and §18.41 includes a flowchart of the United States Patent and Trademark Office (USPTO) Alice test methodology. See Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014).
II. [18.2] CASELAW HISTORY REGARDING THE PATENTABILITY OF SOFTWARE In the not-so-recent past, a software patent was considered to be directed to nonstatutory subject matter. In fact, many foreign patent offices are still very leery of granting software patents and the related business method patents. In the United States, there is a line of cases, from the U.S. Supreme Court, the Court of Customs Appeals, and the Court of Appeals for the Federal Circuit (a descendent of the Court of Customs Appeals), that has spent a lot of time and energy attempting to define what is patentable in the world of software. To fully understand a business method patent, it is therefore necessary first to understand a brief history of software patents. A. [18.3] Computer-Related Invention/Software Patent Caselaw Under 35 U.S.C. §101, certain processes were considered to be directed to nonstatutory subject matter. In particular, “mental steps” were considered to be unpatentable as part of the “mental steps doctrine,” which has been widely discussed and critiqued. See, e.g., Donald S. Chisum, The Patentability of Algorithms, 47 U.Pitt.L.Rev. 959 (1986). The mental steps doctrine provides that a patent cannot be obtained for a method or process when an essential component of the process is human mental processes. The U.S. Supreme Court has struggled with this doctrine, and there has been a very long line of decisions that have attempted to deal with the doctrine and its application to different inventions. See, e.g., Gottschalk v. Benson, 409 U.S. 63, 34 L.Ed.2d 273, 93 S.Ct. 253 (1972), in which the Court ruled that a method for converting numerals expressed in binary coded decimal format into binary numbers could not be patented as a process even though the process was useful for programs in digital computers. In Diamond v. Diehr, 450 U.S. 175, 67 L.Ed.2d 155, 101 S.Ct. 1048 (1981), the Court again faced a computer-implemented process and decided that an industrial process that used a mathematical formula and a programmed digital computer to perform calculations was patentable. In Diamond, the Court distinguished its prior cases, such as Gottschalk, on the basis that the inventions in the prior cases were attempts to patent an abstract algorithm.
18 — 4
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.4
In a line of cases, the Court of Customs and Patent Appeals (CCPA) (a predecessor to the Court of Appeals for the Federal Circuit) tackled some computer-related invention patentability issues in light of the Supreme Court’s holdings. As a result, a two-part test, known as the Freeman-Walter-Abele test for the line of cases from which the test was generated (see Application of Freeman, 573 F.2d 1237 (C.C.P.A. 1978), In re Application of Walter, 618 F.2d 758 (C.C.P.A. 1980), and In re Abele, 684 F.2d 902 (C.C.P.A. 1982)), was set out by the court and provides the following: 1. Does the claim recite, directly or indirectly, a mathematical algorithm or formula? If not, then the claim is directed to statutory subject matter. If so, then the second step of the test must be resolved. 2. Does the claim involve the application of the algorithm to specific physical elements or processes? If so, the claim is directed to statutory subject matter. If not, the claim is directed to nonstatutory subject matter. Using this test, the Federal Circuit decided Arrhythmia Research Technology, Inc. v. Corazonix Corp., 958 F.2d 1053 (Fed.Cir. 1992), in which the court held that the claims of the patent directed to human heart EKG signal analysis method and apparatus were patentable subject matter. The Arrhythmia Research court reasoned that the analysis being performed resulted in a signal related to the patient’s heart activity and therefore satisfied the second prong of the Freeman-Walter-Abele test. The Federal Circuit then decided several other notable cases in which it continued to struggle with the patentablity of computer-related inventions. See In re Alappat, 33 F.3d 1526 (Fed.Cir. 1994); In re Warmerdam, 33 F.3d 1354 (Fed.Cir. 1994); In re Lowry, 32 F.3d 1579 (Fed.Cir. 1994); In re Trovato, 42 F.3d 1376 (1994), vacated, 60 F.3d 807 (Fed.Cir. 1995). B. [18.4] Business Method Patent Caselaw Many commentators see State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed.Cir. 1998), cert. denied, 119 S.Ct. 851 (1999), as being the case that encouraged the large number of business method patent application filings. In State Street Bank & Trust, the patent, U.S. Patent No. 5,193,056 (filed Mar. 11, 1991) (’056 Patent) related to a data processing system for a hub-and-spoke financial services configuration. The hub-and-spoke financial services configuration permitted mutual funds to pool their assets in an investment portfolio wherein the system was able to manage the assets of the portfolio and distribute and allocate the increases and decreases to the funds, allocate gains or losses to the funds, and determine the year-end income, expenses, and capital gain or loss for the portfolio and each fund. On appeal, the Federal Circuit upheld the validity of the claims against challenges that they were directed to nonstatutory subject matter. The State Street Bank & Trust court found that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical equations into a final share price constituted a practical application of a mathematical algorithm because it produced a useful, concrete, and tangible result. 149 F.3d at 1375.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 5
§18.4
INTELLECTUAL PROPERTY LAW
Following State Street Bank & Trust came the Bilski line of cases that included a series of appeals that eventually led to a Supreme Court decision, Bilski v. Kappos, 561 U.S. 593, 177 L.Ed.2d 792, 130 S.Ct. 3218 (2010). It started in 1997 with a patent filing and an examiner’s rejection. The invention in the Bilski cases related to a method practiced by a commodity provider for managing (i.e., hedging) the consumption risks associated with a commodity sold at a fixed price. The patent application disclosed that energy consumers face two kinds of risk — price risk and consumption risk — and the proliferation of price risk management tools over the five years preceding the filing date allowed easy management of price risk. However, consumption risk (e.g., the need to use more or less energy than planned due to the weather) was said to be not currently managed in energy markets, which was the problem addressed by the invention. Claim 1 was as follows: 1. A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of: (a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer; (b) identifying market participants for said commodity having a counter-risk position to said consumers; and (c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions. Ex Parte Bilski, Appeal 2002-2257, 2006 WL 5738364, *1 (B.P.A.I. Sept. 26, 2006). The case eventually wended its way to the Board of Patent Appeals and Interferences (BPAI), where it was decided in September 2006, and was subsequently appealed to the Federal Circuit. See Ex Parte Bilski, supra; In re Bilski, 545 F.3d 943 (Fed.Cir. 2008). The BPAI decision was published as an “informative opinion.” The BPAI found that the claims were directed to nonstatutory subject matter pursuant to 35 U.S.C. §101. Ex Parte Bilski, supra. In arriving at that conclusion, the BPAI reviewed business method caselaw (Ex Parte Lundgren, 76 U.S.P.Q.2d (BNA) 1393, 2004 WL 3561262 (B.P.A.I. 2005) (precedential op.)) and the United States Patent and Trademark Office’s Interim Guidelines for Examination of Patent Applications for Patent Subject Matter Eligibility (2005) (Interim Guidelines). Those Interim Guidelines have been codified in §2106 of the MANUAL OF PATENT EXAMINING PROCEDURE (8th ed. 2001, rev. Nov. 2015), www.uspto.gov/web/offices/pac/mpep. The holding of the BPAI was appealed to the Federal Circuit. After a three-judge panel heard the oral argument for this appeal in 2007, the panel did not issue an opinion. Rather, a poll of the
18 — 6
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.4
judges of the Federal Circuit determined that the appeal should be heard en banc. The result of that en banc decision was published as In re Bilski, supra. In that decision, the Federal Circuit held that the claim in question ultimately failed the “machine-or-transformation” test and was therefore patent ineligible. 545 F.3d at 963 – 965. The use of the machine or transformation test was a way for the Federal Circuit to clarify business method patent eligibility. A succinct test could be utilized in similar cases to strike down many business method patents. And because the test was based on Supreme Court decisions like Gottschalk v. Benson, 409 U.S. 63, 34 L.Ed.2d 273, 93 S.Ct. 253, 257 (1972), and Parker v. Flook, 437 U.S. 584, 57 L.Ed.2d 451, 98 S.Ct. 2522, 2526 (1978), the Federal Circuit hoped that the test would be adopted by the high Court. This set up a Supreme Court appeal that tested the patentability of business methods and possibly even software patents in general. The lead-up to the Supreme Court’s Bilski v. Kappos decision in 2010 had practitioners and academics hoping for finality on whether business methods were patent eligible and for guidelines for determining eligibility. What the Supreme Court issued instead was a decision that left more questions than answers. In short, the Court held that 35 U.S.C. §101 does not exclude “methods” or “processes” outright (130 S.Ct. at 3228) and that business methods were not necessarily “laws of nature, physical phenomena, and abstract ideas” that were patent ineligible (130 S.Ct. at 3225). In fact, the Court reasoned that if all business methods were patent ineligible, then 35 U.S.C. §273 would be rendered meaningless. Section 273, as it existed when the Supreme Court’s decision was rendered, listed specific defenses to infringement including reducing a method to practice more than one year before the effective filing date of a patent that it would otherwise infringe. Section 273(a)(3) stated that the term “method” means “a method of doing or conducting business.” 130 S.Ct. at 3228. The Supreme Court held that although some business methods may be patent eligible, the one found in Bilski v. Kappos was not. The petitioners were held to have attempted to patent “abstract ideas,” which fall out of the purview of 35 U.S.C. §101. But more significantly for the industry than the actual outcome of Bilski v. Kappos was the Supreme Court’s rejection of the Federal Circuit’s use of the machine or transformation test as the sole means of identifying whether a claim was patent eligible. The Supreme Court held that the machine or transformation test was a useful tool but not the exclusive tool for this determination. Without supplying any more clarity, the Supreme Court’s decision left the Federal Circuit wondering which test it should use instead, but with the knowledge that some business methods were patent eligible. After Bilski v. Kappos, the Federal Circuit went back to work, trying to outline which business methods were patent eligible and which were not. In Cybersource Corp. v. Retail Decisions, Inc., 654 F.3d 1366 (Fed.Cir. 2011), the Federal Circuit held that a credit card fraud detection method over the Internet was not patent eligible in what seemed like a critical attack on all business methods.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 7
§18.4
INTELLECTUAL PROPERTY LAW
Cybersource’s relevant Claim 3 recited: 3. A method for verifying the validity of a credit card transaction over the Internet comprising the steps of: a) obtaining information about other transactions that have utilized an Internet address that is identified with the [ ] credit card transaction; b) constructing a map of credit card numbers based upon the other transactions and; c) utilizing the map of credit card numbers to determine if the credit card transaction is valid. 654 F.3d at 1370. The court still resorted to the favored machine or transformation test, but noted that, after Bilski v. Kappos, it could not use the test exclusively. The Federal Circuit held that Cybersource’s claimed invention failed the machine or transformation test and was therefore ineligible for patenting. The court held that the claimed invention was merely a manipulation of data combined with a weak attempt at adding the Internet to tie it to a machine. This was not enough to satisfy the machine prong, which must impose meaningful limits on the claim’s scope. 654 F.3d at 1375. Additionally, the court held that every step of the fraud detection method could be carried out by a person using a pencil and paper, again failing the “machine” element of the test. 654 F.3d at 1371. Further, the claim was too broad, and it could possibly be construed to encompass “any” method of detecting fraud. 654 F.3d at 1373. The Cybersource ruling also held that the attempt at tying the abstract idea to a machine using a Beauregard-style claim failed. 654 F.3d at 1373, citing In re Beauregard, 53 F.3d 1583 (Fed.Cir. 1995). This was seen as an attack on software patents in general, as Beauregard-style claims were commonly used in an attempt to get around the machine or transformation test in the software scenario. See §18.17 below regarding Beauregard-style claims. After Cybersource came Ultramercial, LLC v. Hulu, LLC, 657 F.3d 1323 (Fed.Cir. 2011), vacated, 132 S.Ct. 2431 (2012). In Ultramercial, the Federal Circuit seemed less combative toward business methods in holding that practical applications of abstract ideas may be patent eligible. The claimed invention at issue dealt with exchanging viewing of copyrighted material for viewing of advertisements. 657 F.3d at 1328. The exemplary claim recited: A method for distribution of products over the Internet via a facilitator, said method comprising the steps of: a first step of receiving, from a content provider, media products that are covered by intellectual property rights protection and are available for purchase, wherein each said media product being comprised of at least one of text data, music data, and video data;
18 — 8
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.4
a second step of selecting a sponsor message to be associated with the media product, said sponsor message being selected from a plurality of sponsor messages, said second step including accessing an activity log to verify that the total number of times which the sponsor message has been previously presented is less than the number of transaction cycles contracted by the sponsor of the sponsor message; a third step of providing the media product for sale at an Internet website; a fourth step of restricting general public access to said media product; a fifth step of offering to a consumer access to the media product without charge to the consumer on the precondition that the consumer views the sponsor message; a sixth step of receiving from the consumer a request to view the sponsor message, wherein the consumer submits said request in response to being offered access to the media product; a seventh step of, in response to receiving the request from the consumer, facilitating the display of a sponsor message to the consumer; an eighth step of, if the sponsor message is not an interactive message, allowing said consumer access to said media product after said step of facilitating the display of said sponsor message; a ninth step of, if the sponsor message is an interactive message, presenting at least one query to the consumer and allowing said consumer access to said media product after receiving a response to said at least one query; a tenth step of recording the transaction event to the activity log, said tenth step including updating the total number of times the sponsor message has been presented; and an eleventh step of receiving payment from the sponsor of the sponsor message displayed. 657 F.3d at 1324 – 1325. The Ultramercial decision gave credence back to the argument that computer implementation of software was patent eligible, despite attacks of software from cases like Cybersource, supra. In fact, the Ultramercial court specifically noted that the Cybersource decision, which excluded purely mental steps, was to be narrowly construed. 657 F.3d at 1329. Further, in situations like the one in Ultramercial, “controlled interaction with a consumer via an Internet website” was “something far removed from purely mental steps.” [Emphasis in original.] 657 F.3d at 1330. After Ultramercial, the Supreme Court weighed in once again on business methods in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. ___, 182 L.Ed.2d 321, 132 S.Ct. 1289 (2012). Although the Prometheus decision did not deal with software specifically, it was seen as another decision about business methods in general.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 9
§18.5
INTELLECTUAL PROPERTY LAW
The claims in Prometheus dealt with pharmacology and a way for doctors to check the effectiveness of a drug dosage. A sample typical claim was: A method of optimizing therapeutic efficacy for treatment of an immune-mediated gastrointestinal disorder, comprising: (a) administering a drug providing 6-thioguanine to a subject having said immunemediated gastrointestinal disorder; and (b) determining the level of 6-thioguanine in said subject having said immunemediated gastrointestinal disorder, wherein the level of 6-thioguanine less than about 230 pmol per 8x108 red blood cells indicates a need to increase the amount of said drug subsequently administered to said subject and wherein the level of 6-thioguanine greater than about 400 pmol per 8x108 red blood cells indicates a need to decrease the amount of said drug subsequently administered to said subject. 132 S.Ct. at 1295. In Prometheus, the Supreme Court once again upheld business methods while striking down the claims at issue. The Court held, just as in Bilski, that 35 U.S.C. §101 does not specifically exclude business methods as applications of the law of nature or mathematical formulas. However, the additions to the law of nature or the formula must be more than just stating “apply the law [of nature].” 132 S.Ct. at 1297. The Prometheus Court held that the claims at issue were not patent eligible because they “inform a relevant audience about certain laws of nature [and] any additional steps consist[ing] of well-understood, routine, conventional activity already engaged in by the scientific community; and those steps, when viewed as a whole, add nothing significant beyond the sum of their parts taken separately.” 132 S.Ct. at 1298. Thus, the current caselaw on business method patents holds that business methods are still patent eligible. The trick is crafting claims that are not interpreted as too abstract but instead tie the claims to a machine to have patent-eligible subject matter. C. [18.5] Abstract Idea Patent Caselaw The landscape of subject matter eligibility for patents including business method patents changed significantly in June 2014 when Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014), was decided by the U.S. Supreme Court. Although the case claims to make no new law on subject matter eligibility, it is being used as a bludgeon by lower courts and the United States Patent and Trademark Office in prosecution to invalidate or reject any patent claim that seemed to include some kind of software element. The Supreme Court in Alice held that a series of tests should be applied to determine whether a patent claim was eligible subject matter under 35 U.S.C. §101. It had always been
18 — 10
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.5
understood that mathematical formulas fell into this category along with other natural phenomena and laws of nature. But to apply the term “abstract” to software patent claims, the Court included some elements of prior art analysis (under 35 U.S.C. §§102 and 103) as well when it outlined its test for eligible subject matter. Alice included analysis of U.S. Patent Nos. 5,970,479 (Oct. 19, 1999); 6,912,510 (June 28, 2005); 7,149,720 (Dec. 12, 2006); and 7,725,375 (may 25, 2010). As an example, Claim 1 from the ‘510 patent is reproduced below: 1. A method of exchanging an obligation between parties, wherein an exchange obligation is administered by a supervisory institution, and wherein at least one credit record and one debit record is maintained with an exchange institution, the method comprising: (a) maintaining a shadow credit record and a shadow debit record for a party to be held independently by the supervisory institution from the exchange institution; (b) for every transaction resulting in an exchange obligation, the supervisory institution electronically adjusting said shadow credit record and/or shadow debit record, allowing only those transactions that do not result in a value of said shadow debit record being less than a value of said shadow credit record; and (c) at the end of a period of time, the supervisory institution providing an instruction to the exchange institution to credit and/or debit in accordance with said adjustments of said allowed transactions, wherein said instruction being an irrevocable, time invariant obligation placed on the exchange institution. To determine whether the above example claim was abstract and therefore patent ineligible, the Court came up with a two-part test. First, it must be determined whether the claim is directed to an abstract idea. This test included elements such as fundamental economic practices, certain methods of organizing human activities, an idea itself, and mathematical formulas as being abstract ideas. Interestingly, “fundamental economic practices” sounds much like anticipation or obviousness rejections but was included in an “abstract” analysis under 35 USC §101. If it was determined that the claim was directed toward an abstract idea, it was further analyzed. Second, it must be determined if the abstract idea fell into a judicially created exception for inventions that added “significantly more,” such as an improvement in another technology, improvement to the functioning of the computer itself, and meaningful limitations beyond generally linking the use of an abstract idea to a particular technological environment. Inventions that added significantly more than the abstract idea were found to be patent eligible subject
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 11
§18.6
INTELLECTUAL PROPERTY LAW
matter. In contrast, just saying “apply” the abstract idea to a general computer was not significantly more than the abstract idea and was not patent eligible subject matter. Courts and the USPTO used these tests to reject and invalidate all software claims for the first few months after Alice was handed down. The USPTO even reopened prosecution on hundreds of patents it had previously found allowable and cited Alice in a new §101 rejections. Since Alice, courts wrestled with applying this test in a consistent manner. At the time of this publication, most cases in which the Federal Circuit cited Alice and §101 found the claims at issue to be patent ineligible. However, the courts have issued some cases in which they found the claims to be patent eligible despite Alice. Section 18.6 – 18.7 below contain the substantive Federal Circuit cases citing Alice and their holdings. 1. [18.6] Court Cases Finding Ineligible Claims Under Alice In the following cases, the claims were found, in accordance with Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014), to be patent ineligible under 35 U.S.C. §101: •
I/P Engine, Inc. v. AOL Inc., 576 Fed.Appx. 982 (Fed.Cir. 2014) Part 1 fail — directed to abstract idea of a useful and innovative method of doing business for filtering content Part 2 fail — not substantially more than the abstract idea since the claims do not “improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field” (576 Fed.Appx. at 992)
•
Planet Bingo, LLC v. VKGS LLC, 576 Fed.Appx. 1005 (Fed.Cir. 2014) Part 1 fail — directed to abstract idea of organizing human activity for bingo game Part 2 fail — not substantially more than the abstract idea since the claims recited just storing, retrieving, and verifying chosen set of bingo numbers
•
buySAFE, Inc. v. Google, Inc., 765 F.3d 1350 (Fed.Cir. 2014) Part 1 fail — directed to abstract idea of creating a contractual relationship — a “transaction performance guaranty” (765 F.3d at 1352) Part 2 fail — not substantially more than the abstract idea since the claims recite generic computer functionality
•
Ultramercial, Inc. v. Hulu, LLC, 772 F.3d 709 (Fed.Cir. 2014) Part 1 fail — directed to abstract idea per se for receiving media and selecting an advertisement among other steps
18 — 12
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.6
Part 2 fail — not substantially more than the abstract idea since the claims recite nothing more than instructing the practitioner to implement the abstract idea with routine, conventional steps •
Content Extraction and Transmission LLC v. Wells Fargo, Bank National Ass’n, 776 F.3d 1343 (Fed.Cir. 2014) Part 1 fail — directed to abstract idea of extracting and storing data from hard copy documents Part 2 fail — not substantially more than the abstract idea since the claims recite nothing more than using generic scanning and processing technology
•
OIP Technologies, Inc. v. Amazon.com, Inc., 788 F.3d 1359 (Fed.Cir. 2015) Part 1 fail — directed to abstract idea of offer-based price optimization Part 2 fail — not substantially more than the abstract idea since the claims recite nothing more than using generic computer processing and data gathering steps
•
Internet Patents Corp. v. Active Network, Inc., 790 F.3d 1343 (Fed.Cir. 2015) Part 1 fail — directed to abstract idea of retaining information in the navigation of online forms Part 2 fail — not substantially more than the abstract idea since the claims recite nothing more than “well-understood, routine, conventional activities previously known” (790 F.3d at 1348)
•
Vehicle Intelligence and Safety LLC v. Mercedes-Benz USA, LLC, 635 Fed.Appx. 914 (Fed.Cir. 2015) Part 1 fail — directed to an abstract idea of being a test for physical or mental impairment Part 2 fail — not substantially more than the abstract idea since the claims lack details on how to perform any of the tests so just directed to abstract idea
•
Ariosa Diagnostics, Inc. v. Sequenom, Inc., 788 F.3d 1371 (Fed.Cir. 2015) Part 1 fail — directed to an abstract idea of being a naturally occurring or natural phenomenon Part 2 fails — not substantially more than the abstract idea since the claims just state “apply it” to natural phenomenon and known things (788 F.3d at 1377)
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 13
§18.6
•
INTELLECTUAL PROPERTY LAW
Intellectual Ventures I LLC v. Capital One Bank (USA), 792 F.3d 1363 (Fed.Cir. 2015) Part 1 fail — directed to an abstract idea of tracking financial transactions to determine whether they exceed a preset spending limit (i.e., budgeting) Part 2 fails — not substantially more than the abstract idea since the claims just recite generic computer components.
•
Versata Development Group, Inc. v. SAP America, Inc., 793 F.3d 1306 (Fed.Cir. 2015) Part 1 fail — directed to an abstract idea of determining a price, using organizational and product group hierarchies Part 2 fail — not substantially more than the abstract idea since the claims just recite functions performed by a computer that are purely conventional
•
Allvoice Developments US, LLC v. Microsoft Corp., 612 Fed.Appx. 1009 (Fed.Cir. 2015) Part 1 fail — directed to an abstract idea of an intangible article and not a process claim Part 2 — not analyzed
•
Digitech Image Technologies LLC, v. Electronics for Imaging, Inc., 758 F.3d 1344 (Fed.Cir. 2015) Part 1 fail — no structure or machine Part 2 — not analyzed
•
In re Brown, 645 Fed.Appx. 1014 (Fed Cir. 2016) Part 1 fail — directed to abstract idea of an idea only of assigning hair designs to balance head shape Part 2 fail — not substantially more than the abstract idea since the claims were directed to just applying an abstract idea with scissors
•
Genetic Technologies Ltd. v. Merial L.L.C., 818 F.3d 1369 (Fed.Cir. 2016) Part 1 fail — directed to abstract idea of a law of nature for methods of analyzing DNA sequences Part 2 fail — not substantially more than the abstract idea since the claims were directed to well-known steps
18 — 14
WWW.IICLE.COM
BUSINESS METHOD PATENTS
•
§18.7
Mortgage Grader, Inc. v. First Choice Loan Services Inc., 811 F.3d 1314 (Fed.Cir. 2016) Part 1 fail — directed to abstract idea of anonymous loan shopping Part 2 fail — not substantially more than the abstract idea since the claims recite steps that may be performed by a human being do not improve the functioning of the computer itself and do not solve a problem unique to the Internet
•
In re Smith, 815 F.3d 816 (Fed.Cir. 2016) Part 1 fail — directed to abstract idea of rules for conducting wagering game Part 2 fail — not substantially more than the abstract idea since the claims recite conventional steps
•
In re TLI Communications LLC Patent Litigation, 823 F.3d 607 (Fed.Cir. 2016) Part 1 fail — directed to abstract idea of classifying and storing digital images in an organized manner Part 2 fail — not substantially more than the abstract idea since the claims recite generic computer elements
2. [18.7] Court Cases Finding Eligible Claims Under Alice In the following cases, the claims were found, in accordance with Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014), to be patent eligible under 35 U.S.C. §101: •
DDR Holdings, LLC v. Hotels.com, L.P., 773 F.3d 1245 (Fed.Cir. 2014) Part 1 fail — directed to abstract idea of analyzing websites and web traffic Part 2 pass — substantially more than the abstract idea since the claims recite a solution necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks
•
Bascom Global Internet Services, Inc. v. AT&T Mobility LLC, 827 F.3d 1341 (Fed.Cir. 2016) Part 1 fail — directed to abstract idea of filtering Internet content Part 2 pass — substantially more than the abstract idea since the claims recite a particular arrangement of elements that are a technical improvement over prior art ways of filtering such content
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 15
§18.8
•
INTELLECTUAL PROPERTY LAW
Rapid Litigation Management Ltd. v. CellzDirect, Inc., 827 F.3d 1042 (Fed.Cir. 2016) Part 1 pass — directed to a series of steps that provide a tangible and useful result Part 2 — not analyzed
•
Enfish, LLC v. Microsoft Corp., 822 F.3d 1327 (Fed.Cir. 2016) Part 1 pass — directed to self-referential table in a database. Part 2 — substantially more than the abstract idea since the claims recite an improvement in computer technology
3. [18.8] United States Patent and Trademark Office’s Handling of Alice Caselaw At the same time that the courts were wrestling with Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014), caselaw, the United States Patent and Trademark Office wrestled with Alice in practically applying its decision to cases before the USPTO Examining Corps. (See discussion of Alice in §18.5 above.) To help the examiners, many of whom are not attorneys, the USPTO issued a series of memorandums that provided guidelines to the examiners. Subsequent cases to Alice were also the subject of memorandums, and it is expected that more memorandums will be issued by the USPTO over time. Sections 18.9 – 18.10 contain a list and general synopsis of the memorandums. The USPTO stated in a June memorandum that “[n]otably, Alice Corp. neither creates a per se excluded category of subject matter, such as software or business methods, nor imposes any special requirements for eligibility of software or business methods.” Memorandum from the USPTO, Preliminary Examination Instructions in view of the Supreme Court Decision in Alice Corporation Pty. Ltd. v. CLS Bank International, et al., p, 1 (June 25, 2014); 79 Fed.Reg. 36782, n.9 (June 30, 2014). Further, the Federal Register and 2014 Interim Eligibility Guidance Quick Reference Sheet (see §18.41 below) lay out a formulaic flow chart for patent eligibility under 35 U.S.C. §101. In that flowchart test, Step 1 is to ask “Is the claim to a process, machine, manufacture or composition of matter?” If yes, proceed. Step 2A is to ask “Is the claim directed to a law of nature, a natural phenomenon, or an abstract idea (judicially recognized exception)?” If no, the claim qualifies under §101. In this step, the Reference Sheet states that “directed to” means the exception is recited in the claim, is set forth, or describes the exception. Further, if the claim, when viewed as a whole, clearly does not seek to “tie up” any judicial exception, use the “streamlined analysis.” The 79 Fed.Reg. 74,618 (Dec. 16, 2014) outlines some cases with abstract idea examples. If yes, proceed to Step 2B. Step 2B is to ask “Does the claim recite additional elements that amount to significantly more than the judicial exception?” If yes, the claim is eligible under §101. The Reference Sheet states
18 — 16
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.10
that the elements should be considered both individually and as an ordered combination. It also notes that even if “individual elements when viewed on their own may not appear to add significantly more, but when viewed in combination may amount to significantly more than the exception.” a. [18.9] January 2015 Addendum to December 2014 Memorandum In the January 2015 addendum to the December 2014 memorandum, the United States Patent and Trademark Office explained the two-part test under Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014), by analyzing hypotheticals and actual cases and provided a number of examples. See discussion of Alice in §18.5 above. Cases analyzing part one of the Alice test — hypothetical claims of isolating and removing malicious code from electronic messages that are eligible: •
DDR Holdings, LLC v. Hotels.com, 773 F.3d 1245 (Fed.Cir. 2014) (found eligible)
•
Research Corporation Technologies Inc. v. Microsoft Corp., 627 F.3d 859 (Fed.Cir. 2010) (found eligible)
•
SiRF Technology, Inc. v. International Trade Commission, 601 F.3d 1319 (Fed.Cir. 2010) (found eligible)
Cases analyzing part two of the Alice test: •
Digitech Image Technologies LLC, v. Electronics for Imaging, Inc., 758 F.3d 1344 (Fed.Cir. 2015) (found ineligible)
•
Planet Bingo, LLC v. VKGS LLC, 576 Fed.Appx. 1005 (Fed.Cir. 2014) (found ineligible)
•
buySAFE, Inc. v. Google, Inc., 765 F.3d 1350 (Fed.Cir. 2014) (found ineligible)
•
Ultramercial, LLC v. Hulu, LLC, 657 F.3d 1323 (Fed.Cir. 2014), vacated, 132 S.Ct. 2431 (2012) (found ineligible)
b. [18.10] July 2015 Update and Appendix In July 2015, the United States Patent and Trademark Office included examples of cases decided under Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014): •
Google Inc. v. SimpleAir, Inc., No. CBM 2014-00170, 2015 WL 331089 (Jan. 22, 2015) (holding claim eligible for claiming “ordered combination”)
•
DietGoal Innovations LLC v. Bravo Media LLC, 599 Fed.Appx. 956 (Fed.Cir. 2015) (claims found ineligible for failing to add significantly more than abstract idea)
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 17
§18.11
INTELLECTUAL PROPERTY LAW
A series of hypotheticals were also included, which laid out eligible and ineligible hypothetical claims. A series of old cases are analyzed after Alice: •
Parker v. Flook, 437 U.S. 584, 57 L.Ed.2d 451, 98 S.Ct. 2522 (1978) (revisiting In re Flook, 559 F.2d 21 (1977), in light of Alice and still finding claims ineligible)
•
Diamond v. Diehr, 450 U.S. 175, 67 L.E.2d 155, 101 S.Ct. 1048 (1981) (finding claims eligible in light of Alice)
•
Internal Combustion Engine — U.S. Patent No. 5,533,489 (Mar. 30, 1995) (found eligible)
•
System Software — BIOS U.S. Patent No. 5,230,052 (Oct. 1, 1990) (found eligible)
III. THE BUSINESS METHOD PATENT A. [18.11] Definition of “Business Method Patent” Since business method patents are a relatively new creation, there are many definitions of “business method patent.” A “business method patent” has been defined in different ways by different people, which has led to great confusion. 1. [18.12] Authors’ Definition The authors define a “business method” as a computer-implemented business process that achieves a particular business objective. A “business method” may also be a computerimplemented system for achieving the business objective. Both of these types of business methods fall within the statutory scheme for “patentable” subject matter as defined in 35 U.S.C. §101. As noted in §18.5 above, generally, nonpatentable subject matter includes abstract ideas such as mathematical equations, mental processes, physical phenomena, and laws of nature. On the other hand, processes, apparatus, composition of matter, or manufacture is clearly patentable subject matter under 35 U.S.C. §101. Thus, when one can ground a business method-type invention (see §§18.14 – 18.18 below regarding ways to claim a business method patent) in hardware of some sort, such as a computer-implemented process or apparatus for achieving a business goal and claim substantially more than the abstract idea pursuant to Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014), the claims are directed to statutory subject matter and should not be rejected under 35 U.S.C. §101. As a result, a crafty patent attorney is typically able to avoid a rejection by the United States Patent and Trademark Office that the claim fails to satisfy 35 U.S.C. §101 by properly drafting the claims. 2. [18.13] Public’s Definition The public (including the media) typically has another definition for a “business method.” This definition is probably too broad, however, as many believe that any business process or
18 — 18
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.15
method is patentable. However, as the software and business method caselaw noted in §§18.3 – 18.4 above makes clear, a mental process or manual series of steps to accomplish a business objective is not patentable. In fact, it has never been considered to be something for which one is entitled to receive a patent. However, the authors have been asked by an increasing number of clients whether a particular method of doing business is patentable. For example, a hypothetical client might ask if a method for determining the value of a business plan is patentable since it is clearly a business method according to the client’s understanding of the definition of “business method.” When asked to describe the “process,” the client will say that it involves manually generating data about the business plan and then storing this data in a database. After counsel explains to the client that a purely manual process is not patentable, the client then asks whether placing the data into a database that could be later searched would render the invention patentable. While merely placing the data into a database does not render the process for generating the data patentable, if the method for generating the data about each business plan was automated or performed by a computer, then the process might be directed to statutory subject matter. The client is confused because it seems like a process that was not patentable suddenly becomes patentable if it is put into the proper context by a clever patent attorney. The key to this metamorphosis is the claims that are written by the patent attorney and that determine the scope of the patent. B. [18.14] Drafting of Claims in a Business Method Patent The claims of a business method patent typically fall into one of four categories: (1) meansplus-function-type claims; (2) apparatus/system claims; (3) Beauregard-type claims (see In re Beauregard, 53 F.3d 1583 (Fed.Cir. 1995)); and (4) method claims. To aid in understanding each type of claim, a hypothetical invention is discussed in §§18.15 – 18.18 below along with an example of a claim for each category. The hypothetical business method invention is a system and process for making online shopping easier by providing automatic checkout for a user who has previously registered with the online shopping site. This “hypothetical” invention is actually the infamous Amazon.com “one-click patent,” U.S. Patent No. 5,960,411 (filed Sept. 12, 1997) (’411 Patent), which may be found at the United States Patent and Trademark Office’s website at http://patft.uspto.gov. The following sections use the claims from this patent (as well as the authors’ own means-plus-function and Beauregard claims) to illustrate the differences between the sets of claims. The ’411 Patent is typically referred to as a “business method patent” since it protects a method of doing business (i.e., order placing and fulfillment using a single action of the user). 1. [18.15] Means-Plus-Function Claims A means-plus-function claim is a type of statutorily defined claim set forth in 35 U.S.C. §112(f), which states, “An element in a claim for a combination may be expressed as a means or step for performing a specified function without the recital of structure, material, or acts in support thereof, and such claim shall be construed to cover the corresponding structure, material, or acts described in the specification and equivalents thereof.” The statute provides that a claim may be written in the so-called “means-plus-function” format and then specifies how this type of claim is to be interpreted.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 19
§18.15
INTELLECTUAL PROPERTY LAW
A means-plus-function-style claim is intended to permit a patent attorney to claim an invention by claiming the function being performed without explicitly claiming the hardware that performs this function. For a software patent or a business method patent, it is often easier to claim a piece of software in the means-plus-function style of claim. Often, one can prepare a method claim (as a series of steps, each of which performs a function) and then easily generate the means-plus-function claim based on the method claim with each step in the method claim being a different means element. For example, the method claim might recite the step of “converting an incoming data signal into a common intermediate data format signal,” while the corresponding method claim might recite “means for converting an incoming data signal into a common intermediate data format signal.” A claim written in means-plus-function format may also be fraught with danger. Unless the specification of the patent that contains the means-plus-function claim is well drafted and includes a description of each function being performed and what structure performs each function, the patent later may be found invalid for failing to describe the structure in the specification that performs each function being claimed. Further, the means-plus-function-type claim has fallen out of favor with many patent attorneys because they believe that the resultant coverage from this type of claim is very limited due to the rulings of the Federal Circuit and the U.S. Supreme Court about claims of this type. See, e.g., Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17, 137 L.Ed.2d 146, 117 S.Ct. 1040, reaff’d on remand,114 F.3d 1161 (Fed.Cir. 1997). Although this type of claims has fallen out of favor as of the time of this publication, one could consider including a set of means-plus-function claims in a business method patent as it is difficult to predict future precedential rulings. Additionally, a means-plus-function-type claim might survive a prior art challenge while the other claims might not. The following is an example of a means-plus-function-type claim that might have appeared in U.S. Patent No. 5,960,411 (filed Sept. 12, 1997) (note that since the ’411 Patent did not contain any means-plus-function claims, this claim was created by the authors using the apparatus claims of the ’411 Patent for guidance): A. A system for generating an order, comprising: means for ordering using a shopping cart; means for ordering using a single action further comprising means for storing information about a plurality of users, means for receiving an order from a particular user that occurs based on a single action, and means for placing an order of the particular user by retrieving information about the particular user from the storing means; and means for fulfilling the order of the particular user based on the single action ordering means.
18 — 20
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.16
This claim does not contain any structural elements but defines each element in terms of the function being performed pursuant to 35 U.S.C. §112. In order for this claim to withstand scrutiny and challenges, the specification must be written so that the structure that performs each function is clearly described. 2. [18.16] Apparatus/System Claims An apparatus/system-type claim is the usual type of claim that appears in a patent. In the case of U.S. Patent No. 5,960,411 (filed Sept. 12, 1997), the patent attorney included two different kinds of apparatus claims — a server claim and a client claim. The reason for the two different kinds of claims is that each claim might be infringed by a different third party, and each claim protects two different implementations of the business method system being protected by the patent. The following server claim appears in the ’411 Patent: 9. A server system for generating an order comprising: a shopping cart ordering component; and a single-action ordering component including: a data storage medium storing information for a plurality of users; a receiving component for receiving requests to order an item, a request including an indication of one of the plurality of users, the request being sent in response to only a single action being performed; and an order placement component that retrieves from the data storage medium information for the indicated user and that uses the retrieved information to place an order for the indicated user for the item; and an order fulfillment component that completes a purchase of the item in accordance with the order placed by the single-action ordering component. Id. The client claim that appears in the ’411 Patent is the following: 6. A client system for ordering an item comprising: an identifier that identifies a customer; a display component for displaying information identifying the item; a single-action ordering component that in response to performance of only a single action, sends a request to a server system to order the identified item, the request including the identifier so that the server system can locate additional information
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 21
§18.17
INTELLECTUAL PROPERTY LAW
needed to complete the order and so that the server system can fulfill the generated order to complete purchase of the item; and a shopping cart ordering component that in response to performance of an add-toshopping-cart action, sends a request to the server system to add the item to a shopping cart. Id. Note that the claim elements in each of these claims are very similar. However, in the server claim, the shopping cart component, single-action ordering component, and order fulfillment component are server-based components, and no mention is made of the technique by which a user places the initial order with the system. Thus, this claim would cover any server-based system that performed a single-action order regardless of the method by which the user places the order, so, hypothetically, the claim would cover a system in which a user phones an order into a catalog and the order is processed using a single action as specified in Claim 9. As a result, the claim would be infringed by a company that has a server that performs the single-action order regardless of the how the initial order is generated. In contrast, the client claim has a display component, a single-action ordering component, and a shopping cart ordering component that are all elements of the client system. Thus, this claim covers a system in which a client has the necessary elements and the server performs some functions to support the client. Therefore, each different kind of apparatus claim covers a different implementation of the system, and a different third party might infringe each different claim. 3. [18.17] Beauregard Claims In In re Beauregard, 53 F.3d 1583 (Fed.Cir. 1995), the court found that a computer program product claim (i.e., a computer program embodied in a tangible medium such as floppy disks) is patentable. The claims of the patent application in question constituted a new type of computer software claims, which are now referred to as Beauregard claims in light of this case. Given the closeness of software-type patents and business method patents, claims of this type may prove useful in order to claim a business method as set forth below: A. A system for generating an order on a computer system that has a processor that executes a plurality of computer instructions to implement the order generation, the plurality of instructions comprising: instructions that generate an order using a shopping cart; instructions that generate an order using a single action further comprising instructions that store information about a plurality of users, instructions that receive an order from a particular user that occurs based on a single action, and instructions that place an order of the particular user by retrieving information about the particular user from the storage; and instructions that fulfill the order of the particular user based on the single action ordering.
18 — 22
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.18
Note that this claim is similar to the means-plus-function claim set forth in §18.15 above in that it claims the functions being performed. However, this claim does not contain any means elements and probably should not be interpreted according to 35 U.S.C. §112, resulting in a broader claim than a means-plus-function claim with substantially similar elements. The reasoning is that this type of claim claims instructions (and not just a function) and has a structure (the instructions) that takes it out of the control and scope of §112. Thus, to prepare a well-drafted business method patent, it would be useful to include some Beauregard-type claims. 4. [18.18] Method Claims Another typical way to protect a business method invention is using a method-type claim that covers a method as a series of steps being carried out. The following are examples of the method claims in U.S. Patent No. 5,960,411 (filed Sept. 12, 1997): 1. A method of placing an order for an item comprising: under control of a client system, displaying information identifying the item; and in response to only a single action being performed, sending a request to order the item along with an identifier of a purchaser of the item to a server system; under control of a single-action ordering component of the server system, receiving the request; retrieving additional information previously stored for the purchaser identified by the identifier in the received request; and generating an order to purchase the requested item for the purchaser identified by the identifier in the received request using the retrieved additional information; and fulfilling the generated order to complete purchase of the item whereby the item is ordered without using a shopping cart ordering model. *** 11. A method for ordering an item using a client system, the method comprising: displaying information identifying the item and displaying an indication of a single action that is to be performed to order the identified item; and
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 23
§18.19
INTELLECTUAL PROPERTY LAW
in response to only the indicated single action being performed, sending to a server system a request to order the identified item whereby the item is ordered independently of a shopping cart model and the order is fulfilled to complete a purchase of the item. See http://patft.uspto.gov. Claim 1 is directed to a method for placing an order for an item that has a series of steps that are used to implement the method of placing the order. In contrast, Claim 11 is directed to a method for ordering an item using a client system that closely tracks Claim 6 in §18.15 above and would cover the same third party. As with the apparatus claims in §18.16, each claim attempts to cover a different aspect of the system. Arguably, Claim 1 is directed to nonstatutory subject matter as it is an abstract method that is not specifically tied to any computer or the like. However, the single recitation that it is a “computer-implemented method” turns a nonstatutory subject-matter claim into a statutory subject-matter claim. In the claims of the ’411 Patent, the patent attorney was able to introduce the idea of a computer system (the client system) without explicitly claiming the computer system, resulting in a broader claim. C. [18.19] Statutes Applicable to Business Method Patents To further understand a business method patent and its claims, the governing statutes should be considered. The statutory requirements of a business method patent are identical to the statutory requirements of any other patent in any other technology field. Thus, a business method patent must be enabling (see 35 U.S.C. §112), useful (see 35 U.S.C. §101), clear and concise (see 35 U.S.C. §112), comprised of statutory subject matter (see 35 U.S.C. §101), novel (see 35 U.S.C. §102), not obvious (see 35 U.S.C. §103), and must describe the best mode of carrying out the invention (see 35 U.S.C. §112). However, for a business method patent, certain of these statutory requirements tend to pose more of a problem than in other fields of technology. In particular, the statutory subject-matter requirement has been particularly troublesome for business method patents. Some of the requirements that tend to cause more problems for business method and software patents are discussed in more detail in §§18.20 – 18.23 below. 1. [18.20] Enablement and Best Mode A business method patent (like any other patent) must be enabling so that the patent description and claims enable one of ordinary skill in the art to make or use the invention and disclose the best mode of carrying out the claimed invention. 35 U.S.C. §112. See the discussion of the post-September 16, 2012, best-mode law in §18.27 below. For a business method patent or software patent, a defendant in litigation may often argue that the patent in suit is not enabling or does not disclose the best mode. 35 U.S.C. §112(a) states: The specification shall contain a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same, and shall set forth the best mode contemplated by the inventor or joint inventor of carrying out the invention.
18 — 24
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.21
The Federal Circuit, in Northern Telecom, Inc. v. Datapoint Corp., 908 F.2d 931, 941 (Fed.Cir. 1990), explained that enablement “requires determination of whether a person skilled in the pertinent art, using the knowledge available to such a person and the disclosure in the patent document, could make and use the invention without undue experimentation.” The court noted, “When the challenged subject matter is a computer program that implements a claimed device or method, enablement is determined from the viewpoint of a skilled programmer using the knowledge and skill with which such a person is charged.” Id. A business method or software patent might typically be challenged as invalid for lack of enablement when (a) the patentee has described a software-implemented business method but has not provided sufficient details of the software that implements the business method or (b) the patentee has used means-plus-function claims but did not explicitly describe how a particular claimed function was being performed by the software. For example, the claim might recite a “means for causing,” but the specification might not describe exactly how the causing function is implemented. Under the Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat 284 (2011), a patent cannot be challenged in court as being invalid for best mode. See 35 U.S.C. §282(b)(3), which states: “Invalidity of the patent or any claim in suit for failure to comply with . . . any requirement of section 112, except that the failure to disclose the best mode shall not be a basis on which any claim of a patent may be canceled or held invalid or otherwise unenforceable.” However, 35 U.S.C. §112(a) still contains the best mode requirement, and a business method or software patent might still be challenged at the United States Patent and Trademark Office as lacking best mode when a particular method, algorithm, or series of steps is being claimed and the patentee has a best mode of carrying out the invention (i.e., a preferred implementation of the algorithm that achieves the best results), but the patent application does not describe this best mode or preferred implementation. 2. [18.21] Statutory Subject Matter 35 U.S.C. §101 provides, “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” Section 101 was often used to reject software and business method patents since a software or business method patent is directed to a series of mental steps (known as the “mental steps doctrine”) and not statutory subject matter. As noted in §18.3 above, the mental steps doctrine is largely gone, and software and business methods are generally considered to be directed to statutory subject matter if tied to some type of tangible hardware unless they are seen as being directed to an abstract idea pursuant to the Alice Corporation Pty. Ltd. v. CLS Bank International, 573 U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014), caselaw. See §18.5 above. Thus, a properly drafted business method or software patent application should not run afoul of this statutory requirement. At the same time, it is often easy to fall into this type of rejection or challenge. For example, one of the authors once wrote a method claim for a software patent that recited “A method for ____________,” and this claim was rejected by the patent examiner as being directed to nonstatutory subject matter under §101. However, when the claim was rewritten to recite, “A computer-implemented method for
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 25
§18.22
INTELLECTUAL PROPERTY LAW
____________,” the examiner withdrew the rejection and allowed the claim. Thus, a well-drafted software or business method patent should easily avoid a nonstatutory subject-matter rejection or challenge. 3. [18.22] Novelty and Obviousness As with all other patents, a business method patent must be novel and nonobvious. 35 U.S.C. §102 defines what things and actions will destroy novelty and thus prevent someone from obtaining a patent for his or her ideas. A piece of prior art that might destroy the novelty of a patent is known as “anticipatory prior art.” Prior art encompasses publications, patents, articles, or actions that satisfy the criteria under §102. For example, 35 U.S.C. §102 provides that a person shall be entitled to a patent unless (1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention; or (2) the claimed invention was described in a patent issued under section 151, or in an application for patent published or deemed published under section 122(b), in which the patent or application, as the case may be, names another inventor and was effectively filed before the effective filing date of the claimed invention. (b) Exceptions. — (1) Disclosures made 1 year or less before the effective filing date of the claimed invention. — A disclosure made 1 year or less before the effective filing date of a claimed invention shall not be prior art to the claimed invention under subsection (a)(1) if — (A) the disclosure was made by the inventor or joint inventor or by another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or (B) the subject matter disclosed had, before such disclosure, been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor. (2) Disclosures appearing in applications and patents. — A disclosure shall not be prior art to a claimed invention under subsection (a)(2) if — (A) the subject matter disclosed was obtained directly or indirectly from the inventor or a joint inventor; (B) the subject matter disclosed had, before such subject matter was effectively filed under subsection (a)(2), been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or
18 — 26
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.23
(C) the subject matter disclosed and the claimed invention, not later than the effective filing date of the claimed invention, were owned by the same person or subject to an obligation of assignment to the same person. With the agenda and initiative of the United States Patent and Trademark Office for business method patents (described in more detail in §18.28 below) and the USPTO’s focus on providing improved searchable databases, many business method patents are being challenged on novelty grounds during prosecution at the USPTO and during litigation with a third party. Despite these improvements at the USPTO in its attempts to examine business method patents, the quality of the prior art located by the examiner is still suspect. Thus, it might very well be possible to find prior art that anticipates a business method patent if one is faced with defending against such a patent. A business method patent also must be nonobvious pursuant to 35 U.S.C. §103, which states: A patent for a claimed invention may not be obtained, notwithstanding that the claimed invention is not identically disclosed as set forth in section 102, if the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which the claimed invention pertains. Patentability shall not be negated by the manner in which the invention was made. As with the novelty statutory requirement, a piece of prior art that does not anticipate a patent might still render the patent unpatentable since the claims of the patent would be obvious to one of ordinary skill in the art in view of the known prior art. Counsel should be aware that it is much more difficult to prove that a patent is obvious since one must show that the combination of references shows the elements of the claim and that there is a motivation to combine the references. Cable Electric Products, Inc. v. Genmark, Inc., 770 F.2d 1015 (Fed.Cir. 1985), overruled in part by Midwest Industries, Inc. v. Karavan Trailers, Inc., 175 F.3d 1356 (Fed.Cir. 1999). 4. [18.23] The Leahy-Smith America Invents Act On September 16, 2011, President Obama signed into law the Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat 284 (2011). The law was supposed to bring the American patent system into line with how the rest of the world operated — that is, to move away from the “first-to-invent” system toward a “first-to-file” system. What resulted was a hybrid “first-inventor-to-file” system. Coupled with this new sweeping change in the American patent law was a set of reforms for post-issuance attacks on patents. Existing before the AIA was the inter partes reexamination and the ex parte reexamination, both tools for third parties to attack issued patents. The AIA left ex parte reexamination alone but changed inter partes reexamination into inter partes review and added a post-grant review, similar to the European review. Additionally, §18 of the AIA includes a transitional program for covered business method patents.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 27
§18.24
INTELLECTUAL PROPERTY LAW
The effect that these changes will have on business method patents could be significant, as they were actually designed to allow more powerful and broader attacks on business method patents, such as the transitional program for covered business method patents. a. [18.24] Post-Grant Review The addition of the post-grant review by the Leahy-Smith America Invents Act will have an impact on business method patents. The AIA outlines which statutes can be used to attack patents in each new regime — the post-grant review and the inter partes review. This is significant for business method patents because a patent eligibility attack under 35 U.S.C. §101 is not available for an inter partes review but is available for a post-grant review, along with any other attack. An inter partes review is limited to 35 U.S.C. §§102 and 103 consisting of printed publications of prior art. Thus, post-grant review allows third parties to attack business method patents as they were not able to do before. However, this power is limited by all of the other restrictions placed on post-grant review. Specifically, post-grant review is available only during a nine-month window after issuance of a patent. Practically, this means that third parties will have to monitor patent issuances in order to assess whether to file a post-grant review request. b. [18.25] Transitional Program for Covered Business Method Patents Because of the concern around particular kinds of business method patents, the Leahy-Smith America Invents Act includes a transitional program that runs from September 16, 2012, to September 16, 2020. Essentially, this program allows a post-grant review, with any statute eligible for use, to be filed against covered business methods at any time. This removes a hurdle to using a post-grant review within the nine-month window after issuance. Instead, any covered business method patent in existence during this time period is vulnerable. The issue of which business method patents are “covered” and which are not is another important and as yet unresolved point. The United States Patent and Trademark Office’s regulations state that covered patents are those that claim a method or apparatus “for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except . . . patents for technological innovations.” 37 C.F.R. §42.301(a). This leaves two questions: what is a “financial product,” and what is a “technological innovation.” The USPTO’s definition of “technological innovation” is circuitous and not helpful. It states that a technological innovation “solves a technical problem using a technical solution.” 37 C.F.R. §42.301(b). This definition will clearly have to be interpreted through the courts. As for the term “financial product,” the current consensus of thought is that “financial” will be broadly construed and any business method patents dealing in any way with some aspect of finance will be eligible. Insurance, banking, and commerce in general may all be affected. If so, this will provide another weapon against business method patents in general, as many business method patents have some type of financial aspect to them.
18 — 28
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.29
c. [18.26] Tax Strategies Added by the Leahy-Smith America Invents Act is a provision that excludes any strategy for “reducing, avoiding, or deferring tax liability” by itself. AIA §14. There is a caveat for software or technology that is “used solely for preparing a tax or information return.” Id. But for strictly business method patents that deal with taxes, this provision may arise as a defense to infringement or a way to attack existing patents. d. [18.27] Best Mode The final provision of the Leahy-Smith America Invents Act of interest to the business method patent is §15, the best-mode provision. After September 16, 2012, disclosure of the best mode of practicing a patent is still required by the United States Patent and Trademark Office, but failure to make the disclosure may not be used to attack the validity of the claims. See 35 U.S.C. §282(b)(3)(A). This is significant as it appears to remove a weapon for attacking business method patents, albeit a rarely used one, even in a post-grant review or transitional review for covered business method patents.
IV. [18.28] UNITED STATES PATENT AND TRADEMARK OFFICE GUIDELINES FOR BUSINESS METHOD PATENTS The uproar over business method patents has led the United States Patent and Trademark Office to devote a portion of its website specifically to these patents. See Patent Business Methods, www.uspto.gov/patents-getting-started/patent-basics/types-patent-applications/utilitypatent/patent-business, which contains a wealth of valuable information about business method patents and how the USPTO is attempting to examine those patents. The website also has resources that might prove useful to both patent prosecutors attempting to secure business method patents for their clients and patent litigators who are defending against or asserting business method patents. In an interview with an examiner, one of the authors was told that a client’s invention was considered to be a business method patent and that the USPTO is very careful with these types of patents due to the public’s perception of the USPTO issuing a large number of questionable business method patents. A. [18.29] United States Patent and Trademark Office Update on Business Methods The United States Patent and Trademark Office has been struggling since 2000 with business method patents and the public perception of them. In 2000, the USPTO issued Business Methods Patent Initiative: An Action Plan (Mar. 2000), in which the USPTO set out its approach to the perceived business method patent problem. Also, in 2000, the USPTO held a Business Methods Partnership meeting to explain the USPTO’s handling of business method patents to the public. The USPTO held an Update on Business Methods for the Business Methods Partnership Meeting on June 19, 2007. The presentation noted that more than 9,000 Class 705 patent applications (which include most business method patent applications) were filed in 2006, which is similar to the number filed in 2000. The presentation also noted that the allowance rate is about 20 percent, as compared to 45 percent in 2001, indicating that the USPTO is taking a harder
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 29
§18.30
INTELLECTUAL PROPERTY LAW
review of business method patent applications. In addition, the presentation noted that the USPTO was requesting the ability to hire examiners for Class 705 with specific business method experience (finance, tax, etc.) who were not typically qualified to be examiners under preexisting guidelines, which required a science or engineering background. In addition to the outreach by the USPTO, the USPTO’s website also contains useful information about the examination of business method patent applications, including the entire classification system for Class 705 at www.uspto.gov/web/offices/ac/ido/oeip/taf/def/705.htm. This classification system can be a very useful search tool as it will permit someone to determine how a particular business method might be classified by the USPTO so that a search can be performed for the particular class using the USPTO’s patent search page at http://patft.uspto.gov/. B. [18.30] Prior Art for Business Method Patents In 2001, the United States Patent and Trademark Office issued a notice to the public of the search criteria used during the examination of patent applications related to computerimplemented business methods in Class 705. See 66 Fed.Reg. 30,167 (June 5, 2001). The notice sets out the mandatory prior art resources, including patents, foreign patents, and nonpatent literature, and the various literature databases to be searched for each application as well as databases to be used for subject-specific searches. The notice also sets out supplemental databases that are available to an examiner during the examination of the business method patent. The USPTO also has a business methods section on its website that may be accessed at www.uspto.gov/patents-getting-started/patent-basics/types-patent-applications/utility-patent/ patent-business. As noted in §18.29 above, Class 705 is the classification in which all business method patents, as well as software-related patents, are classified by the USPTO. The USPTO white paper explains that all Class 705 searches utilize the list of core databases that includes various databases containing technology information. Furthermore, for each particular business method subject matter area, such as, for example, Subclass 14 directed to Advertising/Coupon Redemption/Incentives, the white paper lists other databases to be reviewed. The USPTO website also contains a paper by Wynn W. Coggins entitled Prior Art in the Field of Business Method Patents — When is an Electronic Document a Printed Publication for Prior Art Purposes? (Fall 2002), www.uspto.gov/patents-getting-started/patent-basics/types-patentapplications/utility-patent/business-methods-17, that explains the problem of finding prior art for business method patents and the types of prior art that may be used to reject/invalidate a business method patent. Particularly interesting is Part IVG of Coggins’ paper, discussing in part electronic publications, websites, and software products and explaining that each of these references may be used as prior art, provided certain criteria are met, such as proof that the publication of the reference predates the invention. C. [18.31] Other Training Materials The United States Patent and Trademark Office’s website also contains a large amount of other training materials for the public about various aspects of business method patents. See www.uspto.gov/patents-getting-started/patent-basics/types-patent-applications/utility-patent/ patent-business. These materials summarize that although an abstract idea is not patentable under
18 — 30
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.31
35 U.S.C. §101, an abstract idea when practically applied to produce a useful, concrete, and tangible result satisfies the statutory requirement. The materials also provide examples of the application of this standard under the caselaw. The website also has training materials for formulating and communicating rejections under 35 U.S.C. §103 for applications directed to computer-implemented business method inventions that provide guidance to an examiner (and, hence, a patent attorney prosecuting a business method patent application) about a proper rejection under §103. These materials set out the standards governing a rejection, such as the Graham test (see Graham v. John Deere Company of Kansas City, 383 U.S. 1, 15 L.Ed.2d 545, 86 S.Ct. 684 (1966)), and provide examples of proper and improper rejections under §103 for business method inventions. Each of the examples provided in the training materials walks through the entire analysis for a §103 rejection, including the facts on which the rejection is made and the showing of the motivation to combine the two references under §103. See Business Methods Patents — Formulating and Communicating 103 Rejections, www.uspto.gov/patents-getting-started/patent-basics/types-patent-applications/utilitypatent/business-methods-19. The website also contains training materials for computer-implemented inventions that are directed to business, artificial intelligence, and mathematical processing applications. In these materials, the USPTO sets out examples in which an invention is described (along with exemplary independent and dependent claims for the invention), and then the various steps and inquiries to be applied to the exemplary claims under 35 U.S.C. §101 are set forth and answered. The inquiries set forth in the examination guidelines provide a step-by-step guide through the inquiries to determine whether an invention may be directed to nonstatutory subject matter. The examination guidelines provide a patent attorney with guidance on how to properly draft a business method patent to avoid a rejection under §101 and provide a litigator with guidance on how to prepare a challenge to an issued patent. See Business Methods Patents — Formulating and Communicating 103 Rejections. In addition to the above resources, the USPTO’s website contains various other training materials and documents that may prove useful in understanding the USPTO’s position and examination standards with respect to business method patents. These other materials include John J. Love and Wynn W. Coggins, Successfully Preparing and Prosecuting a Business Method Patent Application (Spring 2001), www.uspto.gov/patents-getting-started/patent-basics/typespatent-applications/utility-patent/patent-business; a final version of Examination Guidelines for Computer-Related Inventions, www.uspto.gov/web/offices/com/sol/og/con/files/cons093.htm; and updated examination guidelines for computer-related inventions that are consistent with the caselaw on business method patents (see the USPTO’s MANUAL OF PATENT EXAMINING PROCEDURE §2106 (8th ed. 2001, rev. 9 Nov. 2015), www.uspto.gov/web/offices/pac/mpep. Overall, the USPTO’s website has many different resources that relate to business method patents and serves as a valuable resource for information about these patents.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 31
§18.32
V.
INTELLECTUAL PROPERTY LAW
[18.32] NATIONAL AND REGIONAL PATENT OFFICE GUIDELINES FOR HANDLING BUSINESS METHOD PATENTS
Similar to the United States Patent and Trademark Office, the other major patent offices around the world, most notably the European Patent Office (EPO), www.epo.org, and the Japanese Patent Office (JPO), www.jpo.go.jp, have struggled with how to handle and examine business method patents. A. [18.33] Trilateral Offices Group Report The Trilateral Offices Group is formed by representatives of the United States Patent and Trademark Office, the European Patent Office, and the Japanese Patent Office and tackles patentrelated issues that affect each of the patent offices similarly. The Trilateral Offices Group from time to time will conduct a study and issue a report on a particular topic. From 1985 until 2007, one of these reports was the annual Trilateral Statistics Report. This has been replaced by the Four Office Statistics Report, which also includes the input of the Korean Intellectual Property Office. See Four Office Statistics Report, 2010 Edition, www.trilateral.net/statistics/tsr/fosr2010/ fullreport.pdf. On the topic of business method patents, a comparative study was conducted by the USPTO and the JPO in 1999 that resulted in the Report on Comparative Study Carried Out Under Trilateral Project B3b Business Method Related Inventions (June 14 – 16, 2000) (Trilateral Report), which is available through the Trilateral Offices Group’s website at www.trilateral.net/projects/Comparative/business.html (case sensitive). In this project, the USPTO and the JPO conducted a comparative study using two groups of hypothetical claim sets, with the first group having two hypothetical claim sets focused on business method related inventions proposed by the JPO and the second group having six hypothetical claims sets proposed by the USPTO in the field of the Internet, business methods, database, and graphics. For the study, each claim set in Group 1 was analyzed by the USPTO and the JPO as to statutory subject matter, novelty, and inventive step, while each claim set in Group 2 was analyzed by the USPTO and the JPO as to scope of the claims, source of search, search strategy, and documents considered relevant. The Trilateral Report illustrates the differences in interpretation and examination of business method patents for the USPTO and the JPO. For example, the first claim set in Group 1 is directed to a method for granting points and contains six claims: 1. A service method of granting points in accordance with an amount of the merchandise transaction, comprising the steps of: designating by a customer, a name of a person to whom points issued in accordance with the amount of the merchandise transaction are to be granted; selecting, in response to the name of the designated person, the address of the designated person from a customer list; registering the address of the designated person in a customer list if the address is not available;
18 — 32
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.33
storing the value of the points granted to the designated person in the customer list; and sending a notice that the points were granted, to the address of the designated person. 2. A service method, wherein points are granted in accordance with an amount of the merchandise transaction made by a customer at a shop on the Internet, comprising the steps of: designating by the customer, a name of a person to whom points issued in accordance with the amount of the merchandise transaction are to be granted; selecting, in response to the name of the designated person, the e-mail address of the designated person from a customer list; registering the e-mail address of the designated person in a customer list if the email address is not available; storing the value of the points granted to the designated person in the customer list; and sending a notice that the points were granted, to the e-mail address of the designated person. 3. A service method for granting points in accordance with an amount of the merchandise transaction at a shop on the Internet, comprising the steps of: designating to a server, a name of a person to whom points issued in accordance with the amount of the merchandise transaction are to be granted; selecting by the server, in response to the name of the designated person, the e-mail address of the designated person from a customer list storage unit, which is provided on the server; registering by the server, the e-mail address of the designated person in a customer list storage unit if the e-mail address is not available; storing by the server, the value of the points granted to the designated person in the customer list storage unit; and sending by the server, a notice that the points were granted, to the e-mail address of the designated person.
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 33
§18.33
INTELLECTUAL PROPERTY LAW
4. A service method for granting points in accordance with an amount of the merchandise transaction at a shop on the Internet, comprising the steps of: designating to a server, a name of a person to whom points issued in accordance with the amount of the merchandise transaction are to be granted; selecting by the server, in response to the name of the designated person, the e-mail address of the designated person from a customer list storage unit, which is provided on the server; registering by the server, the e-mail address of the designated person in a customer list storage unit if the e-mail address is not available; storing by the server, the value of the points granted to the designated person in the customer list storage unit; and sending by the server, a notice that the points were granted, to the e-mail address of the designated person, and the steps being characterized in that: the points issued against the merchandise transaction are calculated as those issued against the cost of the merchandise transaction inclusive of taxes[.] 5. A service method for granting points in accordance with an amount of the merchandise transaction at a shop on the Internet, comprising the steps of: designating to a server, a name of a person to whom points issued in accordance with the amount of the merchandise transaction are to be granted; selecting by the server, in response to the name of the designated person, the e-mail address of the designated person from a customer list storage unit, which is provided on the server; registering by the server, the e-mail address of the designated person in a customer list storage unit if the e-mail address is not available; storing by the server, the value of the points granted to the designated person in the customer list storage unit; and sending by the server, a notice that the points were granted, to the e-mail address of the designated person, and the steps being characterized in that:
18 — 34
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.33
the number of points awarded are increased to 10 times the number of points normally awarded for that merchandise transaction in one out of every twenty transactions. 6. A service method for granting points in accordance with an amount of the merchandise transaction at a shop on the Internet, comprising the steps of: designating to a server, a name of a person to whom points issued in accordance with the amount of the merchandise transaction are to be granted; selecting by the server, in response to the name of the designated person, the e-mail address of the designated person from a customer list storage unit, which is provided on the server; registering by the server, the e-mail address of the designated person in a customer list storage unit if the e-mail address is not available; storing by the server, the value of the points granted to the designated person in the customer list storage unit; calling by the server, a comprehensive list of merchandise from a merchandise information storing means for storing a list of merchandise corresponding with the name and price of the merchandise purchased or the number of points necessary for the purchase thereof; converting by the server, the comprehensive list of merchandise into a list, such that the merchandise available merely by redeeming the value of the points can be distinguished from other merchandise; and sending by the server, a notice that the points were granted, attaching thereto the comprehensive list of merchandise as converted, to the e-mail address of the designated person. Trilateral Report, App. 1, §1.1, www.trilateral.net/projects/ Comparative/business/1a.pdf (case sensitive). In determining the scope of the claims, the USPTO stated that all of the claims lacked clarity as they did not specifically recite a step of granting points, but the JPO did not see any problem with the clarity of the claims. Trilateral Report §2.1.1. In determining whether Claims 1 – 6 were directed to statutory subject matter, the USPTO stated that Claims 1 – 5 were directed to nonstatutory subject matter (as the claims did not recite a practical application), while Claim 6 recited the ability to redeem points for merchandise (the practical application) and thus was directed to statutory subject matter. Trilateral Report §2.1.2. The JPO stated that statutory subject matter resulted if it fell under “a creation of technical idea by which law of nature is utilized” and that in practice a judgment was made to see if hardware resources were used in accordance with the examination guidelines for software-related inventions. Id. For the above claims, Claims 1 and 2 were not statutory as they were directed to an arbitrary arrangement of resources, while
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 35
§18.34
INTELLECTUAL PROPERTY LAW
Claims 3 – 6 were statutory. As is apparent from this comparison, the standards of the USPTO and the JPO for statutory subject matter are slightly different so that a claim that is statutory in the United States might not be statutory in Japan. A further discussion of the law in Japan is set forth in §18.35 below. The prior art analysis of the claims appears in §§2.1.3 – 2.1.5 of the Trilateral Report. Using hypothetical prior art, the USPTO and the JPO agreed that Claims 1 – 4 were not novel and lacked inventive step (were obvious over the prior art) and that Claim 6 was novel and had inventive step over the prior art, but they disagreed about Claim 5. For Claim 5, the USPTO reasoned that the prior art did not teach that the points were increased ten times in one out of twenty transactions, but the JPO reasoned that it was well known to provide frequent customers with better services and therefore Claim 5 lacked inventive step. This divergence between the JPO and the USPTO can be somewhat attributed to the difference between the obviousness standards in the United States and the inventive step standards in Japan. B. [18.34] European Patent Office Guidelines for Business Method Patents The Europeans hold a similar view as to business method patents as the United States Patent and Trademark Office. Absent the hardware connections, the abstract ideas are unpatentable. The EPO went as far as to issue a notice in October 2007 reminding applicants that abstract business methods would go unsearched. See Notice from the European Patent Office dated 1 October 2007 concerning business methods, www.epo.org/law-practice/legal-texts/officialjournal/2016/etc/se4/p228.html. Although the EPO did not participate in the Trilateral Report, the it did append its examination guidelines for business method patents to the report, so turning to the report can therefore be helpful in explaining how to proceed in Europe. See Report on Comparative Study Carried Out Under Trilateral Project B3b Business Method Inventions, App. 6 (June 2000), www.trilateral.net/projects/Comparative/business/6.pdf (case sensitive). These guidelines state, “Methods of doing business are . . . not to be considered to be inventions.” Id. The EPO then categorized the types of claims into three groups: abstract business method claims; business method claims that are implemented with a computer; and business method claims that are implemented with other apparatus, such as cell phones. The EPO explained the following approaches for each type of claim: (1) Claims to abstract business methods should be rejected on the grounds that they are excluded by Articles 52(2) and (3) [of the European Patent Convention], since they are methods of doing business “as such”. (2) Claims for computer-implemented business methods should be treated in exactly the same way as any other computer-implemented invention . . . . (3) Claims for other implementations of business methods should be treated using the same scheme for examination as for computer implementations. Id. This classification and this treatment of claims are consistent with the U.S. patent law, in which abstract algorithms are not statutory.
18 — 36
WWW.IICLE.COM
BUSINESS METHOD PATENTS
§18.35
NOTE: A case regarding a method of doing business “as such” is Pension Benefit Systems Partnership, T931/95, [2001] O.J.E.P.O. 441 (Tech.Bd.App. Sept. 8, 2000), in which a data processing method was not considered patentable because all the features of the claim involved the processing and production of purely administrative, actuarial, and financial information, thereby excluding any technical character to the invention. Similar criteria were applied in Auction Method/HITACHI, T258/03, [2004] O.J.E.P.O. 575 (Tech.Bd.App. Apr. 21, 2004), which dealt with an automatic auction method executed by a server computer. The EPO evaluated the auction method as a business method and therefore found it not patentable, but it acknowledged that a technical means to carry out mental steps could comprise an invention. See Dulce M. Miranda, Protecting software and business methods via the EPO, Patents in Europe 2011/2012, p. 12 (supplement to Intellectual Asset Management Magazine), www.iam-magazine.com/issues/ article.ashx?g=e7dd59e1-9255-4ff1-82e8-b2c29884a1f7. The EPO has stated that the term “computer-implemented invention” covers “claims which specify computers, computer networks or other conventional programmable digital apparatus whereby prima facie the novel features of the claimed invention are realized by means of a new program or programs.” Trilateral Report, App. 6. A computer-implemented business method would fall within this broad definition of “computer-implemented invention.” The EPO guidelines explain that the scheme for examining computer-implemented inventions is that (1) the claimed subject matter is presumed not to be excluded from patentability and (2) the subject matter of the claim is examined for novelty and inventive step. In the examination of inventive step, the objective technical problem solved by the invention as claimed when compared with the closest prior art is determined and, if no such objective technical problem can be determined, then the claim is rejected as lacking inventive step. Thus, the guidelines for examining business method patents in the EPO are consistent with U.S. patent practice. C. [18.35] Japanese Patent Office Guidelines for Business Method Patents The Japanese take a similar view of business method and software related patents. Such patents are allowable if they meet the criteria of (1) statutory subject matter (Patent Act art. 29(1)), (2) novelty (Patent Act art. 29(1)(i) – 29(1)(iii)), (3) inventive step (Patent Act art. 29(2)), and (4) description requirement (Patent Act art. 36(4)(i), 36(6)). Similar to the United States Patent and Trademark Office, the Japanese Patent Office has also struggled with how to examine and handle business method patents. As a result, the JPO has dedicated a portion of its website, www.jpo.go.jp, to information about business method patents. The JPO’s website contains links to various guidelines and procedures and includes a notice entitled Policies concerning Business Method Patents (Nov. 2000), which is quite similar to the USPTO’s Business Methods Patent Initiative: An Action Plan (Mar. 2000). See www.jpo.go.jp/tetuzuki_e/t_tokkyo_e/tt1211-055.htm. See also Major Judicial Precedents of Business Method-Related Inventions, www.jpo.go.jp/shiryou_e/s_sonota_e/pdf/gizyutu_han ketu_e/materials_01.pdf. In particular, the JPO notice clarifies its examination guidelines and explains that inventive step would be denied when the invention can be easily conceived through combining publicly known means and methods by those having common knowledge of the business field. As
ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION
18 — 37
§18.35
INTELLECTUAL PROPERTY LAW
examples, the JPO would deny inventive step for (1) application of known technology in another field (e.g., creating a medical search system using a publicly known file search system in the medical field), (2) the automation of manual tasks (e.g., creating a system for receiving over an Internet website orders that traditionally have been received by facsimile and telephone), and (3) the change of a design based on artificial arrangements (e.g., merely applying a generally known cooling-off system to an e-commerce apparatus). The JPO also reiterated the goal (similar to the USPTO) of expanding the database of prior art and cooperating with the USPTO and the European Patent Office to share prior art documents. The JPO will also implement a user-friendly search system for prior art and establish a cross-sectional classification for the business method technologies in addition to using experts and better training examiners to handle business method patents. Further, the JPO’s website contains revised examination guidelines for computer softwarerelated inventions, promulgated as part of the JPO’s implementing guidelines for inventions in specific fields. See Draft revised Examination Guidelines for Computer software-related Inventions (Nov. 2000), www.jpo.go.jp/iken_e/feedback_121102.htm, and Examination Guidelines for Patent and Utility Model in Japan, Pt. VII, Ch. 1 (Apr. 2012), www.jpo.go.jp/ cgi/linke.cgi?url=/tetuzuki_e/t_tokkyo_e/1312-002_e.htm. These guidelines contain a very detailed explanation of each requirement for the patentability of computer software-related inventions along with examples of inventions that meet or do not meet the criteria. The guidelines state that Japanese patent law has an enablement requirement that is substantially similar to the U.S. enablement requirement and explain how to determine whether an invention is directed to statutory subject matter similar to the standard in 35 U.S.C. §101. In Japan, the invention must be a creation of technical ideas utilizing a law of nature. The examination guidelines contain procedures to implement this standard that provide that when information processing by software is not concretely realized by using hardware resources, the claimed invention does not constitute a creation of technical ideas utilizing a law of nature and is unpatentable. For example, a claim for “computer to calculate the minimum value of formula y = F(x) in the range of a