Business and Technology Law

What is the standard for determining whether the use of a similar mark is likely to cause consumer confusion and lead to trademark infringement?

If you don’t think handbags carry important legal issues, consider the Second Circuit’s statement,

We cannot help but observe that for the person carrying it, a handbag may serve as a practical container of needed items, a fashion statement, or a reflection of its owner's personality; it may fairly be said that in many cases a handbag is so essential that its owner would be lost without it.

Louis Vuitton Malletier v. Dooney & Bourke, 454 F.3d 108 (2d Cir. 2006).

In assessing the likelihood of confusion in a trademark infringement case, courts will consider the non-exclusive multi-factor Polaroid test which includes, (1) the strength of the mark, (2) the similarity of the two marks, (3) the proximity of the products, (4) actual confusion, (5) the likelihood of plaintiff's bridging the gap, (6) defendant's good faith in adopting its mark, (7) the quality of defendant's products, and (8) the sophistication of the consumers. Id. at 116. The similarity of the marks is a key factor in determining likelihood of confusion, and was particularly important in the battle of the handbags trademark infringement case.

The Second Circuit noted that the district court made a mistake in its likelihood of confusion analysis by “inappropriately focusing on the similarity of the marks in a side-by-side comparison instead of when viewed sequentially in the context of the marketplace”. Id. at 117. The Second Circuit recognized that a side-by-side comparison can be useful, as long at the court remains focused on the issue of consumer confusion, and that the law only requires confusing similarity and not identity. Id. at 117. So, while the Louis Vuitton bag and the Dooney & Burke bag look very different side-by-side, the court must consider whether the differences between the marks are “likely to be memorable enough to dispel confusion on serial viewing” in the context of the marketplace. Id. at 177, citing, Louis Vuitton Malletier v. Burlington Coat Factory Warehouse Corp., 426 F.3d 532, 538 (2d Cir.2005).

The Second Circuit recognized that the district court overemphasized the side-by-side comparison, and held that “because no single factor is dispositive, we must remand for the district court to revisit the entire analysis, under the new standard,” keeping in mind the context of the marketplace. Id. at 118.

So, in a trademark infringement case, the standard for determining whether the use of a similar mark is likely to cause consumer confusion is sequential viewing in the context of the marketplace, and not merely a side-by-side comparison.

There is currently a bill working its way through Congress to establish a pilot program among district courts, aimed at the better treatment of patent cases. One purpose or objective is to create “rocket dockets” in those districts with a high volume of intellectual property and patent cases. Another purpose of the program is to establish a sort of “IP certified” judicial roster, under the theory that there are a sufficient number of technologically-savvy judges out there to refer these cases to under circumstances where assignment is warranted.

Patent litigators in Texas have likely become accustomed to, and spoiled by, the sua sponte innovation assumed by the Eastern District, which is considered the second most efficient patent and intellectual property “rocket docket” in the nation. Third in the race to adopt specialized local “patent rules,” the Eastern District drafted its patent mandates in accordance with the first in judicial patent legislating, the Eastern District of Virginia. It interprets those rules however in keeping with the current developer of the intellectual property landscape, the Northern District of California, and in doing so, has remained nationally and locally relevant and respected.

Our Eastern District judiciary, not unaware of the national recognition and sudden press, has risen to the challenge by outfitting the sleepy Marshall town courtrooms with the latest in technology, so that those visiting to litigate their billion dollar patent matters are unable to note any offering provided elsewhere that cannot be found there. Moreover, the intellectual ability of our Eastern District judges to digest the tech-laden presentations that big city firms bring to bear upon those courtrooms is nothing less than impressive.

The question then must be, how many rocket dockets and intellectual-property certified judicial rosters is a state entitled to have? The rumor is that our Northern District has applied and is lobbying heavily for inclusion in the new Pilot Program. Should they win their campaign, Texas will soon be on every intellectual property litigation firm’s radar. An irony that should not go unappreciated. And a down-home advantage that cannot go unnoticed. For the few firms, such as this one, truly skilled in the intellectual property and patent litigation arena, that is good news. Large clients and large firms, however, should be wary. With issues of forum selection dominating the IP litigation field, a friend in the courtroom is imperative. It’s the reason that most lawyers serious in the intellectual property practice have moved to boutiques, so they can specialize, and so that the jury perceives them less as the big firm enemy with their big corporate client. With intellectual property litigation moving towards rocket dockets in down home towns like Marshall and down home states like Texas, that seemingly irrelevant consideration could now be more relevant than ever.

Until December of 2006, the Federal Rules of Civil Procedure related to production of documents in a civil case made no mention at all of electronically stored information. The scope of Rule 34 has now been expanded to include electronic evidence:

Rule 34. Production of Documents, Electronically Stored Information, and Things and Entry Upon Land for Inspection and Other Purposes.

(a)Scope. Any party may serve on any other party a request (1) to produce and permit the party making the request, or someone acting on the requestor's behalf, to inspect, copy, test, or sample 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 -- translated, if necessary, by the respondent into reasonably usable form, or to inspect, copy, test, or sample any designated tangible things which constitute or contain matters within the scope of Rule 26(b) and which are in the possession, custody or control of the party upon whom the request is served*** (emphasis added)

The adversary demanding the production of electronic information is now authorized to specify the manner in which the information is produced. Fed R. Civ P 34(b). The manner of production demanded by the adversary may not correspond with the format in which the data is maintained. The manner in which the demand is framed may impose a substantial burden on the responding party. When served with such a demand, it is critical first step to ensure that timely and specific objection is made to the manner of production. It is important to remember however that the making of those objections merely preserves them for resolution by the Court. While some Judges are technically adept, we advise clients involved in responding to electronic discovery to develop and document a protocol as to document retention and manner of storage as a proactive measure. Sharing the protocol may result in an agreement by adversary counsel to formulate demands in a manner in which the information is maintained or in the absence of an agreement, to show the Court that the manner of production demanded is out of synch with the manner, presents an unreasonable burden and should not be allowed.

The adversary demanding the production of electronic information is now authorized to specify the manner in which the information is produced. Fed R. Civ P 34(b). The manner of production demanded by the adversary may not correspond with the format in which the data is maintained. The manner in which the demand is framed may impose a substantial burden on the responding party. When served with such a demand, it is critical first step to ensure that timely and specific objection is made to the manner of production. It is important to remember however that the making of those objections merely preserves them for resolution by the Court. While some Judges are technically adept, we advise clients involved in responding to electronic discovery to develop and document a protocol as to document retention and manner of storage as a proactive measure. Sharing the protocol may result in an agreement by adversary counsel to formulate demands in a manner in which the information is maintained or in the absence of an agreement, to show the Court that the manner of production demanded is out of synch with the manner, presents an unreasonable burden and should not be allowed.

The word spoil or spoiled is commonly used in non-litigation contexts. Food spoils if it needs to be refrigerated and is not. Paint spoils if the can if left open. In the litigation context, a spoliator is a party that failed to preserve evidence that was demanded in litigation or fails to preserve relevant evidence for litigation that is reasonably contemplated. What is not commonly understood is that in some State and Federal Courts, a party who spoils evidence may be severely sanctioned even if the loss of the evidence resulted from carelessness.

Where relevant evidence is spoiled, the jury may be invited to infer that the evidence lost was unfavorable to the party who failed to preserve it, with the prospect of devastating results on the outcome. An article written by the author and recently published in the New York Law Journal entitled “Destroyed E-Data Won’t Make Spoliation Sanctions Disappear” discusses these issues in more detail.

The word spoil or spoiled is commonly used in non-litigation contexts. Food spoils if it needs to be refrigerated and is not. Paint spoils if the can if left open. In the litigation context, a spoliator is a party that failed to preserve evidence that was demanded in litigation or fails to preserve relevant evidence for litigation that is reasonably contemplated. What is not commonly understood is that in some State and Federal Courts, a party who spoils evidence may be severely sanctioned even if the loss of the evidence resulted from carelessness.

Where relevant evidence is spoiled, the jury may be invited to infer that the evidence lost was unfavorable to the party who failed to preserve it, with the prospect of devastating results on the outcome. An article written by the author and recently published in the New York Law Journal entitled “Destroyed E-Data Won’t Make Spoliation Sanctions Disappear” discusses these issues in more detail.

In an April 24, 2007 opinion written by Chief Judge Walker of the United States Court of Appeals for the Second Circuit in Arbor Hills Concerned Citizens Neighborhood Assoc. v. Cty of Albany, et al., the Court agreed that the District Court placed undue reliance on the “forum rule” for determining attorneys’ fee awards on Federal statutory claims. Under the forum rule, an attorney whose client prevailed on a statutory claim would have his or her rates set not based upon what the market would be willing to pay for such services or upon their market rate to paying clients but rather based upon the Court’s reference to fee ranges approved in prior cases in that District The result of using the forum rule was a different range of hourly rates for the same type of litigation in the Second Circuit, depending on where the case was venued, with cases in the Southern District of New York (New York City) having the highest rates, those in the Eastern District (Long Island, Brooklyn, Queens, Staten Island) having lesser rates and the upstate Districts (Northern and Western Districts) having the lowest rates. It was not uncommon for the rate differentials for the same work to command rates 25+% higher in the Southern District.

In Arbor Hills, the Second Circuit admitted that its “fee-setting jurisprudence has become needlessly confused-untethered from the free market it is meant to approximate.” It therefore clarified that the District Court is to consider all of the factors that would be relevant in the free market, such as the reputation of the attorney or firm, the complexity of the case, the resources required to handle the matter aggressively and effectively and any professional benefits which would independently motivate counsel to pursue the litigation. The Court concluded that the fee award should compensate counsel in an amount equal to what a reasonable paying client would pay for that same representation.

The New York Court of Appeals’ decision in Thyroff recognizing a conversion claim based on a company preventing a former employee from accessing personal information stored on the company’s computer certainly presents some difficult privacy issues for businesses, who already face enough potential legal troubles when terminating employees. You suggested that to avoid infringing on an employee’s privacy rights in electronic data on a business computer, a business could give a terminated employee access to the computer to retrieve their personal information. That may present practical difficulties because that access would have to be supervised or somehow limited to prevent the former employee from gaining access to confidential business information or even, in the worst case, sabotaging the company’s computer. Do you have any other ideas on how a business might protect its former employee’s privacy rights and avoid potential tort liability?

Many companies allow their employees to blog during work, or off work, about work, and work related issues. Companies should be aware that their employees may be tempted to blog about subjects that include trade secrets. For instance, on their own time, employees may blog about what they do at work, what they are inventing at work, who their company’s customers are, how the company attracts customers, and other proprietary and confidential information. All of these subjects are potentially exposing the company’s trade secrets. A company must take reasonable measures to protect disclosure of its trade secrets, and keep the trade secrets out of the public domain. If a company fails to take reasonable measures to protect its trade secrets from exposure in the public domain, they will no longer be considered trade secrets.

What can a company do to protect its trade secrets from blogging employees?

The simple answer is to create a blogging policy. A policy should outline the parameters that employees must follow while blogging about the company, and should coincide with the company’s policy manual related to confidential and proprietary information. The following items are suggestions to include in a company blogging policy.

The policy should contain provisions that the employee shall not blog about proprietary and confidential information. The company should provide a definition of proprietary and confidential information.

The policy should contain a provision requiring that the employee shall not post any obscene, defamatory, libelous, abusive or hateful remarks about any the company, company employees, company’s competitors, or company’s customers or partners.

The policy should contain a provision requiring the employee to gain permission from the company before using the company’s symbols, trademarks, or graphics.

For employees who have personal blogs unrelated to the company, the company may want to incorporate a provision that requires the blogger to place a disclaimer on its blog, that all content is that of the author and does not reflect the views of the company.

The policy should not stifle creativity or treat the employee as though they cannot write about work-related topics, but must inform the employee about the legal boundaries of their actions related to blogging about trade secrets, and that the company must take reasonable steps to protect its trade secrets so that they do not lose their status as trade secrets.

Part I – Microsoft Corp. v. AT&T, 550 U.S. ____ (2007)

The question presented to the Supreme Court was whether Microsoft’s liability would extend to computers made in another country when loaded with Windows software copied abroad from a master disk or electronic transmission dispatched by Microsoft from the United States?

Generally, no patent infringement occurs when a patented product is made and sold in another country, except where the patented invention’s components are supplied from the United States for combination abroad. 35 U.S.C. § 271(f)(1).

AT&T holds a patent on a computer used to digitally encode and compress recorded speech. Microsoft’s Windows incorporates software that enables a computer to process speech in the manner claimed by AT&T’s patent. Microsoft sends its software on a master disk to foreign manufacturers, who then make copies of the disk and install them onto computers that they sell. The master disk is not installed.

AT&T sued Microsoft and argued that Microsoft infringed on its patent by supplying from the United States, for combination abroad, components of AT&T’s patented computer, and therefore Microsoft would be liable under § 271. Microsoft argued that the copies were not supplied from the United States and were not a component under § 271.

The Supreme Court answered the question presented in the negative, and characterized the copies of the Windows operating code as a blueprint giving instructions rather than a component as AT&T argued. The Supreme Court reasoned that a blueprint may contain precise instructions related to components of a patented instrument, but the blueprint itself is not a component of the patented instrument. Specifically, the court ruled that if the code is sent abroad, the copy made from it will not be considered a component under § 271. The Court explained that AT&T’s only options would be to seek foreign patent prosecution or seek a change in § 271 from Congress.

The Eastern District of Texas originally claimed fame partially through its implementation of its original local patent rules. Patterned after the local patent rules of districts like the Northern District of California with heavy intellectual property dockets, and the original “rocket docket” in the Eastern District of Virginia, the Eastern District of Texas used the patent rules to speed up its patent trials, as well as its civil case docket in general. Typically complex, drawn-out affairs, patent litigation suddenly became streamlined in a Texas federal court located in the tiny Texas town of Marshall, drawing national attention.

Now, with its recent implementation of its own set of local patent rules, the Northern District of Texas attempts to make headway of its own on the national intellectual property scene and demonstrates its seriousness about its participation in the new federal pilot program. Whether it achieves the same notoriety as the Eastern District remains to be seen. Certainly the Eastern District boasts more than simply a speedy docket. It has gained its reputation by stacking its bench with a judiciary that has become highly savvy in the worlds of engineering and technology. But the Northern District bench does not sit light in those areas itself, and it has the advantage of being located in a major metropolitan area. Thus, if the Northern District manages to accomplish the same speedy “rocket docket” trial reputation, and combines it with expertise and its desirable geography, it will certainly give the Eastern District a run for its money in the “something to talk about” department. Not least because it will be a district most attractive to the multi-million dollar corporate clientele that tends to take up the space on each side of those intellectual property case captions.

Certainly, though, the Northern District has its work cut out for it. The patent rules contain numerous mechanisms to eliminate the traffic jams typically caused by intellectual property litigation. They allow the district to conduct speedier patent trials and civil cases in general by placing strict time constraints on parties’ pretrial activities, such as discovery and claim construction, and by clarifying positions early in the case. The rules eliminate discovery disputes by scheduling mandatory early conferences with the court, with obligations that push parties to be liberal in their disclosure and production, and to produce any relevant materials. Claim term lists and proposed claim constructions must be served early. These provisions, among others, ensure the relatively smooth and continuous flow of patent cases, and prevent them from obstructing the smooth and continuous flow of other cases. Nevertheless, it will be truly interesting to watch as the Northern District implements the pilot program and attempts to remedy the congestion of a docket for one of the busiest metropolitan districts in the nation. Interesting and, if successful, a true achievement and benefit to the bar and the state.

Article 9 of the New York Civil Practice Law and Rules (CPLR) governs class actions. CPLR 901(b) provides that a suit that seeks to collect on a liability imposed by statute that is in the nature of a penalty may not be maintained as a class action. Notwithstanding 901(b), where the enabling legislation creating the statutory remedy authorizes a class action, maintenance of such a suit is permissible. In Sperry v. Compton Corp., 8 N.Y.2d 204, 863 N.Y.S.2d 1012 (2007), the New York Court of Appeals ruled that the legislative history of the amendment to the Donnelly Act that authorized treble damages confirmed that it was intended as an incentive for an individual plaintiff above compensatory losses and therefore could only be construed as a penalty. Inasmuch as the Court of Appeals found the authorization for treble damages to be a penalty, and the Donnelly Act did not expressly authorize a class action, class certification was denied.

The lesson to be learned from this decision is that while courts generally don’t go behind the plain language of a statute, where the intent of the legislation is at issue, legislative history may drive the outcome of the case as happened here.

The Supreme Court unanimously rejected the Federal Circuit’s strict application of the teaching-suggestion-motivation (“TSM”) test for obviousness – making it easier to invalidate patents on obviousness grounds.

Teleflex sued KSR for patent infringement. Teleflex held the exclusive license to the patent entitled “Adjustable Pedal Assembly With Electronic Throttle Control.” KSR International Co. v. Teleflex, Inc., 127 S.Ct. 1727, 1734 (2007). The case revolved around Claim 4 of Teleflex’s patent. Claim 4 describes a mechanism for combining an electronic sensor with an adjustable automobile pedal so that the position can be transmitted to a computer that controls the throttle in the automobile. Id. KSR added an electronic sensor to one of its previously designed automobile pedals, and Teleflex sued for patent infringement. KSR claimed that Teleflex’s Claim 4 was invalid under the Patent Act, 35 U.S.C. § 103, because the Claim was obvious. Section 103 provides that a patent cannot be issued when “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.” Id.

The District Court granted summary judgment in favor of KSR, reasoning the KSR had demonstrated that Claim 4 was obvious. Id. at 1737. The District Court also held that KSR satisfied the TSM test. Id. at 1738. The Federal Circuit reversed, reasoning that the District Court did not apply the TSM test strictly enough. Id.

The Supreme Court held that the Federal Circuit addressed the obviousness question in a “rigid” manner, reasoning that helpful insights like the TSM test need not become “rigid and mandatory formulas,” and the TSM test as applied did not follow Supreme Court precedent. The court threw out the TSM test, explaining that the Federal Circuit made four errors. First, the Circuit erred by holding that courts should only look to the problem the patentee is trying to solve. According to the Supreme Court, “any need or problem” can provide the patentee with a reason for combing elements. Id. at 1741-42. Second, the Federal Circuit erred by holding that a person of ordinary skill would only look to solve a problem with prior art elements designed to solve the same problem. The Supreme Court explained that a person of ordinary skill will be able to fit the teachings of multiple patents together. Id. Third, the Federal Circuit erred by reasoning that a patent cannot be obvious where it is shown that the combination was obvious to try. Instead, a person of ordinary skill attempting to solve a problem will use common sense and ordinary skill to identify and pursue known options in the field, and if success results it is not innovation. Id. Fourth, the Federal Circuit erred by making a wrong conclusion about the risk of hindsight bias. The Supreme Court held that rigid rules denying recourse to common sense are inconsistent with the Court’s caselaw. Id.

It is likely that the change in the obviousness standard will likely increase the amount of patent litigation. This litigation will involve attempts to invalidate patents on obviousness grounds, and many patents will likely be invalidated. Furthermore, it is likely that inventors will not easily resist an infringement claim and will litigate rather than settle the case. In fact, the Federal Circuit’s first decision interpreting KSR was issued May 9, 2007, Leapfrog Enterprises, Inc. v. Fisher-Price, Inc. and Mattel, Inc., No. 06-1402 (Fed.Cir. May 9, 2007). The Federal Circuit affirmed a lower court ruling invalidating Leapfrog’s patent on the grounds of obviousness. There is no doubt that KSR will have a substantial impact on the patent litigation landscape.

Litigants regularly seek advice from counsel before settling or declining to settle a claim or a case. If that litigant subsequently seeks to recover the amount paid from a third party, such as an insurance company in a breach of contract action or under an indemnification agreement, is the attorney-client privilege waived? Proponents of waiver argue that access to the adversary’s work product and communications are critical to the getting to the question of reasonableness or intent of the opponent. Opponents argue that the privilege must be protected. In two decisions, one from New York and the other from Florida, the trial courts held that the privilege was waived by the act of seeking to recover on such claims, but the appellate courts reversed.

In the New York case, Deutsche Bank Trust Co. of America v. Tri-Links Investment Trust, et al., 2007 WL 1412886 (App. Div. 1st Dep’t 2007), the Appellate Division of the Supreme Court of the State of New York, First Department rejected the lower court’s conclusion that Deutsche Bank’s pursuit of the litigation had worked such a waiver. An “at issue” waiver of attorney-client privilege occurs when a party affirmatively places the subject matter of its own privileged communication at issue in the litigation, such that invasion of the privilege is required in fairness to the adversary so as to provide the opponent information vital to its defense. The Appellate Division distinguished between the existence of a privileged communication that contains information relevant to the issues in the case, which does not effect a waiver, and the invocation of a claim or defense which relies upon such privileged materials. In the latter case, selective disclosure is not permitted and will effect a waiver. If Deutche Bank, in pleading its claim, anticipated the defense that the third party settlement was unreasonable by pleading that it relied upon the advice of counsel, the outcome would have been entirely different.

In the Florida case, XL Speciality Ins. Co. v. Aircraft Holdings, LLC, 929 So.2d 578 (1st Dist. 2006), the Florida District Court of Appeal, First District granted a writ quashing an order compelling XL Speciality to produce privileged documents related to the underlying claim. The lower court ruled that because the question of whether the carrier’s refusal to pay the claim was in bad faith, the communications with its counsel and counsel’s work product were relevant to the issue of objective reasonableness. In granting the writ, the Court of Appeal held that that because the statutory cause of action for bad faith did not indicate a legislative intent to waive the attorney-client privilege, no waiver would be found by the filing of such a claim.

The teaching of these decisions is that to avoid a waiver of the privilege, a litigant must be careful not to plead or refer to the advice of counsel to advance its claim or defense.

The Supreme Court’s 2006 decision in eBay, Inc. v. MercExchange, LLC, 126 S. Ct. 1837 (2006), continues to reverberate, with the Federal Circuit applying it just last month to vacate and remand a permanent injunction granted under the previous “general rule” of patent cases. Under that rule, courts would issue injunctions against patent infringement absent circumstances justifying the denial of injunctive relief. In eBay, the Supreme Court held that it is inappropriate to automatically issue an injunction following a finding of patent infringement. Instead, the Supreme Court held that a request for injunctive relief in patent cases is only available if the elements of the traditional four-factor test for injunctive relief are established. In Acumed, LLC v. Stryker Corp., 483 F.3d 800 (Fed. Cir. 2007), after affirming findings of infringement, and willfulness, the Federal Circuit reversed the district court’s decision to grant a permanent injunction. The district court’s decision to issue a permanent injunction had been made before the Supreme Court articulated its new standard for injunctive relief in patent cases. The Federal Circuit rejected Acumed’s argument that the facts underlying the district court’s finding of infringement and willfulness could serve as independent support for the injunction, concluding that making such a determination on appeal would require the appellate court to “weigh the evidence ourselves to reach a conclusion on injunctive relief.”

Acumed is only the latest case to demonstrate the wide-reaching effect that the eBay decision continues to have on patent infringement jurisprudence. Those who have injunctions in place should be wary of challenges under eBay, as Acumed signals the unwillingness of the Federal Circuit to affirm the granting of injunctions by applying the Supreme Court’s rule during an appeal. Moreover, it makes every injunction issued under the previously-existing “general rule” of patent cases vulnerable to reconsideration, and clarifies that evidence separate and independent from that supporting the infringement will be necessary to support the injunction. The resonating message sent by Acumed is that the appellate courts will not only apply eBay to require that there be evidence on the four factors before an injunction issued pre-eBay will be affirmed, but more importantly that the appellate court will not conduct an eBay analysis on appeal. The Federal Circuit’s conclusion in Acumed that evaluating the eBay factors in light of the evidence would be tantamount to weighing the evidence dictates that it cannot affirm any injunction issued prior to eBay, as no district court could have known to conduct the four-factor analysis prior to that time, and the Federal Circuit’s decision precludes it from doing so on appeal. Acumed signals that if injunctions granted in patent infringement cases under the former general rule are challenged on appeal, remand will be necessary for reconsideration of the issues by district courts.

Patent holders contemplating patent litigation in the Northern District should carefully prepare their complaint, taking every available opportunity to carefully and thoroughly analyze infringement contentions prior to filing. They should additionally take every opportunity to reevaluate and update those contentions throughout the course of the litigation. The reason is the Northern District’s newly-adopted local patent rules. Just another symbol of the District’s commitment to the federal pilot program, the rules have particular significance to patent infringement plaintiffs, since Federal Circuit decisions are decidedly unambiguous in allowing district courts considerable discretion when enforcing procedural requirements of the respective local rules. Such requirements can be outcome determinative, and the Federal Circuit has similarly demonstrated no hesitation in affirming the summary dismissal of infringement claims where infringement contentions were not first properly served or updated pursuant to a district’s local rules, or where a party otherwise failed to comply with local patent rule requirements. See 02 Micro International Limited v. Monolithic Power Systems, Inc., 467 F.3d 1355 (Fed. Cir. 2006); Safeclick, LLC v. Visa International Service Assn., 2006 WL 3017347 (Fed. Cir. 2006) (unpublished decision). In both Safeclick and 02 Micro, the federal circuit upheld the discretionary power of a district court to eliminate certain infringement contentions or arguments that were not raised in the final infringement contentions advanced by each Plaintiff. In each case, the Plaintiffs’ argued that the contentions were based on new material revealed in discovery after submission of the final infringement contentions, or advanced as a refined “scope and clarity” of earlier contentions. The district courts in each case rejected these arguments, finding that the Plaintiffs were not diligent in disclosing the theories, and the Federal Circuit affirmed, demonstrating that local patent rules have real teeth, and the district courts that use and apply them have real power.

The Federal Circuit’s jurisprudence evaluating local patent rules therefore provides district court judges with considerable discretionary power to facilitate patent litigation and move along their dockets through enforcing local rule requirements, even where the exercise of that discretion can be outcome determinative. There has been no hesitation to use that discretion among Texas district courts enforcing local patent rules. MGM Well Servcs., Inc. v. Mega Lift Sys., LLC, 2007 WL 433283 (S.D. Tex. 2007) (granting plaintiff’s motion to exclude invalidity contentions, expert testimony, evidence, and argument regarding prior art patents on grounds that Defendant failed to accurately, timely, or properly disclose same in accordance with the patent rules, and with the Court’s discovery and docket control orders); SoftVault Sys., Inc. v. MicroSoft Corp., 2007 WL 1342554 (E.D. Tex. 2007) (denying plaintiff’s motion for leave to amend its claims and contentions disclosures to change the asserted priority date of the claims at-issue, acknowledging that the importance of the priority dates to the overall case weighed in favor of granting the motion, but denying on grounds that plaintiff had access to information earlier in litigation and thus could have amended in accordance with rules and order deadlines, preventing prejudice to opposing party and need for continuance). Thus, patent holders contemplating litigation in the Northern District should take particular care to heed all the procedural requirements of that District’s recently-enacted local patent rules, as the failure to comply could determine the outcome of litigation. Further, given the “abuse of discretion” standard of review on appeal, any discretionary rulings, including dismissals, based upon a failure to comply with local rule requirements in a patent case will likely prove difficult to overturn on appeal. The lesson to take away here is therefore that any patent infringement plaintiff or defendant must take seriously all discovery and procedural obligations imposed by local rule requirements – and in particular the obligations to disclose infringement and invalidity contentions – seeking experienced and knowledgeable counsel to draft and prepare them, and to review and re-examine them at every possible opportunity. All infringement and invalidity theories should be regularly re-examined and updated in accordance with local rule requirements, or should be amended in accordance with a prompt request for leave to amend in the event new information is learned during the course of discovery. Alternatively, given the broad discretion accorded district courts to enforce their local rule requirements, parties will have to be prepared to lose valid infringement and invalidity theories in the face of untimely disclosure under local rules, even where it means losing the litigation as a whole.

A recent Seventh Circuit decision sends the clear message that companies should take precautions to secure their trade secrets by limiting the availability of the information to those who need to know it and by protecting information that is not readily available to the public. Judge Posner delivered the opinion in American Family Mutual Insurance Co. v. Bonnie L. Roth, 2007 WL 1309403 (7th Cir. 2007). The defendants had been insurance agents for the plaintiff. The plaintiff was awarded a preliminary injunction against the defendants enjoining them from using trade secrets, including customer information that they stole upon their termination from the company. The issues were governed by Wisconsin law, which has adopted the Uniform Trade Secrets Act. The court found that the customer information was in fact a trade secret because the information derives independent economic value from sources not readily available, and is information that has been kept secret by reasonable means. Specifically, the customer information was filtered based on their likelihood of buying insurance, and the information was only made available to agents who were assigned those specific customers or potential customers. The court held that the plaintiff was entitled to an injunction because the information was clearly a trade secret under the Uniform Trade Secrets Act and Wisconsin law, but the court remanded to the district court so that the district court could rework the injunction to be more inclusive. In the wake of Roth, it appears that the greater precautions a company takes, the greater the likelihood that an injunction will be granted to continue protecting the companies’ trade secrets.

The NASD requires its member firms to complete and file a U-5 termination notice whenever employment ceases, and in the case of an involuntary separation from employment, to disclose the reasons for the discharge of that employee. See NASD By-laws, Art. IV, § 3(a). Some of the reasons listed by member companies on the U-5 forms have included the employee’s refusal to cooperate with the compliance department, suspicion of fraud or suspicion of other misconduct. This report stays with the former employee throughout their career and could substantially impair their ability to gain employment at another NASD member firm. It is not uncommon under these circumstances for the former employee to sue the member company, claiming libel or other damage to reputation or economic advantage. If these cases must be litigated on the merits of truth or falsity, it is likely that fact issues will require an evidentiary hearing or a trial at great cost to the member company.

In a common law claim for damage to reputation, most jurisdictions recognize privileges belonging to the defendant, which, in varying degrees, may defeat the claim as a matter of law. An absolute privilege bars suit over a communication, even if defamatory, because of competing public policy considerations that recognize the chilling effect of such suits. A qualified privilege is less favorable to the employer and depends on the reasonableness of the employer’s conduct and commonly presents an issue requiring a trial for resolution.

In an unpublished opinion, Galligan v. Edward Jones & Co., 2000 WL 785041 (Ct. Super. 2000), the Court expressed what had been the common view that statements made by the member company on the U-5 termination notice are only protected by a qualified privilege defense and therefore refused to summarily dispose of the issue.

At least in cases subject to New York law, member companies will be protected from suit over pertinent information communicated on the U-5 termination notice by virtue of a recently decided New York Court of Appeals case that expanded the absolute privilege to apply it to the completion of the U-5. The Court’s well reasoned decision provides a blueprint for the public policy arguments that should be pursued in other jurisdictions that have decided this issue less favorably to the employer.

In Rosenberg v. MetLife, 8 N.Y.3d 359 (2007), the New York Court of Appeals declared that statements made by the member firm on the U-5 termination notice are absolutely privileged because it is a preliminary step in the quasi-judicial process the NASD uses to investigate and sanction violations of securities laws. The Court of Appeals rejected the former employee’s claim that the completion of the U-5 was too attenuated from any judicial proceeding to fall under the rubric of the litigation privilege. The Court of Appeals found strong public policy considerations required recognition of an absolute privilege as to pertinent communications on the U-5 termination notice because it is a preliminary step in the NASD’s investigation of brokers in furtherance of regulating the industry. Inasmuch as the absolute privilege defeated the defamation claim, the Court of Appeals agreed that the lawsuit against MetLife was properly dismissed.

Member dealers that have a nexus with New York should also evaluate whether its employment documents are written in such a way so as to invoke these immunities to defeat such claims at an early stage of the case..

Companies doing business in Texas should familiarize themselves with how Texas law defines trade secrets. In Texas, courts apply a six-factor test to determine whether a trade secret exists. The factors, however are not dispositive because it is impossible to set out precise criteria for a trade secret. Astoria Industries of Iowa, Inc. v. SNF, Inc., 2007 WL 937533, *10 (Tex.App.-Fort Worth, n.p.h.).

The six factors that will be considered by Texas courts to determine whether a trade secret exists are:

• The extent to which the information is known outside of the business;
• The extent to which the information was known to employees and others involved in the business;
• The extent of the measures taken by the business to protect the secrecy of the information;
• The value of the information to the business and its competitors;
• The amount of effort or money expended by the business in developing the information;
• The ease or difficulty with which the information could be properly acquired or duplicated by others.

In re Bass 113 S.W.3d 735, 739 (Tex. 2003). These six factors are to be weighed in determining whether the information is a trade secret, but all six factors do not have to be present for the information to be considered a trade secret in Texas. Id. at 740.

Of course, the more of these factors that the information meets, the more likely the information will be considered a trade secret. For instance, Texas businesses should be sure that the information is not widely known outside of the business; the information is only known by employees who have a direct need to know the information; the business should take great measures to protect the privacy of the information; the information should be valuable information; the business should expend significant resources in developing the information; and the business should make it difficult for others to acquire the information. Taking these six steps to protect the trade secrets of your business will also help the Texas courts identify that the protected information is in fact a trade secret worthy of protection from misappropriation.

The Ninth Circuit has recently clarified the scope of immunity for internet services provides under the Communications Decency Act. That statute contains an immunity provision, stating that that “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” 47 USC § 230 (c)(1). This immunity is limited, however, in that it does not apply to claims “pertaining to intellectual property.” The Ninth Circuit has now interpreted this provision as only applying to intellectual property as defined under federal law, e.g. patents, trademarks, copyrights. Perfect 10 v. CCBill LLC, 2007 WL 1557475 (9th Cir. 2007).

What does this mean?

As a defendant service provider it means that you may seek immunity under § 230(c)(1) where state intellectual property claims are brought against you. Of course, if the federal and state claims are similar, you won’t be escaping much because the federal claim will still survive.

As a plaintiff seeking to enforce a state trade secret claim or any other intellectual property interest recognized and created under state law, the results are not so good. It will be much more difficult to bring a state intellectual property claim, or seek an injunction based on a trade secrets claim. For instance, when a service provider hosts user-posted material misappropriating your trade secrets or infringing on other state-recognized intellectual property rights, the service provider will be immune under § 230(c)(1), and your only recourse will be a claim against that user who posted the material.

The original opinion was amended so that the Ninth Circuit could insert a footnote that reiterates that it really did mean that intellectual property means “federal intellectual property” and state intellectual property claims are preempted by § 230. There are two other cases pending before the Ninth Circuit dealing with the same types of questions, and those decisions will indicate just how far the Ninth Circuit believes the immunity provision extends. In the meantime, service providers in particular should take note that they can now invoke section 230 immunity for the acts of third-parties where the claims raised are state intellectual property claims.

It is no secret that patent litigation is a costly endeavor. It can price small defendants out of being able to defend themselves on the merits and can likewise be the prohibitive factor when small plaintiffs want to enforce their claims. For the small or mid-sized company, the amount at issue many times simply does not justify the high-cost and high-risk of patent litigation.

The costs of litigation can be managed and decreased using court rules that promote efficient litigation and provide for speedy resolution of disputes. Courts in the Eastern District of Texas are widely recognized as national leaders in patent litigation, in large measure, because they provide a relatively quick system for resolving patent disputes. For the party that employs experienced counsel and a strategy to maximize those attributes, the cost of preparing a patent case can be reduce on both sides. This efficiency is accomplished in various ways, including the use by several judges of special rules for patent cases and those same judges’ continuation of the district's tradition of early, firm trial settings. Experienced counsel can see that speedy trial settings and discovery limitations can be used not only to the benefit of a plaintiff, but to the small defendants’ favor as well when defending commercial patent cases. In fact, the settings provide a way of defending a case on the merits that would otherwise cost too much. A small patent defendant is best off in the Eastern District when it has a defense on the merits because there it may possibly get the cheapest path to a trial setting of anywhere in the nation. The truth is, with a valid case and good lawyering, there is no reason that tremendous advantage cannot be found and a path to more efficient litigation discovered by all parties by using the resources of the Eastern District.

The Eleventh Circuit has decided to review en banc a ruling refusing to grant immunity to the NASD on the grounds that it was a self-regulating agency. A Florida lawyer named Steven Weissman purchased a substantial amount of Worldcom stock in trust for his minor children. That stock is now virtually worthless. Rather than suing the now-defunct accounting firm of record, Arthur Anderson, or Worldcom’s former CEO Bernard Ebbers and the other directors, Weissman sued the National Association of Securities Dealers and NASDAQ Stock Market, Inc., the latter of which became a for profit enterprise prior to the events in question. In his diversity complaint, filed in Federal District Court in the Southern District of Florida, Weissman asserted claims for false advertising, fraud, and other deceptive practices under Florida law. He contended that his complaint was limited to the defendants’ commercial activities in promoting and vouching for Worldcom, for which the defendants received indirect profits. The District Court rejected the defendants’ argument that as self-regulatory agencies they were immune from suit. On appeal, a three-judge panel of the Eleventh Circuit ruled that this immunity does not apply to commercial for profit activity such as advertising. Weissman v. National Ass’n of Securities Dealers, 468 F.3d 1306 (11th Cir. 2006), vacated, 481 F.3d 1295 (11th Cir. 2007). One judge dissented, concluding that the acts of alleged misconduct by defendants were closely related to core regulatory functions and should not be actionable. The panel’s opinion is available here: http://www.ca11.uscourts.gov/opinions/ops/200413575.pdf

The Eleventh Circuit has agreed to rehear the matter en banc, reflecting the Court’s recognition of the extraordinary impact of the panel opinion. Weissman v. National Ass’n of Securities Dealers, 481 F.3d 1295 (11th Cir. 2007). If the majority opinion prevails and is adopted by other Circuits, for-profit stock exchanges not only face the specter of significant new liabilities in relation to investments solicited in member companies but the added uncertainty because the theory of liability may derive from a myriad of laws that vary from state to state. Stay tuned . . .

A previous posting entitled “Supreme Court to Decide if Parties Can Agree to Judicial Review of an Arbitration Award,” discussed the U.S. Supreme Court’s intention to review the issue of whether parties may agree to expanded judicial review of arbitration awards under the Federal Arbitration Act. Because businesses may be parties to contracts and licenses that will be governed by state arbitration statutes instead of the FAA, companies should also keep an eye on how this issue is being addressed in the state courts.

For instance, while the federal appellate courts have split on the issue, with most courts allowing parties to agree to expanded judicial review, the trend in California has the been the opposite. The California appellate decisions addressing the issue have concluded that parties may not agree to expanded judicial review. In Baize v. Eastridge Companies (2006) 142 Cal.App.4th 293 [47 Cal.Rptr.3d 763], the parties included a provision in their arbitration agreement requiring the arbitrator to apply California substantive law. The court held that despite this provision, the award could not be vacated on the ground that the arbitrator did not apply the proper law. In Cable Connection, Inc. v. Directv, Inc. (2006) 143 Cal.App.4th 207 [49 Cal.Rptr.3d 187], the court even more strongly rejected the parties’ attempt to expand judicial review. The parties in DirecTV included a provision specifically stating that any arbitration award was reviewable for failure to apply the law. The court held that the grounds for vacating or modifying an award listed in the California arbitration act were exclusive and a court is therefore prohibited under California law from vacating or modifying an award on any ground not listed in the statutes. The parties’ agreement to add another basis for vacating or modifying an award was therefore entirely unenforceable.

The California Supreme Court has granted review of the DirecTV case to address whether parties to a commercial arbitration agreement may contractually expand the jurisdiction of the trial court to permit review of an arbitration award for legal error. The case has been fully briefed by the parties and has generated some interest, including a request by L.F.P., Inc – Larry Flint Publications – to file an amicus brief. Oral argument has not yet been scheduled. Because so many companies do business in California and because decisions of the California courts often influence decisions in other states, this case should be watched closely.

Louis Vuitton is once again making headlines by aggressively seeking to protect its valuable trademark and reputation. Louis Vuitton recently filed suit in U.S District Court for the Middle District of Florida in Tampa, Florida alleging trademark infringement by the Home Shopping Network (“HSN”). Louis Vuitton claims that HSN has been selling look-alike Louis Vuitton handbags and thereby violating at least six of its trademarks. The complaint also asserts claims for copyright infringement, misappropriation of advertising ideas, and intentional counterfeiting. In addition to its claims against HSN, Louis Vuitton also makes claims against American Elite Inc., the distributor that sold the merchandise to HSN.

This latest lawsuit is part of Louis Vuitton’s ongoing fight against counterfeiting and trademark infringement. On its website, the company proclaims that it has a special team devoted to fighting counterfeiting and is trying to make consumers aware of the risks inherent in purchasing counterfeit merchandise. Furthermore, Louis Vuitton notes that 13,000 counterfeiting proceedings and 600 raids were launched last year, with 1000 arrests. Finally, Louis Vuitton makes it clear that its products are sold exclusively in its stores and on it websites, so no one can claim they thought they were making a legitimate purchase when they bought a product on the street or at a “purse party.” Louis Vuitton’s actions and strategy are an example to other businesses of the steps that should be taken to protect a valuable trademark. A business that does not actively fight against trademark infringement risks tarnishing the company’s reputation by allowing counterfeiters to sell inferior product and weaken its trademark.

A recent decision by the United States Court of Appeals Sixth Circuit Court of Appeals prohibited the government from secretly accessing the contents of your e-mails . . . or did it? In Warshak v. United States, the Sixth Circuit affirmed an injunction prohibiting the federal government from using an order under the Stored Communications Act to get the contents of “personal e-mail” held by an ISP unless the government either provides notice and an opportunity to be heard or else makes a fact-specific showing that the account holder maintained no reasonable expectation of privacy “with respect to the ISP.” While the court’s decision specifically only applies to residents of the Southern District of Ohio, the implications of the Warshak decision will no doubt be widespread. But the language in Warshak, in particular the acknowledgement that account holders may easily waive any privacy expectations, is troubling.

Steve Warshak ran a company called Berkeley Premium Nutraceuticals selling things like penis enlargement pills and diet pills. The government began investigating him and his company and obtained court orders under the Stored Communications Act to compel two commercial ISPs to disclose material in Warshak’s e-mail accounts. The Act allows the government to compel disclosure of e-mail contents held by ISPs for more than 180 days using less process than a warrant, and, though the language is unclear, may also allow the government to obtain “opened” e-mail stored less than 180 days through similar methods. Warshak found out about the disclosure of his e-mails by the ISPs and filed a civil suit seeking declaratory and injunctive relief on the grounds that the compelled disclosure of his e-mails violated the Act and the Fourth Amendment. Warshak also sought a preliminary injunction blocking the government from using the Act to compel disclosure of the contents of e-mail with less process than a warrant in all future cases in the Southern District of Ohio. The government later indicted Warshak on 107 counts of wire fraud, bank fraud, money laundering, and assorted other crimes.

At issue in Warshak v. United States was 18 U.S.C § 2703, which tells the government by what means it can access user records, subscriber information, and content of electronic messages. More specifically at issue was whether the government could get access to Warshak’s e-mail content under this provision without giving him prior notice. The court made it clear that a constitutional right may be violated when the government obtains the contents of your e-mails without providing notice.

In an age where millions of Americans are under constant video surveillance, our credit card activity is tracked, our personal information is for sale to millions of marketing companies, and GPS systems are ubiquitous, it was almost shocking that the Sixth Circuit found that Warshak had a “reasonable expectation of privacy” in the content of his e-mails. In its lengthy opinion, the court compared the contents of e-mails to the contents of written letters, phone conversations, and safety deposit boxes at banks. With each of these items, we have a reasonable expectation that our “intermediary service provider” (such as the US Postal Service, AT&T, and the local bank), does NOT examine the contents of our conversations, our letters, and our safes merely because they COULD have access in emergency situations. Further, the court noted that postal workers do not read the contents of our mail in the normal course of business.

The Sixth Circuit made a point to examine Warshak’s agreement with his commercial ISP and assess whether this agreement could amount to a waiver of that reasonable expectation of privacy of the e-mail’s contents with respect to the provider. The court recognized that when a user agreement specifically provides that e-mails will be monitored or audited, the user’s knowledge of this fact may well extinguish any reasonable expectation of privacy. In the absence of such statement, “the service provider’s control over the files and ability to access them under certain limited circumstances will not be enough to overcome an expectation of privacy . . ..” Warshak’s agreement with his ISP allowed access only in limited circumstances, “rather than wholesale inspection, auditing, or monitoring of e-mails.” The court further pronounced that “for now, the government has made no showing that e-mail content is regularly accessed by ISPs, or that users are aware of such access to content.” The court went on to indicate that “if the government can show, based on specific facts, that an e-mail account holder has waived his expectation of privacy vis-à-vis the ISP, compelled disclosure of e-mails through notice to the ISP ALONE would be appropriate.”

This begs the question: Have you read your agreement with your Internet Service Provider? Or, rather, did you merely bypass the scroll bar and click “AGREE”? Was there any language allowing the ISP to audit, monitor, or inspect your e-mails? If so, you may have already waived your expectation of privacy, and this big win against Big Brother no longer applies to you.

Full Opinion text – http://www.ca6.uscourts.gov/opinions.pdf/07a0225p-06.pdf

Businesses and corporate lawyers are familiar with the need to conduct due diligence in corporate transactions. Oftentimes however, the status of a company’s intellectual property may not be properly investigated.

A comprehensive due diligence search must include a thorough search of the company’s intellectual property, including its licensed assets, such as computer software. A company’s intellectual property is essential to valuing a company, and identifying strengths, weaknesses, and exposure to potential liabilities. Indeed, the intellectual property should be evaluated before negotiations begin.

Here are some tips for making your due diligence more effective by ensuring that it includes all intellectual property assets.

The due diligence search should include review of all documents related to the following topics:

• General Intellectual Property due diligence

Identify the origins of all of the company’s IP and assure compliance with obligations related to licensed assets.

Review all threatened or pending litigation. Include review of any cease and desist letters concerning the company’s IP. Be sure to review any settlement agreements related to IP.

• Software

Software is a topic that most people overlook, but it is critical to the intellectual property due diligence search. Be sure to review all software licenses used by the seller, regardless whether the seller is the licensee or licensor, and assess the company’s software asset management program.

• Patents

A schedule of all issued, pending, and abandoned U.S. and foreign patents and patent applications should be assembled. Be sure to include all applications and patents filed by the seller, currently or formerly owned by the seller, or licensed to the seller.

Evaluate the strength of the patents.

• Copyrights

Review a schedule of all copyrightable works.

Review all copyright registrations and applications.

Review all licenses of copyrightable works used by the seller.

• Trademarks

Review a schedule of all trademarks and service marks and trademark names registered or used by the seller.

Review all trademark searches performed or obtained in connection with the marks.

Review all licenses related to the marks.

Evaluate the strength of the trademark rights.

• Trade Secrets

A description of the company’s confidential and proprietary information.

A description of methods and processes in place to protect the company’s trade secrets.

Review all agreements between seller and its employees related to confidentiality, non-disclosure, and assignments of inventions and copyrights.

Supreme Court Overturns Antitrust Precedent from 1911

On the last day of the Supreme Court’s 2006 term, the Court published its 5-4 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc.. Leegin raises an important issue related to retail sales agreements and violation of the Sherman Act.

Leegin manufactures products under the brand name Brighton – whose products include handbags, belts, jewelry and other accessories. PSKS owns a boutique that sold the Brighton products at its store. Leegin required its retailers to agree in writing to a minimum resale price for all of their products. (A minimum resale price maintenance (“Minimum RPM”) agreement is an agreement enforced by the manufacturer requiring the retailer to set the resale price at an agreed upon minimum. For example, Brighton would require PSKS to sell a handbag at a minimum price of $250.) PSKS initially agreed, but later sold products at a reduced price in order to compete against other nearby retailers.

Leegin sued in the United States District Court for the Eastern District of Texas and the jury found in favor or PSKS because the court determined that the Minimum RPM agreement was per se illegal under the long-standing precedent of Dr. Miles, decided in 1911. The Fifth Circuit Court of Appeals affirmed. The Supreme Court reversed in a 5-4 decision overruling Dr. Miles, and determining that vertical Minimum RPM’s are to be evaluated under the rule of reason – giving judges greater discretion in determining whether the Sherman Act was violated. The rule of reason requires a court to assess restraints on trade by looking at the impact on competition.

Most commentators and the dissent in Leegin believe that this decision will drive up retail prices and consumers will be paying even higher prices for specialty items because now, manufacturers can enforce vertical Minimum RPM agreements under the threat that the retailer will lose the opportunity to sell their goods if they do not comply with the agreement.

On May 29, 2007, the U.S. District Court for the Central District of California, Magistrate Judge Chooljian, found that a computer’s RAM (random access memory), is a tangible document that can be stored and must be turned over in a lawsuit. Because this order prohibits the Web Site from tossing RAM relevant data, it has potential to effect the way future litigants prepare for E-Discovery. It should be noted, however, that this order is currently stayed pending appeal.

Last year, the Motion Picture Association of America (“MPAA”) filed suit against TorrentSpy for copyright infringement. The MPAA believes TorrentSpy acts as a search engine to aid users in finding copyrighted video files thereby contributing, promoting and profiting from piracy.

Because of the nature of these businesses, the court found that TorrentSpy’s RAM contains data relevant to the litigation, and should thus be turned over. In addition, the Judge also ordered TorrentSpy to begin logging and storing user information, but allowed encryption of the Internet Protocol addresses belonging to the visitors of their website. TorrentSpy must now create documents not in the ordinary course of their business by logging user activity. Because this issue was of great concern, the court also questioned whether requiring the defendants to preserve and produce this server log data was equivalent to the creation of new data, and found that it was not, because the information at issue was already in existence – and it is in the defendant’s control and possession. As such, the court held that the order requiring defendants to preserve and produce the info was not tantamount to requiring the creation of new data. Torrent Spy must turn over all of this data to the MPAA.

This order raises several technical E-Discovery concerns. The Court granted this order in belief that the RAM is a tangible document that can be stored. While it is true that RAM can be stored, it is not permanent storage. RAM is continually being updated, changed, deleted, or overwritten in your business’ computers. For example, TorrentSpy’s RAM servers were, in the normal course of business, being overwritten approximately every six hours. Preserving and backing up this ever-changing data surely has the potential to economically cripple businesses, both small and large. In addition, because the nature of RAM is to continually change, spoliation of evidence may be a serious concern. It should be noted however, that this order does not require TorrentSpy to go back and recreate RAM’s past server logs, but rather, to begin storing the RAM server log data from this point forward.

A recent decision by the United States District Court, Southern District of New York, in Matter of September 11th Liability Insurance Cases, 2007 WL 9731666 (SDNY 2007) [Click here to view case], demonstrates that to avoid sanctions under the Federal Discovery rules, it is not sufficient to show that the litigant was instructed by counsel that documents generally were to be preserved when specific documents damaging to that parties’ case were withheld. The decision also illustrates that the obligations to produce documents created in a computer system encompass the obligation to produce any copies maintained in paper form if the electronic version is no longer accessible.

Zurich and its outside counsel represented to the Federal Court during the proceedings that there would be plenty of evidence on the issue of whether the Port Authority of New York was ever an additional insured under the binder issued by Zurich, resulting in the denial of the Port Authority’s motion to dismiss the declaratory judgment complaint. While the evidence before the District Judge showed that outside counsel met with Zurich shortly before the litigation commenced to remind it of its obligations with respect to preservation of evidence, the Court found that Zurich and its law firms had possession of a printed copy of a critical insurance policy document and failed to produce it to Plaintiff’s counsel over a long period of time. After providing Zurich and its counsel with the opportunity to explain why this document had not been produced, the Court rejected the claim of inadvertence and found that Zurich and its counsel were at fault.

The District Court imposed sanctions under the Federal E-discovery Rules in the amount of $500,000 under FRCP 37 jointly and severally against Zurich and its counsel for misconduct under FRCP 37 for Zurich’s failure to timely produce the insurance policy maintained on Zurich’s computer system and an additional $750,000 in sanctions against them for frivolous litigation conduct under FRCP 11.

The Court observed that bad faith is not required to be shown in order to warrant the imposition upon the adverse party of e-discovery sanctions.

A recent federal district court decision has clarified when state law claims are preempted by the federal Copyright Act and highlights the importance of registering for a copyright. Because different remedies and damages are available under federal and state law, the interaction of the two regimes affects a company’s potential exposure for infringement. In particular, businesses may be able to assert preemption of state law claims by arguing that the federal Copyright Act provides the exclusive remedy for any purported misappropriation of a work. Companies seeking to protect a work should also be aware that they may not be able to rely on the protections of state law where the work falls within the scope of the Copyright Act. To be entitled to any protection under the Copyright Act, it will be necessary to register the work.

The Frontier Group, Inc. v. Northwest Drafting & Design, Inc., 2007 WL 1880299 (D. Conn. 2007), arose out of a dispute over architectural plans. Frontier Group brought an action in state court under Connecticut law against Northwest Design Group, Mark Robinson, and Martial Grondin. While the claims against Northwest Design and Robinson were settled, Frontier alleged that Grondin violated the ownership rights Frontier had in a set of architectural plans, drawings, and specifications by converting Frontier’s rights to his own benefit to the exclusion of Frontier. Frontier created the plans for a home, but the homeowner sold the property to Grondin, who took the plans to another company to finish construction without consent or authorization from Frontier.

Frontier alleged that Grondin converted its ownership and possession rights in the plans, and thereby violated Connecticut’s Unfair Trade Practices Act. Grondin prevailed by arguing that Frontier’s claim was, in reality, a copyright infringement case and that Grondin’s state law claims were preempted. Grondin was able to remove the case to federal court and successfully move for summary judgment.

In assessing whether Frontier’s claims were preempted, the court used a two-prong test to determine whether the Copyright Act governs Frontier’s claim. The first prong is called the subject matter requirement and the second prong is called the general scope requirement. First, the court must determine whether the allegedly infringed work falls within the type of work protected by the Copyright Act, and second the court must determine whether the state law claim protects the same rights as the Copyright Act. The court found that the plans satisfied the first prong because they are works of authorship, fixed in a tangible medium of expression that fall within the categories protected by the Copyright Act. The court also found that the second prong was satisfied because Frontier’s claims did not contain any “extra elements” that made the claims different from a copyright infringement claim, a factor that would have helped to avoid preemption.

While the court found that the Copyright Act did apply, the court then granted summary judgment in favor of Grondin because Frontier did not have a registered copyright on the architectural plans, which is required before a copyright infringement suit may be instituted.

On June 29, 2007, the California Court of Appeal reversed a 15 million dollar jury award against Nestlé arising from the unauthorized use of a model’s image on a coffee label and in advertising. While Nestlé managed to get the large damages award reversed on what was essentially a limitations argument by invoking the “single publication rule,” the case nevertheless serves as a reminder to businesses that the use of a person’s image without authorization may result in significant exposure.

Sometime in 1986, Nestlé Canada arranged a photo shoot where Russell Christoff, a professional model, gazed into a cup of coffee and appeared to enjoy the aroma. Christoff was paid for his photo appearance and given a contract regarding the use of his image. This contract provided that if Nestlé Canada used the picture on a coffee brick label it was designing, he would be paid $2,000 plus an agency commission. The contract also stated that further negotiations would be needed for any other use. Without paying Christoff according to the terms of the contract, or even notifying him, Nestlé Canada used his image on the coffee brick.

Eleven years later, Nestlé redesigned their label for Taster’s Choice instant coffee and decided to use Christoff's image to replace the original Nestlé “taster” that graced the old label. A designer for Nestlé did not inquire into the terms of the contract with Christoff, nor did she attempt to contact him because she was under the mistaken belief that Nestlé owned the rights to his image. Nestlé began printing Christoff’s image on several different mediums of advertisement for Taster’s Choice, including the coffee products themselves. His image was even altered and used in Mexico. Despite all of this, Christoff claims he did not become aware of the use of his image until 2002. Christoff sued Nestlé in 2003 alleging causes of action for violation of California Civil Code section 3344 (which prohibits, inter alia, the unauthorized use of a person’s likeness or photograph), common law appropriation of likeness, quantum meruit, and unjust enrichment. At trial, the jury awarded more than $15 million in damages.
On appeal, Nestlé argued that the jury award must be reversed because the action was time-barred from the start. The SPR (“Single Publication Rule”) restricts all damages found upon a “single publication” to one cause of action only. A “single publication,” however, is distinguished from “republication,” which brings about a new cause of action. A republication occurs when its use is intended to reach a new audience, or if there is a modification to the presentation of the person’s likeness. The court also examined the possible application of republication when the same marketing pitch is applied to different states at different times, in contrast to when the same marketing plan is pitched to all states at the same time. The fact that Christoff’s image was used in different mediums apparently was of no interest to the court, so long as Christoff’s image was part of a mass marketing pitch. The court, however, made it clear that it could not tell from the record what marketing intentions Nestlé had. Surely Christoff’s image alteration and “Latinization” for the Nestle Mexico label could be considered a republication.

In the end, the court agreed with Nestlé, holding that the single publication rule applied to Christoff’s claim under section 3344 and his common law claim for misappropriation of his likeness. As a result, Christoff should have brought this suit within 2 years from the date Nestlé first published his image, or within 2 years of when a reasonable person in Christoff’s position had a meaningful ability to discover the use of his likeness. The court indicated that on remand, the jury would need to consider whether a reasonable person in Christoff’s position had a meaningful ability to discover that his likeness was being used and whether any republications occurred within the limitations period. In reading the court’s decision, it appears that to establish a republication theory, Christoff would have to request that Nestlé disclose all of their past marketing plans, including agendas, specified target markets, various mediums, and product and advertisement launch dates.

The appellate court further held that the jury’s damages determination was erroneous because Christoff’s expert testimony failed to establish that Christoff’s specific characteristics rose to icon status, or created value in the icon (the Taster’s Choice label illustration). This is mainly because “the icon with the image of a handsome man existed before and after Christoff’s likeness was used.” In other words – he was just another pretty face. The court further held that while the Copyright Act protected the photograph taken of Christoff, section 3344 protected his identity and persona. These protections applied even though Christoff was not a celebrity. Section 3344 provided a remedy beyond that afforded by the Copyright Act because, although embodied in a photograph, Christoff’s likeness itself was entitled to protection. On retrial, Christoff will have to demonstrate that some portion of Nestlé’s profits was attributable to the use of his likeness, and not just that of another handsome man being used as part of the “Taster’s Choice” imagery.

Full opinion: http://www.courtinfo.ca.gov/opinions/documents/B182880.PDF

Even if a business does not directly infringe a trademark or copyright, courts seem more willing to hold companies vicariously liable for contributing to others’ infringement. Recent decisions by the Ninth Circuit indicate that determining when such liability may arise can be tricky.

In Perfect 10, Inc.. v. Visa Intern. Service Ass’n, 2007 WL 1892885 (9th Cir. 2007), the US Court of Appeals for the Ninth Circuit held that Visa couldn’t be held vicariously or contributorily liable for allowing the purchase of copyright protected, and violated, images. Perfect Ten sued Visa, Mastercard, and other affiliated banks for processing credit card payments to websites that infringe Perfect 10’s intellectual property rights. Perfect Ten also alleged that international websites stole its images, altered them, and then illegally offered them for sale online. Rather than suing the direct infringers, Plaintiffs sued the deeper pockets – the financial institutions. The Ninth Circuit held that, despite having knowledge of the on going infringement, the credit card processors could not be held liable for inducing, enabling, or contributing to the infringing activity in the same way defendants in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913 (2005), A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001), and Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996), had been.

But in another case involving Perfect 10, the Ninth Circuit held that Google could be held contributorialy liable. In Perfect 10, Inc. v. Amazon.com, Inc., 487 F.3d 701 (9th Circ. 2007), the court concluded that Google could be liable for infringement if it had knowledge that the infringing images were available using its search engine and failed to take steps to prevent further damage to Perfect 10’s copyrighted work. The distinction drawn by the court was that Google’s search engine itself assists in the distribution of infringing content to the Internet users, while Visa and the financial institutions do not. The court in Perfect Ten v. Visa did acknowledge, however, that the financial institutions do make it more profitable for infringers to violate copyrights.

Businesses and individuals are bombarded with contractual legalese daily, and seldom consider the consequence of the language prior to agreeing to the contract. A recent decision addresses the recurring issue of whether language in an adhesion contract barring class actions is enforceable. Authority is split nationwide on the critical question of whether class action waivers in arbitration clauses are enforceable. Several states have denied these waivers any worth, while others continue to enforce class action waiver clauses.

In Scott v. Cingular Wireless, 2007 WL 2003404, (Wash. July 12, 2007), the Supreme Court of Washington granted a substantial win to consumers in a case involving cellular service giant Cingular. Cingular’s service contract included an arbitration clause that provided, inter alia, that the parties waived any right to proceed as part of a class action. The arbitration clause included other provisions applying the American Arbitration Association rules and guaranteeing compensation for consumer arbitration fees, unless determined frivolous. Under the Federal Arbitration Act, written arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exits at law or in equity for the revocation of any contract.” The court nevertheless threw out the arbitration clause and held that a class action waiver in Cingular’s standard arbitration clause was unconscionable and violates Washington State public policy. The court wrote that the waiver “effectively denies large numbers of consumers the protection of Washington’s Consumer Protection Act . . . and because it effectively exculpates Cingular from liability for a whole class of wrongful conduct.” The court reached this conclusion based on its acknowledgement that many of the grievances consumers might have against Cingular would never be litigated absent the filing of a class action because the cases were too small individually.

While Washington has now weighed in on the issue, the question of whether the right to proceed as a class action may be waived as part of an arbitration agreement remains open in other jurisdictions.

Potential security problems with the iPhone offer yet another example of the potential legal issues that can arise for businesses when new technology hits the streets. Neither marketing hype nor exciting innovations will protect a company that has not also devoted resources to considering the legal implications of a new product.

Apple sold over 700,000 iPhones the first 3 days of release, for as much as $600 each. It is one of the priciest and most anticipated high tech phones to ever hit the market. Unfortunately, it appears Apple spent more time on their trademark advertising campaigns and media hype than on investigating the loopholes in the phone’s security system. A Baltimore expert security team just unveiled the iPhone’s hacking sweet-spot.

According to the Independent Security Evaluators , a security attacker can gain access to the iPhone through a website controlled by the hacker, or through a wireless access point. The 7 person part-time team of investigators managed to hack the phone in just 2 weeks. They discovered that attackers can create a network with the same name and encryption method as the one the phone already uses. Thereafter the attacker can substitute a webpage with exploit code to gain access to the phone. Another means of breaching the phone’s security system is by using a link planted on an unedited or unmoderated online forum, or a link sent by SMS or e-mail. When the iPhone user opens a “malicious” webpage, the attacker’s code can be run on the phone and allow the attacker to read the iPhone’s SMS address book, SMS log, call history, and voice-mail information. This information is then also sent to the attacker. One hacked, the attacker can also access the iPhone and manipulate it to send the hacker the phone’s passwords, send text messages to sign up for additional services, and record audio to relay to the attacker. The Independent Security evaluators introduced a patch for the susceptible spot to Apple, and will reveal further information about the exploit at a conference in Las Vegas on August 2, 2007. This patch is not yet available to consumers.

It is unknown whether any lawsuits concerning the breach have been filed to date , however, the causes of action will be broad and no-doubt, creative. Causes of action could range from the vanilla actions like fraudulent inducement, negligence, breach of warranty for services, Texas Wiretap Act, or product defect to more creative causes of action such as contributory invasion of privacy or public disclosure of private facts. Unlike the data breach incidents involving TJMaxx, DSW, Disney, or Check N’ Go, most of the personal data in the iPhone (such as address books and SMS messages) is not uploaded and stored by Apple. Instead, the data is uploaded voluntarily by the consumer, just like it was a personal home computer. Apple’s potential liability on other data breaches, such as the attacker accessing and manipulating the consumer’s billing, are more questionable. Because such little information is known about the security breach, and each state’s Privacy and Security Laws differ, it is unknown whether this breach would be in violation of the any state Data Security Acts. Without federal mandates on security breach and notification, the state courts are left to their own interpretation of the state’s laws in light of the issues presented.

Fretful potential plaintiffs will probably look to AT&T, the exclusive service provider for the iPhone, for liability as well. As mentioned in a July 24, 2007 blog entry entitled Arbitration Clause Barring Class Actions is Unconscionable and Unenforceable, AT&T is currently caught in the middle of disputes arising from its arbitration clause forbidding class actions. Washington’s Supreme Court recently threw out the arbitration clause in its entirety; however, the states nationwide are struggling with waiver of class action language in arbitration clauses. Long story short, this will be an interesting and potentially messy case to track.

A recent federal court decision highlights the need for businesses to maintain the confidentiality of their valuable trade secrets. While many companies rely on non-compete agreements with nondisclosure clauses, that may not be enough. Without internal protocols for maintaining the secrecy of devices, products, or methods, a company may find that there is no legal protection for that information should it end up in the hands of a competitor. A business concerned about protecting its secrets should be proactive in establishing and enforcing safeguards before the secrecy of such information becomes an issue in court.

In Tank Tech, Inc. v. Neal, 2007 WL 2137187 (E.D. Mo. 2007), Tank Tech found out that its efforts to protect its trade secrets were insufficient. Tank Tech is in the business of retrofitting/lining, inspection, and repair of above ground and underground storage tanks used in the petroleum industry. Neal was a Tank Tech foreman who had signed a non-compete agreement that included a requirement that he not share trade secrets without written consent. Neal quit his job and went to work for a competitor. When he left, Neal took numerous photographs of Tank Tech worksites, a jobsite checklist, and a list of items needed and used for all Tank Tech jobsites. Tank Tech sued Neal alleging that Neal had misappropriated its trade secrets, including information about various processes and devices used by Tank Tech at its worksites. Tank Tech sought to enforce its non-compete agreement and enjoin Neal from working for the competitor for a period of five years.

The federal district court refused to issue the requested injunction. The court noted that the employer bears the burden of proving that its purported trade secrets are, in fact, secret. In this case, Tank Tech’s claims were “fatally and inescapably doomed by its own lack of secrecy with respect to all of the designs and developments it has presented.” While Tank Tech had its employees sign non-compete agreements and barricaded its job sites, this was insufficient to meet its burden of demonstrating that its information was actually secret.

The court was very clear that a non-compete agreement does not grant protection when the information itself is not secret. The evidence indicated that all of Tank Tech’s employees were aware of the information, and Tank Tech never told its employees that the information was to be considered a trade secret. Tank Tech had actually sold one of the devices it claimed was secret to another competitor. Tank Tech also demonstrated many of the procedures it claimed were secret at trade shows. Other aspects of Tank Tech’s processes were in plain view at job sites and were not so complicated that the designs and elements could not be readily reproduced by a competitor. The court also noted that there was no evidence indicating that Tank Tech had expended a significant amount of effort or money in developing the information it claimed was secret.

The decision in Tank Tech serves as a reminder to businesses that if you want to keep important information away from your competitors, it is vital to develop plans and protocols that will keep your trade secrets secret.

The United States Court of Appeals for the Second Circuit has recently clarified the standards for false advertising under the Lanham Act. The court has now indicated that an advertisement can still be false even when it does not explicitly include any false assertions if the entire advertisement, taken as a whole, conveys a false message. But the court also expanded the concept of “puffery” to include advertisements featuring inaccurate images that are so grossly exaggerated that no reasonable consumer would believe them to be true. These dueling concepts may make it more difficult for businesses to discern where the line is drawn with respect to advertising that attacks the competition.

Time Warner Cable, Inc. v. DirecTV, Inc., 2007 WL 2263932 (2d Cir. 2007), arose out of a dispute between Time Warner and DirecTV over a marketing campaign DirecTV conducted touting its HDTV picture quality in comparison to cable TV. Time Warner alleged that two television ads run by DirecTV, as well as internet advertisements, constituted false advertising under section 43(a) of the Lanham Act.

One TV advertisement featured Jessica Simpson as her Daisy Duke character from the “The Dukes of Hazzard” movie, with Simpson telling viewers “Hey, 253 straight days at the gym to get this body and you're not going to watch me on DirecTV HD? You’re just not going to get the best picture out of some fancy big screen TV without DirecTV. It’s broadcast in 1080i. I totally don't know what that means, but I want it.” Another ad featured William Shatner, as Captain Kirk from “Star Trek,” in a conversation taking place on the bridge of the Starship Enterprise:

Mr. Chekov: Should we raise our shields, Captain?

Captain Kirk: At ease, Mr. Chekov. [addressing viewers] Again with the shields. I wish he’d just relax and enjoy the amazing picture clarity of the DirecTV HD we just hooked up. With what Starfleet just ponied up for this big screen TV, settling for cable would be illogical.

Mr. Spock: [Clearing throat.]

Captain Kirk: What, I can’t use that line?

The court noted that under section 43(a), liability may be established when an ad is literally false or it is likely to mislead or confuse consumers. With respect to the Jessica Simpson ad, the ad indicates that the best quality picture, in 1080i resolution, could only be obtained from DirecTV. The court agreed with Time Warner that this was literally untrue, given that the same picture resolution could be obtained by ordering HDTV programming from a cable company.

In considering the Shatner ad, the court broke new ground. The court’s analysis focused on Shatner’s statement that for HDTV, “settling for cable would be illogical.” The court adopted what it called the “false by necessary implication” doctrine, which requires a court to evaluate whether an advertisement is literally false by considering the message conveyed by the entire advertisement and not limiting its analysis to the specific statements contained in the ad. While none of the statements in the ad, in isolation, were literally false, the court concluded that the entire Shatner ad conveyed a false message – that DirecTV’s HDTV picture was superior to cable’s HDTV picture.

The court, however, rejected Time Warner’s contention that DirecTV’s internet ads were false. The advertisements featured a split screen, with one side highly distorted that purportedly depicted a cable TV picture. The court noted that the ads, which included images of sports figures, were “not just inaccurate; they are not even remotely realistic.”
The court concluded that the internet ads were acceptable because they so distorted what a cable image would look like that no viewer could think it was an accurate depiction. In doing so, the court accepted DirecTV’s contention that the ads constituted puffery, which cannot form the basis of a claim under section 43(a).

Puffery is generally defined as subjective claims that cannot be proven true or false and includes exaggeration or overstatement expressed in broad, vague, and commendatory language. The court expanded this concept to apply to the grossly distorted images featured in the DirecTV ads. The ads depicted the cable TV picture as a series of large, colored square blocks laid out in a grid that nearly entirely obscured any image. The court concluded that this was obvious hyperbole, stating that “it is difficult to imagine that any consumer, whatever the level of sophistication, would actually be fooled by the Internet advertisements into thinking that cable’s picture quality is so poor that the image is nearly entirely obscured.”

While the court’s expansion of the concept of puffery may allow more freedom to advertisers, the court’s treatment of DirecTV’s television ads indicates that taking care not to make false statements in an ad may not be enough to avoid a charge of false advertising.

The latest twist in the patent dispute between Microsoft and Alcatel-Lucent demonstrates how difficult it can be for a business to enforce patent rights it thinks it holds. Even when a company gets a favorable verdict, true victory may be a long way off.

In February of 2007, a jury sat through 3 weeks of trial and 4 days of deliberation resulting in a unanimous verdict that Microsoft must pay $1.52 billion for infringing Alcatel’s patent rights. On August 6, however, Judge Brewster of the United States District Court for the Southern District of California ruled that the jury’s damage award could not stand because one of the two patents was not infringed. In the 43 page opinion, the court determined that they jury’s verdict was “against the clear weight of the evidence,” and that Microsoft had a valid license to the patent co-owned by the Fraunhofer Institute, a German research institute.

Alcatel-Lucent is the world’s largest maker of telecommunications equipment. This particular dispute arose over Alcatel-Lucent’s MP3 digital music format developed years go. In 1989, AT&T Corp and the Fraunhofer Institute agreed to develop the MP3 format. MP3 has since become widely used by individuals and companies worldwide. Microsoft contended that it paid $16 million for the rights to the technology by licensing it from a co-owner of the patent. The district judge disregarded the jury’s verdict and agreed with Microsoft that its license of the technology was valid. The decision will affect many other companies that have also licensed MP3 technology. For instance, companies like Apple Inc. and RealNetwork feared legal potential liability should Alcatel prevail in its claims with respect to the MP3 patent.

Although this would have been the largest patent verdict in US history, Alcatel still hoped for a higher damage award, and to obtain a precedent setting verdict. Specific to this case, Alcatel complained that the jury award only covered sales through November 2005. That motion was denied however, because Alcatel was “no longer the prevailing party.” Alcatel hopes this decision won’t stick around long and plans on appealing it. The appeal of this verdict is one to follow closely.

Alcatel is also pursuing at least six other cases concerning the use of technology developed at Bell Labs, which is now owned by Alcatel-Lucent. Stay tuned for the other disputes, including those concerning video coding on Microsoft’s Xbox game console and Window’s interface.

A federal judge’s decision castigating both attorneys and their client in the Qualcomm patent litigation highlights the potential for conflict between attorneys and their clients created by the new federal e-discovery rules. The e-discovery rules place great burdens on both counsel and clients to produce information stored in electronic form. Counsel has a duty to protect the client’s interest and to make sure that discovery complies with the rules. But what if the discovery doesn’t comply? When responsive electronic information is not produced, the interests of the client and counsel may come into conflict, with counsel attempting to shield herself from the wrath of the court by claiming that she was not made aware by her client of the existence of the responsive information.

These issues arose in the ongoing Qualcomm litigation, where, according to the court, counsel tried to fend off allegations of noncompliance by claiming that the client kept counsel “in the dark” about the existence of more than 200,000 pages of critical e-mails and electronic documents that were not produced in discovery.

Qualcomm unsuccessfully sued rival chip maker Broadcom for infringing several of its patents dealing with the transmission of video data under the H.264 standard. Broadcom counterclaimed, alleging that the patents were unenforceable due to waiver and inequitable conduct. At trial, the jury returned a unanimous noninfringement verdict in favor of Broadcom. In an advisory verdict, the jury also found that one of the patents was unenforceable due to inequitable conduct and both patents were unenforceable due to waiver. In its August 6, 2007 decision, the United States District Court for the Southern District of California (Brewster, J.), rejected the inequitable conduct finding but held that both patents were unenforceable due to waiver based on Qualcomm’s conduct before the Joint Video Team (“JVT”), the standards-setting body that created the H.264 video standard.

According to the court, the waiver issue turned on information about Qualcomm’s participation with the JVT that Qualcomm had originally not disclosed. The court found that Qualcomm had concealed “over two hundred thousand pages of emails and electronic documents that were finally produced four months after trial containing direct evidence that multiple representatives of Qualcomm participated in the JVT from the beginning, and that multiple Qualcomm witnesses knew of this participation even as they testified to the contrary at deposition and trial.” The court’s decision indicates that the possibility that this information existed only came to light during Broadcom’s cross-examination of a Qualcomm witness on one of the last days of trial.

According to the judge, “after over three more months of denials, refusals, and opposition, Qualcomm reversed its position, allegedly to avoid further dispute over the matter, and produced on April 13, 2007, over 110,000 pages of emails, company correspondence, and memoranda, and on May 15, 2007, over 120,000 more pages, some of which have now been filed with the Court, none of which have been disputed by Qualcomm.” The court found that Qualcomm had actively engaged in misconduct by concealing information from the court and opposing counsel. In support of this finding, the court pointed to, inter alia, e-mails that the court claimed evidenced Qualcomm’s actions before the JVT and contradicted testimony given under oath by Qualcomm personnel.

The court specifically concluded that Qualcomm’s counsel “participated in an organized program of litigation misconduct and concealment throughout discovery, trial, and post-trial before new counsel took over lead role in the case on April 27, 2007.” The court rejected counsel’s claim that Qualcomm had kept counsel in the dark about the existence of the e-mails and other documents. The court pointed to a letter in which, according to the court, Qualcomm counsel claimed that while perhaps “there was some fleeting mention of emails in my presence,” he was “not cognizant that the emails from Ms. Raveendran’s archive had been identified.” The court noted that counsel had previously told the Court during a sidebar that no such emails existed.

The court’s decision makes it clear that the court didn’t believe counsel’s protestations of innocence. The court stated that Qualcomm counsel’s discovery responses “demonstrate that they were able to locate with alacrity company records from December 2003 forward and find four or more Qualcomm employees participating in proceedings of the JVT. Yet inexplicably, they were unable to find over 200,000 pages of relevant emails, memoranda, and other company documents, hundreds of pages of which explicitly document massive participation in JVT proceedings since at least January 2002.” The court found that “these examples of Qualcomm counsel’s indefensible discovery conduct belie counsel’s later implied protestation of having been ‘kept in the dark’ by their client.” The court also referenced its finding that Qualcomm’s counsel, while preparing a witness for her testimony, “had stripped over fifty pages of emails regarding the JVT from her email archives.”

Given the difficulties inherent in locating and producing electronic information, the issues raised in the Qualcomm litigation may be a preview of things to come. The discovery dispute and the resulting court order certainly raise questions regarding the extent of counsel’s duty to investigate the existence of responsive electronic information, the potential conflict between counsel’s duties to the court and the client’s interests, as well as the circumstances under which counsel will be held responsible for a client’s failure to make electronic information available in discovery.

Citation: Qualcomm, Inc. v. Broadcom Corporation, No. 05-CV-1958-B(BLM), 2007 WL 2296441 (S.D. Cal. August 6, 2007).

In a trademark action involving lightweight car toys, the Ninth Circuit has clarified the weight to be given to the eight Sleekcraft factors when determining the likelihood of confusion. Business concerned about trademark infringement issues should consider the ruling in Jada Toys, Inc. v. Mattel, Inc., 2007 WL 2199286 (9th Cir. 2007), where the court refused to completely rule out a claim of infringement even where the two marks were dissimilar. The court wanted to make it clear that even though some factors are “more important than others,” a determination of dissimilarity alone is insufficient to support a finding that there was no evidence of infringement.

Jada Toys filed suit against Mattel asserting claims for trademark infringement, false designation of origin, and unfair competition related to Mattel’s advertising and sale of it’s OLD SCHOOL and NEW SCHOOL line of car toys, where Jada Toys had registered the trademark of OLD SKOOL. In turn, Mattel filed counterclaims asserting that Jada’s use and sale of its HOT RIGZ mark infringed on Mattel’s HOT WHEELS mark. Both parties moved for summary judgment.

Trademark infringement claims often turn on whether the alleged infringer’s use of a mark creates a likelihood of confusion. The eight factors employed to determine the likelihood of confusion (the “Sleekcraft factors”) are (1) strength of the mark; (2) proximity of the goods; (3) similarity of the marks; (4) evidence of actual confusion; (5) marketing channels used; (6) type of goods and degree of care likely to be exercised by the purchaser; (7) defendant’s intent in selecting the mark; and (8) likelihood of expansion of the product lines. AMF Inc. v. Sleekcraft Boats, 599 F.2d 341, 348-49 (9th Cir. 1979).

The district court granted summary judgment against Mattel on its infringement counter-claim, relying on the principle that the dissimilarity of the marks alone determined that no likelihood of confusion existed. None of the other Sleekcraft factors were considered. On appeal, the Ninth Circuit reversed because dissimilarity alone does not obviate the need to inquire into evidence of other important factors. While it is true that the test for likelihood of confusion is “pliant” and that some factors are more important than others, that does not mean that dissimilarity alone is determinative of the likelihood of confusion. Evidence of “relatively important factors” must be considered as well. The decision indicates that even a dissimilar mark may be infringing if some of the other Sleekcraft factors are present.

Full Opinion Text: http://www.ca9.uscourts.gov/ca9/newopinions.nsf/F552D4DFDE50F88B8825732A007F4367/$file/0555627.pdf?openelement

In AT&T Mobility, LLC v. National Ass’n for Stock Car Auto Racing, Inc., 2007 WL 2297832 (11th Cir. 2007), decided on August 13, the Eleventh Circuit rebuffed a claim filed by AT&T seeking an injunction compelling NASCAR to permit it to display its logo on a race car originally sponsored by Cingular. The decision cleared the way for NASCAR to prevent AT&T from substituting the AT&T logo for the current Cingular logo on Jeff Burton’s racing car. The court’s resolution of the ongoing dispute highlights the importance of careful drafting in sponsorship agreements as well as the need to consider the legal ramifications of any potential rebranding of a business.

AT&T bought Cingular and has since been in the process of rebranding the wireless provider under the AT&T name. Naturally, AT&T wanted to place the AT&T logo on Jeff Burton’s No. 31 Richard Childress Racing Chevrolet. After all, NASCAR races are broadcast in over 150 countries to approximately 75 million viewers. But NASCAR was not so sure this was a good idea.

NASCAR declined to permit AT&T to display its logo on Jeff Burton’s race car because NASCAR asserted that this action would violate its contract with Sprint Nextel. In June of 2003, Sprint Nextel Corp. reportedly paid $700 million for its exclusive sponsorship rights for the NASCAR Cup Series races over a 10 year period. The Nextel Sponsorship Agreement contained language defining competitors and specifically naming AT&T and several other telecommunications companies. Competitors of Sprint Nextel are prohibited from advertising and sponsorships in connection with NASCAR Nextel Cup Series Events. However, at the time this agreement was executed, Nextel became aware that the #31 car owned by RCR and driven by Jeff Burton, had been sponsored by Cingular Wireless since 2001. According to the court’s opinion, the Nextel Sponsorship Agreement carved out narrow exceptions to Sprint Nextel’s exclusivity as an accommodation to those pre-existing telecommunications sponsors. The agreement permitted RCR’s #31 car to continue under their pre-existing sponsorship agreement with Cingular, under certain terms and conditions. NASCAR also agreed to take all legally permissible steps to protect Sprint Nextel’s exclusivity.

In 2007, NASCAR, RCR, and Jeff Burton were parties to a 2007 Driver and Car Owner Agreement. The court noted that an addendum to the RCR Agreement, designed to effectuate the narrow exceptions for Nextel’s exclusivity, contained a grandfather clause permitting RCR to “renew it’s non complying sponsorship so long as the sponsor’s brand position is not increased on the #31 car.” This clause also provides that “in the event the sponsorship relationship with Sprint Nextel Competitor is not renewed, RCR will not be permitted to enter into a subsequent sponsorship agreement with a different Sprint Nextel Competitor.” On January 4, 2007, RCR submitted approval for a paint scheme of car #31 that maintained the Cingular logo on the hood of the car, but also introduced the AT&T logon on the rear panel. The court stated that NASCAR rejected this paint scheme as it violated the Sprint Nextel Sponsorship Agreement, prohibiting the display of the AT&T logo. On March 26, 2007, AT&T Mobility filed an amended complaint against NASCAR asserting claims for breach of the RCR Agreement, breach of implied covenant of good faith and fair dealing, and seeking a declaratory judgment from the district court that AT&T could place the name, brand, logos, and marks of its choosing on car #31, driver uniforms, helmets, and in all merchandising and licensing rights, including a change of its name, brand, logos and marks to AT&T. AT&T also requested a preliminary injunction preventing NASCAR from interfering with its right to place its name, logo, and marks on car #31. The district court found that AT&T had standing as a third party beneficiary of the RCR and NASCAR agreement, and granted AT&T’s requested injunction. The appellate court decided otherwise.

The Eleventh Circuit found that AT&T did not have standing to challenge NASCAR’s decision under the RCR Agreement to prohibit the display of AT&T Logo on the #31 car. Georgia law permits a “beneficiary of a contract made between other parties for his benefit [to] maintain an action against the promisor on the contract.” Ga. Code Ann § 9-2-20(b). Further applying Georgia law, the court stated that in order for a third party to have standing to enforce a contract, it must clearly appear from the contract that it was intended for his benefit. The court said that this simply wasn’t the case in the RCR-NASCAR agreement. The court reasoned that any benefit to Cingular was merely incidental to NASCAR’S intended purpose of preserving RCR’s choice of sponsorship, and that the fact that Cingular (now AT&T) would benefit was not enough. The court was also unable to conclude that NASCAR promised to render any performance to Cingular under the RCR Agreement, stating that “RCR was the intended beneficiary of that promise, not Cingular.” RCR retained the rights to either continue or discontinue their sponsorship with Cingular, and so the court believed that NASCAR assumed no duty to preserve or protect Cingular or its successors rights. This injunction was vacated and remanded for dismissal. The remainder of the case, including a countersuit by NASCAR has yet to be resolved.

Full Opinion Text: http://www.ca11.uscourts.gov/opinions/ops/200712299.pdf

The Securities and Exchange Commission has adopted a new rule intended to clarify its authority to bring enforcement actions against hedge fund advisers. The SEC’s action comes in the wake of a federal appeals court decision questioning attempts by the SEC to invoke its statutory authority to control hedge funds and other pooled investment vehicles. The new rule clarifies the SEC’s intent to expand its regulation of hedge funds and similar investment types and authorizes enforcement actions against investment advisers without a showing of fraudulent intent. The new rule, while not creating any private right of action, will also apply to both registered and unregistered investment advisers.

The new rule appears to be inspired by the DC Circuit’s decision in Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006). The SEC has previously brought enforcement actions under section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80-b(1), et seq., against investment advisers that the SEC alleges have defrauded investors in hedge funds or other pooled investment vehicles. The statutory provision invoked by the SEC, 15 U.S.C. § 80-b(3), by its terms does not apply to investment advisers with 15 or fewer clients.

After the near collapse of the Long Term Capital Management fund in 1998, the SEC began exploring ways to increase the regulation of hedge funds. With the fund itself considered to be the “client,” section 80-b(3) did not apply. In 1994, the SEC issued a regulation redefining the term “client” as used in section 80-b(3). Under the rule, advisers to hedge funds must register with the Commission if the funds they advise have fifteen or more “shareholders, limited partners, members, or beneficiaries.” 17 C.F.R. § 275.203(b)(3)-2. In Goldstein, an investment advisory firm and a hedge fund petitioned the court for review of an SEC order regulating hedge funds under the Investment Advisers Act of 1940. The court held that this rule, which essentially required that investors in a hedge fund be counted as clients, was invalid as conflicting with the purposes underlying the statute.

In answer to this decision, the SEC has now adopted Rule 206(4)-8, which becomes effective on September 10, 2007. In doing so, the SEC has invoked section 206(4) of the Investment Advisers Act of 1940, which specifically makes it unlawful for investment advisers to engage in any act or practice that is fraudulent or deceptive and authorizes the SEC to adopt rules that are reasonably designed to prevent fraud by advisers. This new rule allows the SEC to avoid the client limitation on which the Goldstein decision was premised.

Under new rule 206(4)-8, it is a violation for the investment advisor of any pooled investment vehicle to:

1. make any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading to any investor or prospective investor in the pooled investment vehicle; or


2. otherwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.

By adopting rule 206(4)-8, the SEC has signaled its intent to increase its enforcement of the laws against hedge fund advisers and advisers to other pooled asset vehicles. The rule allows the SEC to proceed against advisers that disseminate materially false or misleading information or omit material information, with or without intent to defraud, or otherwise engage in fraudulent conduct.

The United States Court of Appeals for the Second Circuit has tightened its once-liberal policy with respect to oral arguments. The court has adopted Interim Local Rule 34, which limits the circumstances under which parties to an appeal will be entitled to oral argument. Interim Local Rule 0.29 also establishes a procedure under which certain types of immigration-related appeals are placed on a non-argument calendar. Because oral argument is no longer automatically available, parties can no longer count on being able to clarify points in oral argument. Businesses with appeals in the Second Circuit should make certain that every argument they intend to make to the court is included in the briefing.

Under the old rules, parties were generally entitled to oral argument, although the court could determine, on its own, to decide the case based on the briefs. Interim Rule 34 states that parties now must request oral argument within a specified time frame or the case will be decided on the papers. The court has invited the public to comment in writing on the new rule. Comments must be submitted by September 27, 2007.

Interim Rule 34 requires that in an appeal where all parties are represented by counsel, counsel for the parties must confer and file, within 14 days after the due date of the last brief, a joint statement indicating whether the parties seek oral argument or intend to submit the case for decision on the briefs. If only some of the parties want oral argument, the statement must identify those parties. If the statement is not filed within the specified time, the case will be decided on the briefs unless the court otherwise directs.

The court has created a form for the joint statement that is available on the court’s website. Parties are not required to indicate why oral argument would be helpful to the court, and the form does not provide any place for the parties to do so.

Even if the parties request oral argument, the court, on its own motion, may choose not to hear oral argument. If the court contemplates doing so, the parties will be given an opportunity to file a statement setting forth the reasons for hearing oral argument. Oral argument will be allowed unless all three judges on a panel agree that (1) “the appeal is frivolous,” (2) “the dispositive issue or set of issues has been recently authoritatively decided,” or (3) “the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument.”

Interim Rule 34 does not apply to certain types of immigration cases that are automatically placed on the non-argument calendar under Interim Rule 0.29. This rule applies to appeals or petitions for review of the denial of: (1) “a claim for asylum under the Immigration and Nationality Act (“INA”),” (2) “a claim for withholding of removal under the INA,” (3) “a claim for withholding or deferral of removal under the Convention Against Torture (“CAT”),” or (4) “a motion to reopen or reconsider an order involving one of the claims listed above.” Cases on the non-argument calendar will be disposed of by a panel without oral argument unless the court chooses to transfer the case to the regular argument calendar.

Because arguments not made in the briefing may be waived, it is never a good idea to omit an argument from the briefs with the intent of raising it at oral argument. Overall, these new rules are another reminder that a lawyer should never think “I’ll just wait for the argument” to clean up the brief or to really flesh out the arguments you intend to make.

The court’s order adopting Interim Local Rule 34 and inviting public comment may be found here: http://www.ca2.uscourts.gov/Docs/News/localrule34final.pdf

In an important case for businesses concerned about potential liability for data security breaches, the United States Court of Appeals for the Seventh Circuit has held that plaintiffs who only sought damages for future credit monitoring and emotional distress did not suffer a “compensable damage” under Indiana law for negligence and breach of contract actions. While the decision in Pisciotta v. Old Nat. Bancorp, 2007 WL 2389770 (7th Cir. 2007), only applies directly to claims based on Indiana law, the court’s reasoning may be helpful in responding to similar claims in other states.

The case arose out of a data security breach involving a banking website. Defendant Old National Bancorp (“ONB”) operates a marketing website on which “individuals seeking banking services can complete online applications for accounts, loans and other ONB banking services.” Depending on the service requested, applications required submission of the customer or potential customer’s personal information, such as their name, address, social security number, driver’s license, date of birth, mother’s maiden name, and credit card or other financial account numbers. The web hosting facility notified ONB that there had been a security breach, and ONB in turn notified its customers and potential customers.

Plaintiffs filed a class action against ONB alleging that “by failing to protect [their] personal confidential information [ONB] caused Plaintiffs and other similarly situated past and present customers to suffer substantial potential economic damages and emotional distress and worry that third parties will use [the plaintiffs’] confidential personal information to cause them economic harm, or sell their confidential information to others who will in turn cause them economic harm.”

The plaintiffs asserted that they had been damaged because they “have incurred expenses in order to prevent their confidential personal information from being used and will continue to incur expenses in the future.” Further, the plaintiffs requested compensation “for all economic and emotional damages suffered as a result of [ONB’s] acts which were negligent in breach of implied contract or in breach of contract,” and “any and all other legal and/or equitable relief to which Plaintiffs . . . are entitled including establishing an economic monitoring procedure . . ..”

The Seventh Circuit, applying Indiana law, affirmed a trial court’s entry of judgment on the pleadings pursuant to Rule 12(c), holding that as a matter of law, the plaintiffs failed to assert any compensable damages. The appellate court acknowledged that many other courts have found that federal courts lack jurisdiction because a plaintiff whose data has been compromised, but not yet misused, has not suffered an injury-in-fact sufficient to confer Article III standing. The court, however, agreed with the notion that the injury-in-fact requirement can be satisfied by only a threat of future harm or by an act which harms the plaintiff by only increasing the risk of future harm that the plaintiff would have otherwise faced, absent the defendant’s actions.

The court was presented with the question of whether Indiana would compensate victims for potential future damage in the form of credit monitoring to guard against identity theft that might occur as a result of a data security breach. The Seventh Circuit found no Indiana precedent with respect to the issue. Because Indiana did not yet have any data privacy statutes, the court was forced to predict how the Indiana Supreme Court may have ruled.

In its analysis, the court compared the plaintiff’s situation to that of a toxic tort plaintiff seeking damages for fear of future injury. Noting that Indiana courts had not recognized a claim for the cost of future medical monitoring, the court also considered other state cases regarding the issues raised in this case.

The court recognized that the Indiana legislature did enact a statue applicable to database security breaches sometime after the plaintiffs’ causes of action arose. Although this statute could not be applied to this case, the Seventh Circuit considered it as indicative of Indiana public policy on the question of data breaches. The new Indiana privacy statute only imposes a duty to disclose a breach and did not create a private right of action to enforce it. According to the court, the statute does not create a duty to compensate affected individuals for inconvenience or potential harm to credit that might follow a breach. The court concluded that the narrowness of the statute, combined with other Indiana authority regarding future harm, suggested that Indiana law would not recognize the costs of credit monitoring as “compensable damages.” Ultimately, the court declined to adopt a “substantive innovation . . . to invent what would be a truly novel tort claim,” and affirmed the trial court’s dismissal of claims against ONB. The Seventh Circuit’s struggle with the issues raised in Pisciotta is likely to be repeated in the future as other courts deal with the novel issues raised by data security breaches.

See the full opinion here: http://www.ca7.uscourts.gov/tmp/680M5MZZ.pdf

A recent federal district court opinion makes it clear that a claim for infringement of an unregistered derivative work does not give rise to federal subject matter jurisdiction under the Copyright Act. The decision in Dalton-Harris Homes, Inc. v. Williams, 2007 WL 2461892 (D. Ariz. 2007), highlights the importance of registering a work that a business hopes to protect. While derivative works are generally entitled to copyright protection, if a derivative work is not itself registered, federal court jurisdiction cannot be invoked based on infringement of the derivative work alone.

The factual scenario in the case was a bit convoluted. Dalton-Ross Homes accused Williams of infringing a copyright it holds on architectural floor plans for houses. Another homebuilding company developed the “VDM Plan,” a floor plan for single-family homes, and registered it with the U.S. Copyright Office. Dalton-Ross licensed the VDM Plan from the original owner. Dalton-Ross later entered into a contract with Link for construction of a residential home, and the draftsman who prepared the plans for the Link home used the original VDM Plan as a base. There was a dispute about whether when Dalton-Ross built a home for the Conways, the draftsman also used the VDM Plan or based his plans on the Link home plans. In January of 2005, Williams hired the same draftsman to prepare plans for a home. The plans for the Williams home were based largely on the Conway home plans. Dalton-Harris alleged that because the Conway plans were derivative of the VDM plan, either directly or through use of the Link home plans, it had a cause of action for infringement under the Copyright Act.

Dalton-Harris claimed that it had a copyrightable interest because the Conway home plans were derivative of the VDM plan. A work is considered derivative if it incorporates in some form a portion of a copyrighted work. A party that reproduces a derivative work without authorization of the pre-existing work’s owner violates that owner’s copyright.

The United States District Court for the District of Arizona held that Dalton-Harris had no right to assert a claim for violation of the Copyright Act in federal court under these circumstances. Dalton-Harris’ infringement claim was premised on Williams copying the Conway home plans, an unregistered derivative of the VDM Plan. The court concluded that the registration of the VDM Plan had no bearing on whether Dalton-Harris could pursue a claim in federal court. Under section 411(A) of the Copyright Act, no infringement action may be brought until preregistration or registration of the copyright has been made. Citing this requirement, the court held that registration is a jurisdictional prerequisite to the right of a holder to enforce a copyright in federal court. Accordingly, separate registration of a derivative work is a prerequisite to bringing an action for infringement of the derivative work.

The court did note that copying an unregistered derivative may give rise to liability based on infringement of the underlying original work that has been registered. Dalton-Harris, however, was unable to demonstrate that in copying the Conway home plans, Williams also copied protectable elements of the registered VDM Plan.

The decision in Dalton-Harris demonstrates that registration of a claim on an original work does not create subject matter jurisdiction with respect to a suit for infringement of the original’s unregistered derivative. Accordingly, if a company intends to protect its interest in a derivative work, it will be necessary to also register the derivative work.

Last month, in United States of America v. Kendra D’Andrea and Willie Jordan, 2007 WL 2076472 (D. Mass. 2007), the United States District Court for the District of Massachusetts declared that internet users have no reasonable expectation of privacy in materials and content stored on a password protected web-site. In a criminal case with background facts too disturbing to detail, the Court expressly denied the Defendants’ claims that the password-protected website was exclusively theirs. The case raises concerns for business and individuals with respect to the privacy of information stored on the internet.

The case began when an inside informant called the Department of Social Services child-abuse hotline and reported that an 8 year old girl was being sexually abused by her mother and the mother’s live-in boyfriend. The caller also notified the DSS that photos of the sexual abuse had been taken with a cellular phone and posted on a website. The caller provided the DSS with the password, log-in name, and telephone number used by the defendants, as well as the defendants’ address. The informant caller was a former girlfriend of the live-in boyfriend, who claimed that the defendants provided her with the website information, login, and password. A senior DSS administrator accessed the website, downloaded the images, and notified the police, who in turn obtained a warrant. Upon the search of the residence, the police arrested the mother and found a mobile camera-phone.

Defendants moved to suppress the downloaded images, the evidence seized from their residence, and any incriminating statements made by the defendants (although made after Miranda rights were read). They alleged that the DSS violated their Fourth Amendment rights by accessing the website and downloading the images. Because the images were critical to the clerk-magistrate’s finding of probable cause, the Defendants argued that the fruits of the search of the residence as well as one defendant’s subsequent confessions should be suppressed as fruit of the poisonous tree.

The court rejected Defendants’ assertions the DSS violated their Fourth Amendment rights. Noting that the information had come from a private party, the court quoted United States v. Jacobsen, 466 U.S. 109, 117 (1980), for the proposition that “[w]here a private party, acting on his or her own, searches a closed container, a subsequent warrantless search of the same container by government officials does not further burden the owner’s already frustrated expectation of privacy.” The court also cited the recent decision in Warshak v. United States, 490 F.3d 455 (6th Cir. 2007), noting that this case fell into the “assumption of the risk” exception identified in Warshak, where any expectation of privacy was unreasonable given that Defendants shared website access information with the caller. In a footnote, the court also made it clear that the result would not have changed if the caller had hacked her way into the website, rather than being voluntarily provided the website access information, stating that the state would not be held responsible for the caller’s actions In another footnote, the court noted that a warrant permitting seizure of “cameras,” “computer storage devices,” and “computer accessory” encompasses the modern camera-equipped cellular telephone.

In sum, the decision indicates that a password does not always protect the content of a webpage from disclosure.

The power of Congress to change American copyright law has recently come under scrutiny in the federal courts. Companies owning copyrighted materials should note that the United States Court of Appeals for the Tenth Circuit’s decision in Golan v. Gonzalez, 2007 WL 2547974 (10th Cir. 2007), reaffirmed the authority of Congress to extend the lifespan of copyright protection. In addition, businesses or individuals making use of works currently in the public domain should be aware that the Golan decision calls into question an attempt by Congress to extend copyright protection to foreign works previously in the public domain. .

Several artists, performers, and educators challenged two acts of Congress – the Copyright Term Extension Act (“CTEA”) and section 514 of the Uruguay Round Agreements Act (“URAA”). Both of these acts changed American copyright law. Under the CTEA, Congress extended the duration of existing and future copyrights from life-plus-50-years to life-plus-70-years. Section 514 of the URAA implemented Article 18 of the Berne Convention for the Protection of Literary and Artistic Works, which requires member countries to afford the same copyright protection to foreign authors as they provide to their own authors. In particular, complying with Article 18 would require the copyrighting of some foreign works that are currently in the public domain.

The court rejected the plaintiffs’ challenge to the CTEA. Under the Copyright Clause of the Constitution, Congress may “promote the Progress of Science and useful Arts, by securing for limited Times to Authors . . . the exclusive Right to their Writings.” In Eldred v. Ashcroft, 537 U.S. 186 (2003), the Supreme Court upheld the CTEA, holding that Congress had acted within its authority by changing the copyright duration. Eldred did not directly address the validity of the life-plus-70-years timespan, and the plaintiffs contended that this timespan violated the “limited Times” prescription in the Copyright Clause because the Framers of the Constitution would have viewed such a timespan as “effectively perpetual.” The court concluded that the duration of copyrights was left up to Congress and could not be challenged in court.

With respect to the URAA, the court reached a different conclusion. The Court did acknowledge that Congress had the power to change American copyright law as long as it acted rationally, concluding that it was rational to comply with the Berne Convention, which secured copyright protection for American works in other countries. But by copyrighting works that were previously in the public domain, section 514 did implicate the First Amendment. Unlike the CTEA, which only extended the protection given to already-copyright works or new works, section 514 would alter the traditional contours of copyright protection by copyrighting works that were previously in the public domain. The court focused on what it described as the “copyright sequence.” According to the court, “until § 514, every statutory scheme preserved the same sequence. A work progressed from 1) creation; 2) to copyright; 3) to the public domain.” Section 514, however, changed this because “the copyright sequence no longer necessarily ends with the public domain; indeed, it may begin there.” This alteration of the copyright sequence, combined with the bedrock principle that no one may copyright a work in the public domain, raises significant First Amendment issues.

The court noted that the First Amendment protects the rights of the plaintiffs and the public “to unrestrained artistic use” of works in the public domain. By removing works from the public domain, section 514 interferes with those rights. The court stated that “by withdrawing works from the public domain, § 514 leaves scholars, artists, and the public with less access to works than they had before the Act.” The court remanded the case to the district court with instructions to analyze section 514 under traditional First Amendment principles, including making a determination regarding whether the restrictions on free expression embodied in section 514 were content-based or content-neutral.

Full Opinion
Text: http://www.ca10.uscourts.gov/opinions/05/05-1259.pdf

The Federal Elections Commission (“FEC”) has announced that it resolved two complaints addressing the issue of whether Internet blog activity is subject to FEC regulation. On September 4, 2007, the FEC found that such blogging activity is exempt from regulation under the media or volunteer exemption. Now, political bloggers can breathe a little easier knowing that they might escape FEC regulation under these exemptions.

Media activity was pronounced exempt from federal campaign finance in 1974. Then in 2006, the FEC clarified that this media exemption extends to online media, stating that “costs incurred in covering or carrying a news story, commentary, or editorial by any broadcasting station… website, newspaper… or other periodical publication, including any Internet or electronic publication” are not a contribution or expenditure unless the facility is owned by a political party, committee, or candidate.

In the first matter, the Commission determined that the respondent operator of the DailyKos website, Kos Media, did not violate the Federal Election Campaign Act. The website allegedly charges a fee to place advertising on its website and provides a “gift of free advertising and candidate media services” by posting blog entries that support candidates. The subject of the complaint facing the website was for a Failure to Register as a Political Committee. Upon review, the commission found that the this website falls within the media exception, and that therefore, the activity on the website does not constitute a contribution or expenditure that would trigger political committee status, meaning that the website did not violate federal campaign finance law.

In the second case, the complainant (a political candidate) asserted that the respondent failed to report expenditures, coordinated these expenses with the candidate’s opponent in the race, and fraudulently represented campaign authority in violation of 2 U.S.C. § 441h. The respondent leased space on a computer server to create a “blog” which advocated the defeat of Representative Mary Bono in the November 2006 election. The commission determined that the respondent did not make unreported expenditures by engaging in this activity. The FEC also rejected allegations that the party coordinated these expenditures with the complainant’s opponent, finding that no in-kind contributions to the opponent’s campaign resulted from the respondent’s blogging activity. Lastly, the FEC found that the respondent did not fraudulently misrepresent himself.

FEC Decision: http://www.fec.gov/press/press2007/20070904murs.shtml

Computer glitches are commonplace in the corporate world, but courts apparently have little sympathy for the victims of such incidents when it comes to e-discovery. In PSEG Power New York, Inc. v. Alberici Constructors, Inc., 2007 WL 2687670 (N.D.N.Y. 2007), the United States District Court for the Northern District of New York held that despite the burdensome cost, one respondent that was hit with electronic software malfunctions nonetheless had to re-produce electronic emails with their corresponding attachments. Businesses should be conscious of the fact that technology flaws are unlikely to be a valid excuse for not producing e-discovery information.

The issue arose in a multi-million dollar contractual dispute between PSEG Power New York and Alberici Constructors. PSEG sued Alberici alleging improperly performed work and failure to complete other obligations on the contract. Alberici filed a mechanic’s lien against PSEG and then filed an answer with 2 counter-suits and 14 affirmative defenses. Both companies sought electronic e-mail communications and documentary evidence in their discovery requests. PSEG claimed that while compiling the e-mails, a technical glitch occurred whereby numerous emails were “divorced” from their attachments. PSEG asserted that the “vendor’s software was not compatible with the HTML format in which PSEG had provided its documents and that this incompatibility had resulted in the parent child link between the emails and attachments being broken.” The raw data was not lost, and PSEG did produce a hardcopy of more than 211,000 pages of documents.

Over the next several months, the parties attempted to find a way to resolve the detachment problem. PSEG created a spreadsheet it claimed Alberici could use to match up the hardcopies with e-mails, but this apparently did not work. The parties also attempted to use “metadata” associated with the e-mails and attachments as a means of “remarrying” the attachments with the e-mails, but this was unsuccessful.

PSEG contended that the estimated cost of retrieving the emails and their attachments, based on its vendor proposal, would be $206,000. After conferring with its own consultant, Alberici alleged that the cost of retrieval would be less than $40,000. Neither party was willing to bear the costs, whatever the estimate. The court then addressed three issues: “(1) is Alberici entitled to receive the emails with the related attachments together as opposed to their current state of separation, lacking coordinated identification with each other; (2) although PSEG has provided these emails and attachments in hard copy albeit not ‘married,’ is PSEG obligated to provide these documents in their original format; and (3) if re-production is required, which party bears the cost of production?”

The court acknowledge that this case was brought in 2005, before the e-discovery amendments to the rules became effective. and “[p]rior to December 1, 2006, parties were required to produce records as they are kept in the usual course of business or organize and label them to correspond with the categories in the request, as evidence that nothing has changed materially as to electronic discovery.” The court concluded that the 3000 emails and attachments had not been produced in accordance with that requirement. According to the court, there is no excuse for producing emails and attachments “in a jumbled, disorganized fashion.” After weighing several factors, including its determination that Alberici established good cause for requiring reproduction of the e-mails in their original form, the court found that the potential for discovery in this case outweighed the cost and burden of reproduction. The court also placed the burden of cost for the reproduction on PSEG, “whatever that [cost] may be,” but gave PSEG several options for meeting the obligation. Nonetheless, PSEG must re-produce the emails with their corresponding attachments, and bear the burden of cost.

Full opinion at http://www.nylawyer.com/adgifs/decisions/092007treece.pdf

International Corporations take note. Last week, the ABA Journal reported that the second-highest court in the European Union issued a ruling denying the extension of the attorney-client privilege to communications between companies and their in-house counsel. This judgment of the Court of First Instance, dated September 17, 2007, can be found here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62003A0125:EN:HTML.

The facts in this case arise out of a 2003 investigation by the Commission of the European Communities into the affairs of Akzo Nobel Chemicals, Ltd, Akcros Chemicals Ltd, and their respective subsidiaries (“Azko”) based on a regulation aimed at seeking evidence of possible anti-competitive practices. During the investigation, the Commission officials obtained a number of documents that Azko declared were protected by the Legal Professional Privilege (“LPP”). The principle behind LPP is similar to that of the United States’ protections of attorney-client privilege. However, the LPP is subject to different discovery rules and procedures in such a regulatory investigation. These procedures and requirements are also laid out in the 33 page court decision.

Most of the court’s opinion discussed the procedures the Commission must adhere to in order to obtain potentially privileged documents and what constitutes a privileged document. The decision reviewed multiple sets of documents with multiple standards for inspection of their content. It was found that the Commission “infringed” upon the procedure for protection of the LPP in reviewing a group of the documents.

The remainder of the decision dealt with the actual issue of how the LPP applied to in-house attorneys in communications with their employer companies. The assertion of the LPP particular to Akzo’s in-house attorney arose in 2 documents concerning e-mail correspondence between the General Manager of Akcros Chemicals and an attorney in Azko’s legal department. Turning to case law, the court stated that the protection accorded to the LPP under Community Law, in the application of the Anti-Competition regulation at issue, only applies to the extent that the lawyer is independent and not bound to his client by a relationship of employment. It further reasoned that the “independent” lawyer concept is based on a belief in the lawyer’s role as “collaborating in the administration of justice by the courts and as being required to provide, in full independence, and in the overriding interests of the administration of justice, such legal assistance as the client needs.” This idea excludes communications with in-house attorneys, who are deemed to be legal advisers bound to their clients by a relationship of employment, from protection under LPP.

From this, the Court of First Instance determined that for the LPP to apply, the legal advice must have been provided “in full independence,” meaning it was “provided by a lawyer who, structurally, hierarchically and functionally, is a third party in relation to the undertaking receiving that advice.” Because the in-house attorney was believed to be bound to Akzo Nobel, the LPP did not protect the documents at issue from disclosure.
In justifying its, the Court of First Instance made a comparative examination of the application of privilege law in other Member states, and determined that it is inconsistent. It appears that an exception to applying the LPP to in-house counsel may have existed when the attorney was bound by ethical-licensing requirements and subject to review before a board. Azko argued that their in-house attorney was licensed and subject to the obligation of independence and compliance with the Netherlands’ Bar rules. Nonetheless, the Court of First instance still rejected the claim that the LPP protected the communications. It also observed that that a large number of Member States exclude in-house lawyers from LPP protection, and in fact some Member States refuse to allow in-house lawyers to be admitted to the Bar of Law Society. This denial of admittance into the bar appeared to be an indicator to the court that in-house attorneys are not independent and exclusive from the direction of their corporate employers. The court went on to further clarify that “even in countries which do permit this [admission] possibility, the fact that in-house lawyers are admitted to a Bar of Law Society and are subject to professional ethical rules does not always mean that the communications with such persons are protected under LPP.”

Businesses manufacturing and selling patented goods should consider the recent Seventh Circuit decision in County Materials Corporation v. Allan Block Corporation, 2007 WL 2701979 (7th Cir. 2007), where the court tackled several important issues related to non-compete covenants in agreements concerning the manufacture and sale of patented goods, including jurisdiction, patent misuse, and enforceability under the state’s laws. Of particular importance is the court’s discussion of when the provisions of a covenant not to compete constitute patent misuse.
County Materials manufactures concrete blocks, and Allan Block develops, markets, and licenses technology for the manufacture of concrete blocks. The parties entered into an agreement granting County Materials the exclusive right to manufacture Allan Block’s patented block products in northwest Wisconsin. County was granted the right “to sell these products under the Allan Block trademark.” The agreement also allowed County Materials to make and sell two specific competing block products, without time restrictions. It also specified that the 18 months following termination of the agreement, County Materials could not “directly or indirectly engage in the manufacture and/or sale of any other [competing]… block.”

Allan Block notified County Materials that it would be terminating the agreement. County Materials soon completed its own competing new design of concrete block. When County Materials began taking steps to produce the block, Allan Block threatened to sue for a violation of the non-compete clause in the agreement. County Materials beat them to court, filing a declaratory judgment action seeking a declaration that the non-compete provision of the parties’ agreement constituted patent misuse and was therefore void. The federal district court found that the non-compete clause did not violate federal patent policy or Minnesota law.

The United States Court of Appeals for the Seventh Circuit affirmed. The Seventh Circuit reviewed three issues: 1) whether this case involved question of federal patent law and should therefore be decided by the Federal Circuit, 2) whether the non-compete clause constituted patent misuse, and 3) whether the non-compete clause violated Minnesota state law. First, the court held that it was proper for it to hear the appeal because the question presented was merely one of the contractual enforceability of a non-compete clause, rather than a question of federal patent law.

The court went on to reject the claim that the non-compete clause constituted patent misuse. County Materials argued that the inclusion of the non-compete clause in the patent license was per se unlawful patent misuse and the improper result of patent leverage. Under current law, however, such per se claims are rarely recognized unless the patent owner has market power or the provisions of the non-compete clause were not reasonably within the patent grant. The court instead applied the rule of reason to County Materials’ claim that the clause was unreasonable because it allowed Allan Block to use its patent to exclude the competition in the market from unpatented products. The court concluded that the plaintiff failed to show that the non-compete clause had any effect on the broader market for concrete blocks, rather than just impacting the plaintiff. In rejecting the patent misuse allegation, the court also noted that the non-compete clause was subject to temporal and geographic limits and permitted County Materials to sell and manufacture two competing products. The court also determined that the non-compete clause did not violate Minnesota state law, finding that the agreement was reasonable particularly in light of the exclusivity provisions, explaining that that “when a licensee gets an exclusive patent license… it is benefitting from the patentee’s property rights more than it would with a non-exclusive license.”

Businesses involved in California appeals should review a recent decision by the California Court of Appeal clarifying when a party that prevails in an appeal can seek an award of appellate attorney’s fees. In Butler-Rupp v. Lourdeaux, 65 Cal.Rptr.3d 242 (Cal. App. 2007), the court held that a refusal to award costs on appeal does not preclude a prevailing party from later seeking an award of appellate attorney’s fees in the trial court after remand. This ruling will give companies that prevail in an appeal an opportunity to seek an award of fees from the trial court without reference to the appellate court’s determination with respect to what party was responsible for costs on appeal.

The case arose out of a commercial landlord-tenant dispute involving both tort and contract claims. In a prior opinion, the Court of Appeal reversed a $500,000 damages award for negligent infliction of emotional distress, affirmed a contract-based award of $855,000, and reversed the trial court’s order denying plaintiffs their attorney’s fees incurred in connection with the trial. At the conclusion of its opinion, the Court of Appeal stated that “the parties to the appeal are to bear their own costs on appeal.” After remand, plaintiffs filed a motion in the trial court seeking an award of attorney’s fees incurred in connection with the appeal. The trial court granted the motion, awarding $200,000 in attorney’s fees for the prior appeal.

The court rejected the defendants’ contention that the trial court had no jurisdiction to award appellate attorney’s fees. Defendants argued that by ordering each side to bear its own costs, the court foreclosed any award of attorney’s fees by the trial court. In analyzing the issue, the court noted that the authority for making any attorney’s fees award in this case was based on the parties’ contract, which provided for an award of fees to a prevailing party. Code of Civil Procedure section 1033.5 also grants a superior court the authority to award costs, including attorney’s fees, authorized by contract, statute, or law. An award of fees may be requested from the appellate court while the appeal is pending or in the trial court after the remittitur is issued.

The court concluded that its prior decision to have each party bear its own costs did not preclude the plaintiffs from seeking an attorney’s fees award. During the prior appeal, plaintiffs did not request an award of attorney’s fees. Unless specified, costs on appeal do not include attorney’s fees, and an appellate court ruling with respect to costs does not affect a party’s ability to seek an attorney’s fees award in the trial court. In the wake of Butler-Rupp, businesses involved in California appeals should be aware that after remand, appellate attorney’s fees will still be available where the appellate court did not deny a request for such fees even if the court did not award costs to the prevailing party.

“Lack of frankness in discovery can have unintended and sometimes damaging consequences.” So begins the decision in In re WRT Energy Securities Litigation, 2007 WL 2826624 (S.D.N.Y. 2007), where the Southern District of New York administered a stern lesson in the dangers that may arise for companies that allow the destruction of documents during litigation. The case is particularly important because the plaintiffs were actually hit with a spoliation sanction based on the destruction of documents that they did not have in their possession and did not themselves destroy.

The litigation involving WRT Energy, which began in 1995, arose out of an offering for the sale of senior notes as part of an effort by WRT to raise capital for its business of using advanced technologies to revitalize abandoned or shut-in oil and gas wells. The registration statement for the notes made a number of representations regarding the “success rate” WRT had experienced with respect to wells where it had implemented its technologies. After the notes offering, WRT’s financial condition deteriorated, the value of the notes fell significantly, and WRT ultimately filed for bankruptcy. The plaintiffs filed class action complaints alleging violations of the federal securities laws.
In the operative complaint, the plaintiffs alleged that the claims made by WRT with respect to its success in revitalizing failed wells were materially incorrect.

Discovery was suspended from 1999 through 2004 while various motions to dismiss were litigated. When discovery resumed, defendants repeatedly asked the plaintiffs through interrogatories to specify and identify the basis for their contention that the claims regarding well revitalization were incorrect. Plaintiffs responded that they had reviewed documents relating to 21 specific wells but reserved the right to supplement their responses. In the meantime, a document depository had been created to store the voluminous documents related to WRT’s business activities during the bankruptcy proceedings. After the bankruptcy was concluded, the depository was liquidated and the documents were returned to various parties, including WRT’s successor, Gulfport Energy. The bankruptcy court entered an order requiring the parties to preserve the documents until this proceeding was over.

Gulfport made the documents available for inspection, and the defense team identified and copied only the documents relating to the wells identified in plaintiffs’ interrogatory responses. In May of 2006, Gulfport’s general counsel informed the attorneys for both plaintiffs and the defendants of Gulfport’s intention to dispose of the WRT documents and gave the parties the opportunity to take possession of the documents. Counsel for the parties told Gulfport they had no further interest in the documents in Gulfport’s possession, and the documents were destroyed. Four months later, the parties exchanged expert reports, and plaintiffs’ expert identified an additional 75 wells that he characterized as failures. Defendants moved for sanctions, asking the court to preclude the plaintiffs from relying on their late-discovered theory of liability and the 75 wells on which it was based.

The court, in part, granted the motion for spoliation sanctions. In doing so, the court rejected plaintiffs’ argument that they could not be held responsible for breaching a duty to preserve evidence that they did not personally destroy. According to the court, the plaintiffs had functional control over the documents, since Gulfport gave them the opportunity to take custody of the documents, and plaintiffs therefore had an obligation to preserve them. As to culpability, plaintiffs had already seen a draft of the expert’s report that anticipated using more than the 21 wells in its analysis. The court concluded that “it was at least grossly negligent for plaintiffs’ counsel to permit the Gulfport documents to be destroyed without specifically warning [defendants] that their expert had analyzed all the wells and would likely present expert opinion regarding all of them.” The court did not allow the plaintiffs to rely on their having reserved the right to supplement their interrogatory responses, concluding that “the plaintiffs’ boilerplate reservation language does not trump the specific information that they provided concerning their theory.”

While the court agreed with plaintiffs that defendants had not established that documents relating to plaintiffs’ “cash flow model” analysis were relevant for purposes of spoliation, the court reached the opposite conclusion regarding documents containing reserve and related data. According to the court, “these documents are central to the [defendants’] argument” regarding how “success rate” was to be measured. The court stated that “any evidence of increased reserves would be favorable to the [defendants] given their broad definition of success.”

In crafting a remedy, the court rejected plaintiffs’ claims that spoliation sanctions should not be granted because the defendants had an opportunity to inspect the documents before they were destroyed. By “misleading” the defendants regarding their theory of the case, “the plaintiffs rendered the [defendants’] opportunity to review the Gulfport documents illusory . . ..” The court entered an order precluding the plaintiffs “from challenging the representativeness of the reserve information that the defendants ultimately rely upon . . . it will be conclusively presumed that similar results would have obtained for the remainder of the 97 wells if that information were available.” The court also allowed a jury instruction “explaining that this asymmetry is a consequence of a loss of evidence for which the plaintiffs were responsible.”

These devastating spoliation sanctions against the plaintiffs in WRT Energy are a reminder that a business involved in litigation should think twice before ever allowing the destruction of any documents that might be relevant.

If an attorney commits malpractice in connection with patent prosecution or patent litigation, a legal malpractice claim may be filed in federal court even when there is no diversity jurisdiction and all the claims are based on state law. In a case of first impression, the United States Court of Appeals for the Federal Circuit has held that a legal malpractice case involving patent prosecution and patent litigation issues arises under federal law and must be heard in a federal court. In Air Measurement Technologies, Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 2007 WL 2983660 (Fed. Cir. 2007), the court determined that when establishing patent infringement is a necessary element of a claim, federal jurisdiction exists. The decision will therefore be of interest to any business involved in litigation where a question of patent infringement is an essential part of the claims at issue.

Louis Stumberg and James Fulton developed technology for a safety device that could be used by firemen and other emergency personnel. This device, when integrated into self-contained breathing apparatuses (“SCBA”), measures temperature, calculates the user’s remaining airtime, and computes how long the user can safely remain in a fire environment or other hazardous situation. The device also includes an alarm that goes off if the wearer is motionless for a particular period of time. Stumberg and Fulton formed various companies, including Air Measurement Technologies, Inc., to develop, license, and market the safety device. In 1989, they hired patent attorney Gary Hamilton to secure patent protection for the safety device and related technology. Hamilton then practiced law with Akin Gump.

Some years later, Air Measurement filed six patent infringement suits in federal court against SCBA manufacturers. All six suits settled without a judicial determination of infringement, invalidity, or unenforceability of Air Measurement’s patents. During the course of the cases, Air Measurement hired new counsel, who claimed to have discovered various errors Hamilton allegedly made during the patent prosecution and the six infringement cases.

In May of 2003, Air Measurement, a Texas company, filed suit against Hamilton and several law firms in a Texas state court alleging state-law causes of action for legal malpractice, negligence, negligent misrepresentation, and breach of fiduciary duty. Air Measurement alleged that Akin Gump’s errors forced it to settle the prior cases far below the fair market value of the patents because the defendants in the prior cases were able to raise invalidity and unenforceability defenses that would not have existed without attorney error.

Akin Gump removed the case to federal court, contending that the resolution of Air Measurement’s suit required the resolution of a substantial question of patent law. Akin Gump also filed a counterclaim seeking a declaration of invalidity of the patents and a declaration that the patents were not invalid or unenforceable by reason of attorney conduct. The federal district court denied various motion to remand and certified the following question for interlocutory appeal: “whether a Texas state-law legal malpractice claim arising out of underlying patent prosecution and patent litigation necessarily raises a question of federal patent law, actually disputed and substantial, that a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities.”

The Federal Circuit concluded that “the patent infringement question is a necessary element of [Air Measurement’s] malpractice claim and raises a substantial, contested question of patent law that Congress intended for resolution in federal court . . ..” 42 U.S.C. § 1338(a) provides the federal district courts with jurisdiction over “any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection and copyright cases.” In Christianson v. Colt Indus. Operating Corp., 486 U.S. 800 (1988), the United States Supreme Court established a two-part test for determining whether a federal court has exclusive jurisdiction over a case under section 1338(a). Exclusive federal jurisdiction exists if a well-pleaded complaint establishes either (1) that federal patent law creates the cause of action or (2) a plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal patent law. Because Air Measurement’s claims were entirely grounded in state law, the Federal Circuit focused on the second prong of the Christianson test and analyzed whether patent law was a necessary element of Air Measurement’s legal malpractice claim.

The court limited its analysis to the allegations in the complaint, noting that “a claim does not arise under the patent laws if a patent issue appears only in a defense to that claim.” To prevail on its Texas state-law claims for legal malpractice, Air Measurement would have to demonstrate that (1) an attorney owed it a duty stemming from the attorney-client relationship, (2) the attorney breached that duty, (3) the breach proximately caused Air Measurement’s injuries, and (4) Air Measurement suffered damages as a result of the injuries. In particular, because Air Measurement’s malpractice claim was based, in part, on unsuccessful prior litigation, Air Measurement would have to establish that it would have prevailed in the prior litigation but for Akin Gump’s negligence that compromised the litigation. Under Texas law, this is called the “case within a case” requirement of the proximate cause element of malpractice. The court found that because Air Measurement needed to establish that the underlying suit would have been won but for the attorney’s breach of duty, the “case within a case” requirement “is necessarily a component of the plaintiff’s burden on cause in fact.”

The Federal Circuit determined that “because the underlying suit here is a patent infringement action against SCBA defendants, the district court will have to adjudicate, hypothetically, the merits of the infringement claim.” Given that “proof of patent infringement is necessary” to demonstrate that Air Measurement would have prevailed in the prior litigation, the court held that “patent infringement is a ‘necessary element’” of Air Measurement’s legal malpractice claim and therefore presents a substantial question of patent law that confers exclusive jurisdiction on the federal courts under section 1338(a). In explaining this conclusion, the court stated that “we would consider it illogical for the Western District of Texas to have jurisdiction under § 1338 to hear the underlying infringement suit and for us then to determine that the same court does not have jurisdiction under § 1338 to hear the same substantial patent question in the ‘case within a case’ context of a state malpractice claim.” According to the court, this result is consistent with “the commonsense notion that a federal court ought to be able to hear claims recognized under state law that nonetheless turn on substantial questions of federal law . . ..”

The implications of the court’s holding may be significant. Indeed, the decision in Air Measurement indicates that when a state law claim turns on establishing patent infringement as a necessary element, a plaintiff should be able to demonstrate that federal court jurisdiction exists.

Full Opinion Text: http://www.cafc.uscourts.gov/opinions/07-1035.pdf

Business and attorneys with litigation in California should review a strongly worded decision by the California Court of Appeal, Fourth Appellate District, regarding the use of the “notice of unavailability” by attorneys. The practice arose in the wake of the decision in Tenderloin Housing Clinic, Inc. v. Sparks (1992) 8 Cal.App.4th 299 [10 Cal.Rptr.2d 371]. Attorneys often make use of the notice procedure in situations, such as a planned vacation, to preemptively ward off surprise attacks from opposing counsel. In Carl v. Superior Court (2007), the Court of Appeal expressed its frustration with what it views as the abuse of this practice. According to the court, “to the extent this practice attempts to put control of the court’s calendar in the hands of counsel – as opposed to the judiciary – it is an impermissible infringement of the court’s inherent powers.

The issue arose after Carl filed a statement of disqualification against the assigned trial judge on April 4, 2007. Carl then filed a notice of unavailability under Tenderloin, indicating that he would be unavailable to respond to anything until May 11, 2007. Under Code of Civil Procedure section 170.3, a judge must act on a statement of disqualification within ten days or be deemed to have consented to the disqualification. On April 13, 2007, during the time period Carl claimed he would be “unavailable,” the trial judge struck the statement of disqualification because it disclosed no legal grounds for disqualification and was untimely. Carl did not file his petition for writ of mandate with respect to the disqualification order until June 11, 2007, outside the ten-day window provided in Code of Civil Procedure section 170.3

The Court of Appeal rejected Carl’s contention that his petition was timely because the trial judge acted improperly by issuing a ruling during the time period specified in his notice of unavailability. The court rejected the idea that under Tenderloin, a notice of unavailability has the effect of prohibiting opposing counsel or the court from taking any action during that period which adversely affects the unavailable party. As the court described it, “simply put, petitioner essentially argues that by filing a ‘notice of unavailability’ he unilaterally called a litigation time-out.” The court strongly disagreed, noting that the petitioner had no power to stop a superior court from issuing orders and could not use a notice of unavailability to extend statutorily imposed deadlines or time periods.

The court went on to harshly attack the practice of filing notices of unavailability, explaining that the practice of filing notices in the superior court “now permeates the appellate system. We receive them on a regular basis and at all times during the appeal process: they come before the record is filed, they come while the matter is being briefed, and they have even come after a matter has been submitted for decision.”

But no more. The court questioned the very premise for filing notices of unavailability, stating that Tenderloin merely holds that that a trial court may impose sanctions against an attorney who conducts litigation in bad faith and solely for the purpose of harassment.” According to the court, “nothing in Tenderloin, however, expressly condones the practice that has grown up around its name. It has simply been made up.”

The Carl court made it very clear that there was no authority for filing notices of unavailability in the appellate courts, and Carl also calls into question the use of the practice in the trial courts. In the wake of Carl, the “notice of availability” may itself become unavailable.

Full Opinion Text: http://www.courtinfo.ca.gov/opinions/documents/G038766.PDF

The United States Court of Appeals for the Second Circuit has rejected an attempt to certify a class action by copyright holders for the unauthorized electronic reproduction of their works. In In re Literary Works in Electronic Databases Copyright Litigation, 2007 WL 4197413 (2d Cir. 2007), thousands of authors sued a number of large publishing companies, including the New York Times, West Publishing, for copyright infringement. The court, however, held that because the class included claims made by class members who had not registered their copyrights, the district court lacked subject matter jurisdiction to certify a class and enter a judgment.

The claims all arose from the unauthorized electronic reproduction of various written works. The class members were mainly freelance writers that contracted with publishers to author the works for publication in print media. The class members retained the copyrights in those works, and the vast majority of those copyrights were unregistered. The contracts between the authors and the publishers did not grant the publishers the right to electronically reproduce those works or license them for electronic reproduction by others. The publishers, however, did so, and four class actions were consolidated in the United States District Court for the Southern District of New York, with the plaintiffs contending that the unauthorized electronic reproduction of their works infringed their copyrights. A settlement was reached after lengthy negotiations, and the district court certified a class and approved the settlement.

The Court of Appeals vacated the order and judgment, holding that the district court did not have subject matter jurisdiction to approve a settlement or certify a class consisting of claims that arose from the infringement of unregistered copyrights. The court began its analysis by recognizing that the legal theory on which the claims were based was sound. In New York Times Co. v. Tasini, 533 U.S. 483, 488 (2001), the Supreme Court held that under section 201(c) of the Copyright Act, publishers are not permitted to reproduce freelance works electronically when they have not been specifically authorized to do so. But jurisdictional issues proved to be a barrier to pursuing the claims in a class action format.

The court noted that most of the claims of the class members arose from the infringement of unregistered copyrights. 17 U.S.C. § 411(a) states that “no action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.” Previously, outside the class action context, the Second Circuit has held that registration is a jurisdictional requirement, and a district court lacks subject matter jurisdiction over infringement claims arising from unregistered copyrights. See Well-Made Toy Mfg. Corp. v. Goffa Int’l Corp., 354 F.3d 112, 115 (2d Cir. 2003); Morris v. Bus. Concepts, Inc., 259 F.3d 65, 72 (2d Cir. 2001). Other circuits have also reached the same conclusion, and the court held that section 411(a)’s registration requirement limits a district court’s jurisdiction over copyright claims. The court went on to conclude that the class action mechanism cannot be used to circumvent this jurisdictional requirement. Because every claim within a certified class must meet the registration requirement, the district court did not have jurisdiction to certify a class containing claims arising from thousands of unregistered copyrights. The court also rejected the plaintiffs’ contention that such claims could be included under a supplemental jurisdiction theory, finding that supplemental jurisdiction could not be exercised over jurisdictionally deficient federal claims. Judge Walker dissented from the opinion, arguing that in the wake of the Supreme Court’s decision in Eberhart v. United States, 546 U.S. 12 (2005), the requirement in section 411(a) was not a true jurisdictional bar to pursuing claims based on unregistered copyrights.

Full Opinion text: http://www.ca2.uscourts.gov:8080/isysnative/RDpcT3BpbnNcT1BOXDA1LTU5NDMtY3Zfb3BuLnBkZg==/05-5943-cv_opn.pdf#xml=http://www.ca2.uscourts.gov:8080/isysquery/irl368/12/hilite

Business and attorneys involved in California litigation may be affected by a recent ruling by the California Supreme Court regarding an attorney’s obligations when receiving inadvertently disclosed information that is protected by the attorney-client privilege or the work product doctrine. In Rico v. Mitsubishi Motors Corp., 2007 WL 4335934 (Cal. 2007), the court ruled that when an attorney inadvertently receives privileged documents in discovery, the attorney “may not read a document any more closely than is necessary to ascertain that it is privileged.” Once that determination is made, the attorney is obligated to notify opposing counsel and try to resolve the situation. To do more than that will invite disqualification.

The issue arose after a Mitsubishi Montero rolled over while being driven on a freeway. Plaintiff, who was injured in the accident, sued Mitsubishi and the California Department of Transportation. Mitsubishi’s representatives met with their lawyers and two designated defense experts to discuss litigation strategies and vulnerabilities. Defendant’s attorney took notes at the meeting and had the notes typed up and printed. The printed copy was not labeled “confidential” or “work product.” A few weeks later, defendants’ attorney deposed one of plaintiff’s expert witnesses. Plaintiff’s counsel was late to the deposition, and while waiting, defendant’s attorney left the room, leaving his briefcase, computer, and case file. According to the court, “somehow,” plaintiff’s attorney acquired the printout of the notes taken by defendant’s attorney during the earlier strategy session. A week after acquiring the notes, plaintiff’s attorney used them in a deposition of a defense expert, asking about the witness’s participation in the strategy session. Mitsubishi then moved to disqualify plaintiff’s counsel.

The Supreme Court agreed with the trial court and the court of appeal that the motion to disqualify was property granted. The court found that the notes, which discussed strategy and trial preparation and reflected counsel’s opinions, were protected as attorney work product. Accordingly, the notes were absolutely protected from disclosure.

The court then addressed an attorney’s duty upon receipt of attorney work product. When privileged documents – either work product or material subject to the attorney-client privilege – are received inadvertently, an attorney “should refrain from examining the materials any more than is essential to ascertain if the materials are privileged, and shall immediately notify the sender that he or she possesses material that appears to be privileged.” The parties may then either resolve the issue themselves or seek guidance from the court. This rule protects the right of an attorney to prepare for trial with the necessary degree of privacy and prevents opposing counsel from taking undue advantage of their adversary’s efforts. In this case, plaintiff’s counsel acknowledged that after reviewing the document for a few moments, he realized it contained work product. The court noted, however, that such an admission is not necessary to apply the rule.

The court also concluded that disqualification was an appropriate remedy. The damage caused by plaintiff’s counsel reading and using the document could not be mitigated. The court determined that plaintiff’s counsel “also acted unethically by making full use of the document.” Plaintiff’s counsel contended that his use of the document was proper because it showed that the experts were not being truthful. The court rejected this argument, making it clear that the contents of the document were entirely irrelevant to enforcing the rule regarding advertent disclosure. “Once the court determines that the writing is absolutely privileged, the inquiry ends. Courts do not make exceptions based on the contents of the writing.” The decision in Rico establishes a bright-line rule for dealing with inadvertent disclosure.

Full Opinion Text: http://www.courtinfo.ca.gov/opinions/documents/S123808.PDF

Businesses located outside New York that retain attorneys in the state to perform legal services should review a recent decision from the New York Court of Appeals establishing that having an attorney-client relationship with a New York attorney can subject the business to personal jurisdiction in a New York court. This result can occur even if the attorney does not represent the company in a New York court and the company never actually sends any of its representatives to New York. The state’s highest court ruled in Fischbarg v. Doucet, 2007 WL 4438979 (N.Y. 2007), by establishing a continuing attorney-client relationship with a New York attorney, a business necessarily purposefully avails itself of the benefits and protections of New York’s laws and is subject to jurisdiction in that state.

Doucet, a California resident, placed a call to Fischbarg, a New York attorney, to discuss a potential copyright-infringement lawsuit Doucet was interested in filing against an Oregon corporation. Doucet then sent a letter to Fischbarg confirming that he had agreed to take on the case for a one-third contingency fee. Along with the letter, Doucet sent Fischbarg documents related to the potential litigation. Doucet then entered into a retainer agreement with Fischbarg via telephone. The Oregon company beat Doucet to the punch, filing suit against her and her business in the federal district court in Oregon. Fischbarg represented Doucet in that litigation, although he never actually appeared in court or otherwise travelled to Oregon. Instead, Fischbarg appeared at depositions and hearings via telephone from New York. Doucet repeatedly communicated with Fischbarg via e-mail, fax, and telephone, though she never went to New York.

The relationship between Doucet and Fischbarg soured, and Fischbarg resigned as Doucet’s attorney. Fischbarg then asked the Oregon federal court for an order awarding him fees for services rendered prior to his resignation, but the court denied the motion, concluding that it lacked personal and subject matter jurisdiction over the fee dispute. After the Oregon litigation was settled, Fischbarg filed suit against Doucet in New York state court seeking damages for unjust enrichment and breach of contract. Both the trial court and the appellate division ruled that the New York courts had jurisdiction over Doucet.

The Court of Appeals also held that the New York courts properly exercised jurisdiction over Doucet. The court rejected Doucet’s contention that because she never physically set foot in New York, she had not purposefully availed herself of the state’s protections and laws. Under New York law, jurisdiction is proper even though the defendant never enters the state as long as “the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted.” While limited contacts may not be sufficient to establish jurisdiction, this case involved Doucet’s “purposeful attempt to establish an attorney-client relationship via calls, faxes, and e-mails” that were protected into the state over many months. The court focused on the quality of Doucet’s contacts with New York, noting in particular that the regular communications between Doucet and Fischbarg involved the creation of a continuing relationship with a New York attorney. By doing so, Doucet projected herself “into our state’s legal services market . . . invoking the benefits and protections of our laws relating to the attorney-client relationship.” The court held that this ongoing, substantial professional relationship was sufficient to support long-arm jurisdiction. Businesses contemplating hiring attorneys in New York should therefore be aware that they may be haled into court in New York should an issue arise.

Business with pending Texas litigation should be aware of a recent decision by the Texas Supreme Court clarifying when a trial court loses plenary power to order a new trial. In In re Brookshire Grocery Company,2008 WL 53702 (Tex. 2008), the court held that an amended motion for new trial does not extend a trial court’s plenary power to grant a new trial unless it has been filed before any prior motion for new trial was overruled and it is filed within 30 days of judgment. In its 5 to 4 decision, the court rejected the contention that meeting either of those conditions was sufficient to extend the trial court’s plenary power.

The issue arose in a tort action filed by Goss against Brookshire where the jury returned a verdict in favor of Goss. Before the judgment was signed, Brookshire filed a motion for judgment notwithstanding the verdict that also requested a new trial in the alternative. The trial court signed the judgment on December 9, 2004 and on December 10, 2004, the trial court entered an order denying the motion. Twenty-nine days after the judgment was signed, Brookshire filed a second motion for new trial that again argued that the court’s charge was erroneous and that there was insufficient evidence to support the verdict. The lower court granted the motion on February 1, 2005 despite Goss’s contention that the trial court’s plenary power had expired. Goss filed a petition for writ of mandamus in the court of appeals, and the court of appeals ordered the trial court to vacate its order. Brookshire then sought mandamus relief in the Supreme Court, asking to have the order granting a new trial reinstated.

The Supreme Court held that the trial court did not have plenary jurisdiction to grant the motion for new trial. Under Texas Rule of Civil Procedure 329b, a motion for new trial must be filed within 30 days after the judgment is signed. Amended motions may be filed without leave of court if they are filed (1) before any prior motion has been overruled and (2) within 30 days after the judgment was signed. A trial court’s plenary power to grant a new trial expires 30 days after all timely-filed motions for new trial are overruled. In this case, the court had to determine whether Brookshire’s second motion for new trial, which was filed within 30 days of judgment but after a prior motion had been overruled, was timely-filed for purposes of extending the trial court’s plenary power.

The court concluded that the only timely- filed motion for purposes of the rule was Brookshire’s first motion for new trial, meaning the trial court’s plenary power expired on January 10, 2005, 30 days after the court overruled that first motion. In reaching this determination, the court interpreted Rule 329b(b) to provide that amended motions may be filed when two conditions are met – no preceding motions have been overruled and it is within 30 days of judgment. A motion that does not meet both conditions need not be considered by the trial court and, more importantly, does not extend the trial court’s plenary power. Even if the trial court granted leave to file an amended motion, the trial court’s plenary power cannot be extended unless both conditions are met.

Full Opinion Text: http://www.supreme.courts.state.tx.us/historical/2008/jan/050300.htm

In the latest chapter of the ongoing Qualcomm litigation, a federal judge has levied more than $8 million dollars in sanctions and referred attorney’s representing Qualcomm to the State Bar of California for e-discovery abuses. The sanctions are the culmination of a discovery dispute where, according to the court, counsel for Qualcomm tried to fend off allegations of noncompliance with the discovery rules by claiming that the client kept counsel “in the dark” about the existence of more than 200,000 pages of critical e-mails and electronic documents that were not produced in discovery.

The issues arose in a lawsuit between Qualcomm and Broadcom over sever patents dealing with the transmission of video data under the H.264 standard. In its August 6, 2007 decision, the United States District Court for the Southern District of California held that both of Qualcomm’s patents were unenforceable due to waiver based on Qualcomm’s conduct before the Joint Video Team (“JVT”), the standards-setting body that created the H.264 video standard. According to the court, the waiver issue turned on information about Qualcomm’s participation with the JVT that Qualcomm had originally not disclosed. The court found that Qualcomm had concealed “over two hundred thousand pages of emails and electronic documents that were finally produced four months after trial containing direct evidence that multiple representatives of Qualcomm participated in the JVT from the beginning, and that multiple Qualcomm witnesses knew of this participation even as they testified to the contrary at deposition and trial.”

The court issued an order to show cause regarding why sanctions should not be imposed against Qualcomm’s attorneys. After receiving submissions and hearing argument, the court granted in part and denied in part Broadcom’s motion for sanctions against Qualcomm. In its order, the court concluded “that Qualcomm intentionally withheld tens of thousands of decisive documents from its opponents in an effort to win this case and gain a strategy business advantage over Broadcom.” With respect to Qualcomm’s lawyers, the court stated that “Qualcomm could not have achieved this goal without some type of assistance or deliberate ignorance from its retained attorneys. Accordingly, the Court concludes it must sanction both Qualcomm and some of its retained attorneys.”

The court rejected the notion that the experienced attorneys representing Qualcomm were entirely misled by Qualcomm’s attempts to hide documents and were therefore not culpable. “It is inconceivable that these talented, well-educated, and experienced lawyers failed to discover through their interactions with Qualcomm any facts or issues that caused (or should have caused) them to question the sufficiency of Qualcomm’s document search and production.” In concluding that the lawyers bore some responsibility, the court found that in all likelihood, “one or more of the retained lawyers chose not to look in the correct locations for the correct documents, to accept the unsubstantiated assurances of an important client that its search and production were inadequate, not to press Qualcomm employees for the truth, and/or to encourage employees to provide the information (or lack of information) that Qualcomm needed to assert its non-participation argument and to succeed in this lawsuit.”

The court specifically identified the lawyers it held responsible and declined to sanction others who did not significantly participate in the discovery violations or acted reasonably. The court imposed $8,568,633.24 in sanctions against Qualcomm referred the sanctioned attorneys to the State Bar of California “for an appropriate investigation and possible imposition of sanctions.” The sanctioned attorneys were ordered to forward a copy of the court’s order to the state bar and directed them to participate in a comprehensive “Case Review and Enforcement of Discovery Obligations” program.

The saga of the Qualcomm case highlights the need for counsel to investigate the existence of responsive electronic information and not accept at face value a client’s representations regarding what is and is not available.

Citation: Qualcomm, Inc. v. Broadcom Corporation, No. 05-CV-1958-B(BLM), 2008 WL 66932 (S.D. Cal. Jan. 7, 2008).

A recent Texas appellate decision highlights the difficulties that may arise when claiming that a particular product formula constitutes a trade secret. In Global Water Group, Inc. v. Atchley, 2008 WL 82241 (Tex. App. – Dallas 2008, n.p.h.), the Texas Court of Appeals rejected a claim by Global held that a competitor had stolen its trade secrets, holding that the imprecise formula used by Global was did not constitute a protectable trade secret.

In the 1990s, Global created the first successful self-contained, self-powered, mobile water purification system. Global treated this system as a trade secret and required all its employees to sign confidentiality agreements. Atchley was Global’s president until 1994, when he resigned, and Atchley had access to all of Global’s claimed trade secrets. Beginning in 1999, Atchley began manufacturing portable self-sustained water purification systems through his own company. Global filed suit against Atchley for misappropriation of trade secrets and conspiracy. After trial, the jury found in favor of Global, concluding that its trade secrets had been misappropriated and awarding one million dollars in damages based on lost profits. The trial court, however, granted Atchley’s motion for judgment notwithstanding the verdict on the grounds that Global failed to prove that it had any trade secrets and that Atchley had used any such trade secrets.

The Court of Appeals affirmed the order granting judgment notwithstanding the verdict. Under Texas law, “a trade secret is any formula, pattern, device or compilation of information which is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not know or use it.” The court rejected the contention that because Global treated its information as secret, it was therefore a trade secret. Instead, the court examined a number of factors in making its determination. In this case, Global contended that its trade secrets were the formula of the compound it used to treat the water and the sequence of the processes it used. The court noted that other manufacturers of water purification systems used the same ingredients that Global did. While Global claimed the ratio of ingredients was secret, the court disagreed, stating that “Global however claims no secret in any discrete formula” but instead claimed only an approximate ratio as its trade secret. According to the court, “the imprecise nature of the information weighs heavily against it being a trade secret.” Because there was no discrete formula it issue, the court was uncertain as to “what information Atchley . . . should be prohibited from using. For example, should they be prohibited from using a 10:80 ratio, 30:70, 40:60? It thus becomes apparent, it would be difficult to protect such a ‘formula’ without prohibiting fair competition.”

The court also determined Global had failed to demonstrate that the formula gave it a competitive advantage and did not show that it took money or effort to create the formula. In addition, the similarities between the formula used by Atchley and Global’s formula was insufficient to raise an inference that a trade secret had been misappropriated.

Following the lead of the federal courts, the California Judicial Council has proposed a set of amendments to the Code of Civil Procedure intended to deal with electronic discovery in California state courts. The proposal includes amendments to the Civil Discovery Act (Code of Civil Procedure § 2016.010 et seq.), the addition of two new sections to the Code of Civil Procedure, and amending two case management rules in the California Rules of Court. In putting forward the proposal, the Counsel noted that the federal rules and the ABA Civil Discovery Standards have been revised to take electronic discovery into account and recognized that similar uniform standards were needed in California state courts.

The proposed amendments include a broad definition of what constitutes electronic information for purposes of discovery, referencing information stored in an electronic medium that is related to technology having “electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.” “Electronically stored information” would be defined as “information that is stored in an electronic medium.”

CCP 2031.010 would be amended to specifically state that a party may obtain discovery of “electronically stored information,” provide for “copying, testing, or sampling” of that information in addition to the right to inspect. The proposal does not alter the time frames for discovery. CCP 2031.030 would be amendment to include a provision that the party seeking discovery “may specify the form in which each type of electronically stored information is to be produced.”

Unlike the federal rules, where a party seeking information must move to compel production of information that is purportedly inaccessible, the California proposal would require a party seeking to avoid production to move for a protective order on the grounds that the information is inaccessible or production would be unreasonably burdensome. Even if such a showing is made, the court may still order production “if the requesting party shows good cause.” If such good cause is shown, the court may make appropriate allocation of the expenses associated with the production.

The proposed amendments would also include a safe harbor provision for information that has been “lost, damaged, altered, or overwritten” due to the routine and good faith operation of an electronic information system. The amendment would prohibit the imposition of sanctions in such a situation “absent exceptional circumstances.”

A “meet and confer” requirement would also be added that applies whenever any party informs any other party in writing that discovery of electronically stored information is reasonably likely to be sought.

The Judicial Council’s proposal and its invitation to comment may be viewed here:
http://www.courtinfo.ca.gov/invitationstocomment/documents/w08-01.pdf

Companies are often confronted with the question of whether they should register a trademark or service mark with the United States Patent and Trademark Office or simply register their mark with a state. State registration is usually less expensive, but state law also provides less protection to a mark.

Under the Lanham Act, a person who obtains a federal registration that predates another person’s use of the same (or a confusingly similar) mark has superior rights to use the registered mark throughout the United States. This is true regardless of whether the person has been granted a state registration or was the first person to use the mark in the state. When there is a conflict between a federal registration and a state registration, thanks to the Supremacy Clause, the federal registration usually wins. For instance, a prior federal mark takes priority over a subsequently registered, or “junior,” state mark. Under trademark law, a federal registrant has a nationwide right to a mark if they have a federal registration and show a likelihood of entry into an area where a local junior user exists. The junior user may continue to use the mark in the state for as long as the federal registrant remains outside the market area. But once the federal registrant shows a likelihood of entry, the junior user must cease use of the mark. A federal registration is constructive notice that the registrant has the right to use the mark throughout the entire country (even if the registrant is not using it in a specific geographic area) and can prevent others from using the same or similar mark anywhere in the U.S.

An exception to this exists when the state mark was registered prior to the federal registration. If the state mark was in use before the date of first use of the federally registered mark, the prior state user may have some rights to use the mark, but those rights would be limited to a certain geographical area, usually the state where the mark has been registered and used. A state registration may also be helpful as a means of establishing prior use of a mark. State registrations can serve as evidence for a prior user to help establish rights to the mark in those states where such a registration was obtained.

Once a business has successfully registered a trademark, that mark must also be managed and maintained. One of the best ways to protect a valuable mark is to have it declared incontestable by the USPTO. After a mark has been registered for at least five years, the mark owner may file a declaration under section 15 of the Act. This declaration will state that the mark has been registered for five years and has been continually used by the owner during that five year period. After this declaration is filed, the mark automatically becomes “incontestable.”

A declaration of incontestability offers many advantages to the trademark owners. When a trademark becomes incontestable, a third party may no longer challenge certain things about the registration. For instance, a third party may no longer claim that the mark was improperly registered or challenge the ownership of the mark. With an incontestable mark, a third party loses the affirmative defense that the mark is merely descriptive of the goods or services. In litigation over an incontestable mark, a defendant may not oppose a request for injunctive relief even if the mark has not yet been used in a particular geographical area.

But even an incontestable mark is still open to some challenges. An incontestable mark may still be attacked on the grounds of abandonment, functionality, genericness, or fraud. Accordingly, careful policing of the mark is still necessary, even after it has become “incontestable.”

New York practitioners should review a recent decision by a sharply divided Court of Appeals establishing that members of limited liability companies may bring derivative suits on behalf of their LLCs. The majority of the court reached this conclusion even though New York law provides no explicit authorization of such suits. Describing the majority’s decision as “unique in the annals of the Court of Appeals,” the dissenters accused the majority of deliberately defying the Legislature, stating that “never before has a majority of the Court read into a statute provisions or policy choices that the enacting Legislature unquestionably considered and rejected.”

In Tzolis v. Wolff, 2008 WL 382345 (N.Y. 2008), the plaintiffs owned 25% of Pennington Property Co. LLC, which owns a Manhattan apartment building. According to the plaintiffs, those in control of the LLC arranged to lease and sell the apartment building for sums that were below market value, improperly assigned a lease, and benefited personally from the sale. The plaintiffs brought their lawsuit “individually and in the right and on behalf of” the LLC and sought to declare the sale void and terminate the lease. The trial court dismissed the action, holding that New York law did not permit derivative suits on behalf of LLCs. The Appellate Division reversed, concluding that derivative actions were available, and certified the issue to the Court of Appeals.

The Court of Appeals affirmed, holding that derivative suits may be brought by members of a New York LLC. The New York Limited Liability Company law, which was enacted in 1994, does not include any reference to derivative actions. Nevertheless, the court held “this omission does not imply such suits are prohibited.” The court noted that derivative suits have been part of the state’s corporate law since 1832 and that this cause of action was created by case law and not by statute. The rule that derivative suits could be brought on behalf of corporations was eventually. Other derivative causes of action have also been recognized in the absence of statutory authority. For instance, the Second Circuit recognized that members of a limited liability partnership were able to pursue such a claim before the partnership law was amended to recognize such suits.

In addressing whether derivative suits should be available to members of an LLC, the court relied on the long-recognized principle that “when fiduciaries are faithless to their trust, the victims must not be left wholly without a remedy.” Citing decisions from the 18th and 19th century involving corporations, the court stated that “to hold that there is no remedy when corporate fiduciaries use corporate assets to enrich themselves was unacceptable in 1742 and in 1832, and it is still unacceptable today.” According to the court, “the Legislature obviously did not intend to give corporate fiduciaries a license to steal.” Noting that derivative suits had been a recognized remedy for corporate malfeasance for more than two centuries, the court concluded that “to abolish them in the LLC context would be a radical step.”

Three of the justices dissented, however, stating that the majority’s decision was, itself, “radical.” The dissenters claimed that the Legislature, having full knowledge of general corporate law, obviously choose to omit any reference to derivative suits from the act establishing limited liability companies. Indeed, the dissenters cited to the legislative history, which indicates the Legislature intentionally deleted provisions regarding derivative suits from the law. In the dissent, Judge Susan Phillips Read stated that “the majority has effectively rewritten the law to add a right that the Legislature deliberately chose to omit. . .for a Court that prides itself on resisting any temptation to usurp legislative prerogative, the outcome of this appeal is curious.” Unless the Legislature changes the law, in the wake of Tzolis, LLC members will be able to pursue derivative lawsuits.

Full Decision Text: http://www.nycourts.gov/ctapps/decisions/feb08/5opn08.pdf

Businesses that are parties to arbitration agreements should review a recent decision by the Supreme Court of the United States where the Court held that parties to an arbitration agreement may not contract for expanded grounds of judicial review. In the 6-3 decision in Hall Street Associates, LLC v. Mattel, Inc., 2008 WL 762537 (U.S. 2008), the Court concluded that the grounds for judicial review established by the Federal Arbitration Act (“FAA”) are exclusive and cannot be varied by agreement.

The case arose out of a dispute over a commercial lease. The parties agreed to submit the issue to arbitration, and their agreement to arbitrate was entered as an order by a federal district court. The agreement provided, inter alia, that the arbitration award could be vacated, modified, or corrected by a court if the arbitrator’s findings were not supported by substantial evidence or if the arbitrator made erroneous conclusions of law.

The FAA establishes a limited basis on which an arbitrator’s award may be corrected, vacated, or modified by a court. The federal appellate courts had split on the question of whether the parties to an agreement may contract for expanded judicial review. After the arbitration, the district court vacated the award on the grounds that the arbitrator failed to follow the applicable law. The Ninth Circuit reversed, holding that the terms of the parties’ arbitration agreement with respect to judicial review were unenforceable.

In an opinion by Justice Souter, the Supreme Court held that the specific grounds set forth in the FAA are the only bases on which an arbitration award may be vacated, modified, or corrected. In particular, the court rejected the argument that because arbitration is a creature of contract, the parties should have the authority to establish the features of the arbitration proceeding, including how an award may be reviewed. Instead, the court found that the text of the FAA compelled a reading of the judicial review grounds as exclusive. According to the court, the text of the FAA establishes “a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can render informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.” The three dissenters disagreed, rejecting the majority’s narrow interpretation of the FAA.

The court, however, did not merely affirm the Ninth Circuit’s decision. Instead, the court noted that the arbitration agreement in this case was reduced to an order by the district court. The court remanded the case for an analysis of whether the agreement should “be treated as an exercise of the District Court’s authority to manage its cases” under the federal rules. This determination leaves open the possibility that parties might have the ability to modify the way an arbitration award will be reviewed by invoking a district court’s authority to manage its cases.

Full opinion text: http://www.supremecourtus.gov/opinions/07pdf/06-989.pdf

The California Supreme Court has given additional protections to manufacturers faced with products liability suits. Following the lead of other state and federal courts, California courts will now apply the “sophisticated user” doctrine. Under this doctrine, a manufacturer cannot be held liable when it fails to warn specialists about a product’s dangers when those dangers should be well known to such sophisticated users.

William Johnson is a certified HVAC technician who had received extensive training in the field of air conditioning repair. In particular, he had been certified by the EPA to work on large commercial air conditioning systems. Johnson filed suit against American Standard, air conditioner manufacturers, and various chemical manufacturers and suppliers after he developed pulmonary fibrosis. Johnson contended that the disease resulted from his exposure to phosgene gas. Large air conditioning systems commonly use R-22, a hydrochlorofluorocarbon refrigerant that, when exposed to light or flame, can decompose into phosgene gas. Johnson claimed that while maintaining and repairing air conditioning systems, he brazed refrigerant lines and was thereby exposed to phosgene gas. The trial court granted summary judgment in favor of the manufacturer, and the court of appeal affirmed, holding that the manufacturer did not have a duty to warn a sophisticated user like Johnson of such dangers which were well known in the industry.

In Johnson v. American Standard, Inc., 179 P.3d 905 (Cal. 2008), the California Supreme Court agreed. The court adopted the sophisticated user doctrine, concluding that normally, there is no duty to warn professionals about commonly known hazards. This doctrine is an exception to the general duty a manufacturer has to warn consumers about potential risks and dangers. According to the court, “just as a manufacturer need not warn ordinary consumers about generally known dangers, a manufacturer need not warn members of a trade or profession (sophisticated users) about dangers generally known to that trade or profession.” In reaching this determination, the court cited decisions by other state courts, as well as federal cases, adopting the doctrine. The court also mad eit plain that the sophisticated user doctrine applies equally in strict liability and negligent failure to warn cases.

The court also rejected Johnson’s contention that even though he received training and held certifications, he did not remember hearing or reading about the dangers of phosgene. According to the court, “even if a user was truly unaware of a product’s hazards, that fact is irrelevant if the danger was objectively obvious.” The decision in American Standard will certainly make it more difficult for sophisticated consumers to hold manufacturers liable under a failure to warn theory.

Full opinion text: http://www.courtinfo.ca.gov/opinions/documents/S139184.PDF

New York businesses should review a recent decision by the Court of Appeals expanding the scope of liability under New York Labor Law section 240(1). In Sanatass v. Consolidated Investing Company, Inc., 2008 WL 1817261 (N.Y. 2008), a divided court held that a property owner is liable for a Labor Law section 240(1) violation even when a tenant of the building contracted for the work without the owner’s knowledge.

Consolidated owned a commercial building in Manhattan, and C2 Media subleased the 11th floor of the building. Under the lease, C2 Media was required to get the landlord’s written consent for any repairs and renovations. In January of 2000, C2 Media hired Sanatass to install a commercial air conditioning unit on their floor. C2 Media did not notify Consolidated about the work. While he was installing the air conditioning unit, one of the manual lifts fails causing the unit to drop, nearly crushing Sanatass.

Sanatass then sued Consolidated alleging violations of Labor Law 240(1) and 241(6). Consolidated successfully moved for summary judgment, and the Appellate Division affirmed, holding that Consolidated could not be held liable because the installation was performed without its consent and in violation of the lease.

The Court of Appeals disagreed. The court first determined that the installation of an air conditioner constituted an “alteration” within the scope of section 240(1), and that Sanatass sustained injuries “as a result of an elevation-related hazard – a falling object.” The Court then rejected Consolidated’s contention that it could not be held liable given that C2 Media breached the lease by not obtaining Consolidated’s permission before hiring a contractor to perform the alterations. Recognizing that the purpose of section 240(1) was to protect workers, the Court noted that section 240(1) imposes strict liability that “is nondelegable and that an owner is liable for a violation of the section even though the job was performed by an independent contractor over which it exercised no supervision or control.” For instance, out-of-possession owners have been held liable under section 240(1).

The Court concluded that Consolidated similarly could not avoid liability by contending that it was not an “owner” for purposes of the statute by relying on its lack of knowledge of Sanatass’ work. In sum, the Court refused to create “a lack-of-notice exception to owner liability.” Instead, the court held that “the owner’s lack of notice or control over the work is not conclusive – this is precisely what is meant by absolute or strict liability in this context.” In reaching this conclusion, the Court distinguished its decision in Abbatiello v. Lancaster Studio Assoc., 3 N.Y.3d 46 (2004). In Abbatiello, a cable repair technician was injured while accessing a junction box on the exterior of a building. The court in Abbatiello refused hold the owner liable because the plaintiff was only on the property by virtue of the Public Service Law to repair the cable system, meaning there was no nexus between the owner and the plaintiff. In contrast, Sanatass was employed by C2 Media to perform work in Consolidated’s building, and “as between the owner and the worker, section 240(1) clearly places the burden on the owner should a violation of the statute proximately cause injury.” In the wake of Sanatass, an owner cannot insulate itself from liability under Labor Law 240(1) by requiring its tenants to give notice of any repairs or alterations.

Full Opinion Text: http://www.nycourts.gov/ctapps/decisions/apr08/60opn08.pdf

Companies concerned about trademark issues should take note of a recent federal court verdict in an infringement case. On May 7, 2008, a jury in Oregon awarded Adidas $305 million in damages for trademark infringement by Payless Shoes, which is owned by Kansas-based Collective Brands. The jury’s award is believed to be the largest trademark verdict ever.

Adidas alleged that Payless purchased multiple versions of Adidas’s three-stripe sneakers, sent them to China where copies were manufactured with either two or four stripes, then sold approximately 30 million pairs of the copies in its stores. Sales for the shoes totaled approximately $400 million. The verdict form in the case included pictures of more than 200 shoe styles that Adidas alleged infringed its trademarks. The jury awarded $30 million in actual damages for trademark and trade dress infringement, trademark and trade dress dilution, and unfair and deceptive trade practices. The jury also found that Payless acted willfully and ordered it to disgorge its profits from the infringing shoes, approximately $137 million. The jury also awarded approximately $137 million in punitive damages. Based on the willfulness finding, the court may also award attorney’s fees and has the option of trebling the actual damages award. Payless has indicated that it will ask the court to set the verdict aside and pursue an appeal if necessary.

The verdict form itself may be accessed here: http://s.wsj.net/public/resources/documents/WSJ_JuryVerdict_No861.pdf

The Texas Supreme Court has indicated that a party’s conduct in removing a case from state to federal court and later attempting to transfer the case to a multidistrict litigation panel did not constitute a waiver of its right to arbitration. With its decision in In re Citigroup Global Markets, Inc., 2008 WL 2069835 (Tex. 2008), the court continues to explore the question of what constitutes a waiver of arbitration rights. The decision in Citigroup appears to allow a party additional leeway to pursue some litigation options before endangering its arbitration rights.

Robert and Natalie Nickell had investment accounts with Citigroup and signed agreements to arbitrate any disputes concerning or arising from the accounts. The Nickells claim they lost more than $4 million invested in WorldCom, Inc. based on research reports prepared by a Citigroup analyst. The Nickells filed suit against Citigroup in Texas state court. Citigroup immediately removed the case to federal court on the ground that it related to WorldCom’s bankruptcy proceedings. While the Nickells moved to remand, Citigroup asked to have the case transferred to a federal multidistrict litigation court in New York that was managing similar WorldCom-related suits against Citigroup. Citigroup also asked to stay proceedings in the federal court pending a resolution of the issue by the multidistrict panel. In seeking a stay, Citigroup specifically reserved its defense that the Nickells were obligated to arbitrate their claims. In the multidistrict panel, the Nickells again moved to remand and Citigroup did not oppose the motion.

After this seven-month process, the case returned to Texas state court. Citigroup filed an answer and moved to compel arbitration. The trial court denied the motion, and the court of appeals denied Citigroup’s petition for writ of mandamus on the ground that Citigroup had expressly waived arbitration by making statements in its motions to transfer suggesting that it was doing so for the purpose of litigating, not arbitrating.

The Supreme Court disagreed. According to the court, “Citigroup never opposed arbitration, nor did it expressly waive its arbitration rights.” The statements in its moving papers “were required by statute to justify transfer to the MDL court.” The court disagreed that Citigroup’s attempts to transfer the case to the multidistrict panel were necessarily inconsistent with seeking arbitration, noting that “arbitration is possible for consolidated actions as well as individual ones.” Therefore, Citigroup’s actions in seeking to transfer the case did not indicate that it had abandoned arbitration. The court also concluded that Citigroup had not impliedly waived arbitration. While Citigroup’s actions in requesting transfer to the multidistrict panel were factors to be considered in a totality-of-the-circumstances analysis the court had announced in Perry Homes v. Cull, 2008 WL 1922978 (Tex. 2008), those actions were not determinative. Citigroup’s litigation conduct “was limited to jurisdictional transfers, not the merits.” Citigroup had not engaged in any discovery or filed any motions related to the merits before it sought arbitration. Because Citigroup had not waived its right to arbitration, the court granted its petition for writ of mandamus and directed the trial court to compel arbitration.

Full opinion text: http://www.supreme.courts.state.tx.us/historical/2008/may/060886.pdf

A recent federal court decision highlights the difficulties that may arise when a personal name becomes a trademark that identifies a business’s products. In particular, difficult issues can come up after the right to use the name is sold. In JA Apparel Corp. v. Abboud, 2008 WL 2329533 (S.D.N.Y. 2008), the court rejected an attempt by a trademark’s namesake to invoke the fair use doctrine as a basis for continuing to use his personal name to promote products he had designed.

In 1987, fashion designer Joseph Abboud launched his first menswear line under the “Joseph Abboud” label. At this time, he also registered his personal name “Joseph Abboud” as a trademark with the U.S. Patent and Trademark Office. In 1988, Abboud entered into a joint venture with another company to manufacture, market, and sell various products under the Joseph Abboud label. The joint venture was named JA Apparel, and during the joint venture, Abboud licensed the “Joseph Abboud” trademark to JA Apparel. In 2000, Abboud signed an agreement under which he conveyed all trademarks and licenses, including the mark “Joseph Abboud” to JA Apparel. Abboud also signed a noncompete agreement that was to run until 2007. Several disputes subsequently arose between Abboud and the owners of JA Apparel. In the Spring of 2005, Abboud left the business. A few weeks after the noncompete agreement expired, JA Apparel learned that Abboud intended to debut a new menswear collection under the name of “jaz” and intended to promote the new label with taglines such as “a new composition by designer Joseph Abboud” and “by the award-winning designer Joseph Abboud.”

JA Apparel filed suit against Abboud to prevent him from using his name in connection with goods and services. The court described the issue presented as follows: “whether and how an individual, whose name and reputation have become clearly identified with a business and line of products, and which serve as its trademarks, can continue to use his name after he sells the business, its trademarks, and his name, for a considerable amount of money.” Abboud contended that his use of his own name constituted fair use under the Lanham Act. The court, however, disagreed. While the court acknowledged that Abboud was not seeking to use his name as a tradename, the court concluded that Abboud’s use of his name did more than describe the products being sold – the name was being used to promote the products. Indeed, at trial, Abboud acknowledged that he wanted consumers to know that “jaz” was his brand.

The court also disagreed with Abboud’s contention that consumers would not be confused by his proposed use of his personal name to refer to himself as the designer of the “jaz” product line. According to the court, advertising the “jaz” menswear collection as being designed by Joseph Abboud would result in a likelihood of confusion with JA Apparel’s trademarks. The court noted the close proximity of the goods and services at issue, the strength of the marks, and at least some instances of actual confusion that had been identified at trial. The court issued a permanent injunction preventing Abboud from using his personal name to promote products.

The Naked Cowboy (a/k/a Robert Burck), a New York icon, is usually in the news for his well-known antics as a street performer. But the Naked Cowboy recently made some trademark law in a battle with Mars, Inc. and its Blue M & M. In Burck v. Mars, Inc., 2008 WL 2485524 (S.D.N.Y. 2008), the court recognized Burck’s trademark rights in the name and likeness of “The Naked Cowboy” but also allowed Mars to raise a defense of parody even though the parody was being used in part for advertising purposes.

The U.S. District Court for the Southern District of New York described Burck as follows: “a ‘street entertainer’ who performs in New York City’s Times Square as The Naked Cowboy, wearing only a white cowboy hat, cowboy boots, and underpants, and carrying a guitar strategically placed to give the illusion of nudity.” Burck owns registered U.S. trademarks in the Naked Cowboy name and likeness. Starting in April 2007, Mars began running an animated cartoon advertisement on two oversized video billboards in Times Square featuring a blue M & M dressed “exactly like The Naked Cowboy, wearing only a white cowboy hat, cowboy boots, and underpants, and carrying a guitar.” The court illustrated these facts with the following picture:

Burck sued Mars for compensatory and punitive damages asserting violations of New York’s right to publicity laws and trademark infringement. The court dismissed Burck’s right to privacy claim but held that Burck could proceed with his false endorsement claim under the Lanham Act because consumers might mistakenly conclude that the Blue M & M advertisements were endorsements of Mars’ products by Burck. The court, however, denied Burck’s motion to strike Mars’ affirmative defense of parody. According to the court, parody is a form of fair use that is protected under the First Amendment. This protection applies even where the parody is used in part for advertising purposes. Specifically, the court held that “because a parody may be of a hybrid nature, combining artistic expression and commercial promotion, it is valid to plead a parody defense even where the parody is used in part for advertising purposes.” The dispute between the Naked Cowboy and the Blue M & M will therefore continue.

The Naked Cowboy (a/k/a Robert Burck), a New York icon, is usually in the news for his well-known antics as a street performer. But the Naked Cowboy recently made some trademark law in a battle with Mars, Inc. and its Blue M & M. In Burck v. Mars, Inc., 2008 WL 2485524 (S.D.N.Y. 2008), the court recognized Burck’s trademark rights in the name and likeness of “The Naked Cowboy” but also allowed Mars to raise a defense of parody even though the parody was being used in part for advertising purposes.

The U.S. District Court for the Southern District of New York described Burck as follows: “a ‘street entertainer’ who performs in New York City’s Times Square as The Naked Cowboy, wearing only a white cowboy hat, cowboy boots, and underpants, and carrying a guitar strategically placed to give the illusion of nudity.” Burck owns registered U.S. trademarks in the Naked Cowboy name and likeness. Starting in April 2007, Mars began running an animated cartoon advertisement on two oversized video billboards in Times Square featuring a blue M & M dressed “exactly like The Naked Cowboy, wearing only a white cowboy hat, cowboy boots, and underpants, and carrying a guitar.” The court illustrated these facts with the following picture:

Burck sued Mars for compensatory and punitive damages asserting violations of New York’s right to publicity laws and trademark infringement. The court dismissed Burck’s right to privacy claim but held that Burck could proceed with his false endorsement claim under the Lanham Act because consumers might mistakenly conclude that the Blue M & M advertisements were endorsements of Mars’ products by Burck. The court, however, denied Burck’s motion to strike Mars’ affirmative defense of parody. According to the court, parody is a form of fair use that is protected under the First Amendment. This protection applies even where the parody is used in part for advertising purposes. Specifically, the court held that “because a parody may be of a hybrid nature, combining artistic expression and commercial promotion, it is valid to plead a parody defense even where the parody is used in part for advertising purposes.” The dispute between the Naked Cowboy and the Blue M & M will therefore continue.