Scott & Scott | Software Compliance Counsel
Scott & Scott Scott & Scott


Rob Scott Archives

January 20, 2011

Working On A License Agreement? Don’t Skimp On The License.

If you are working on a license agreement, don’t forget to carefully define what is and is not included within the scope of the license. “Scope creep” has the potential to contaminate the parties’ understanding of what the license includes and to damage the parties’ relationship. License agreements almost always include provisions to protect the parties, to provide for indemnity, to define appropriate limitations of liability, to set the extent of any warranties, and to set rules and effects of termination, but the license provision itself often receives inadequate attention.

The parties should ask themselves and each other: What may the licensee do with the licensed product? What may the licensee not do? May only certain individuals associated with the licensee use the licensed product? Don’t be afraid to delve into details. If the license includes a product with an accompanying service, clearly define the product and the service (some products and services appear inseparable at first glance, but it is usually possible to differentiate them in some meaningful way). If the license is for software, may the licensee make copies of the software for its internal use? May the licensee run older versions of the software for legacy systems? May the licensee run the software in multiple virtual environments simultaneously? If the license is for a complete technology solution, will the licensee have access to the technology platform, or will the licensor deliver the solution to the client from a secure environment under its exclusive control?

License agreements that incompletely define the scope of the license may result in disagreement and even litigation between the parties at a later date. It is almost always a good idea to seek the advice of knowledgeable IP counsel when drafting or reviewing such documents.

August 18, 2010

Proof of License in SIIA Software Audits

Like all audits, success in a SIIA software audit depends less on what you own and more on what you can prove that you own. Although not required by law, the SIIA takes the position that a target company is out of compliance for each installation of SIIA member software products for which the target company cannot produce a dated proof of purchase. Many clients are dismayed to discover what does and does not constitute valid proof of purchase according to the SIIA.

Not Considered Valid Proof
1. Copies of Checks to Software Vendors
2. Dated Purchase Orders
3. Undated Software Licenses
4. Credit Card Statements Evidencing Software Purchases
5. Certificates of Authenticity
6. Media, Manuals, or Key-Codes
7. Invoices Bearing and Entity Name Other than the Entity Named in the SIIA’s Initial Letter

Valid Proof of Purchase
1. Dated Invoices in the Name of the Audited Entity
2. Soft Records (online account statements) from Recognized Resellers
3. Signed and Dated License Agreements
4. Soft Records from SIIA Member’s such as Microsoft Licensing Statements
5. Cash Register Receipts for Retail Sales where Product, Version, Quantity and Price Paid are Included.

Understanding how the SIIA analyzes software audit materials is critically important to achieving the most favorable outcome. In our experience, it is the most time consuming and difficult part of the process for clients to handle on their own.

Scott & Scott, LLP is not affiliated in any way with the SIIA.

August 10, 2010

Patent Lawsuit May Cause Negative Feedback for eBay

On July 13, 2010, online auction giant eBay, Inc. was sued for $3.8 billion in the United States District Court for the District of Delaware by XPRT Ventures, LLC, on claims that eBay incorporated XPRT’s patented business method processes in eBay’s payment processing technology and that eBay breached a confidentiality agreement that allegedly covered the processes in question.

The viability of XPRT’s claims will depend on a number of factors that likely will be points of contention during the litigation. Those factors include the patentability of the processes in question (especially in light of the Supreme Court’s recent Bilski opinion regarding business method patentability), the degree to which the processes incorporated into eBay’s payment methods really are encompassed, if at all, within XPRT’s patent claims, and the enforceability of the confidentiality agreement referenced in (though not attached to) XPRT’s complaint, among others.

Patent infringement claims – especially those involving patented business methods and processes – are fairly common, and especially so when a defendant, such as eBay, has deep pockets and a similarly deep dependence on technological innovation in order to remain competitive. XPRT’s claims are somewhat more incendiary than those involved in many such suits, in that they include allegations of intentional wrongdoing by eBay’s officers and attorneys. However, the case generally appears to fit within a fairly common paradigm of a relatively unknown patent holder making claims for significant monetary damages based on patented technology allegedly incorporated in some aspect of the defendant’s products or services. Microsoft’s litigation with i4i, Inc. regarding XML-related technology in its Word software is another noteworthy, recent example.

The XPRT lawsuit also has the potential to be more of a news item than the average patent-infringement suit, because it alleges that the wrongdoing in question occurred during a period of time in which California gubernatorial candidate Meg Whitman was the CEO of eBay. Recent history shows that California politics – especially those involving contests for the Governor’s Office – almost always entail explosive political drama, so it would not be surprising if the lawsuit is used as a political weapon against Ms. Whitman in the run-up to the election. However, Ms. Whitman is not named separately as a defendant in the lawsuit, and there are no allegations in the complaint that she was directly responsible for any of the allegedly wrongful conduct.

Technology-dependent firms of all types must be prepared to recognize patent exposure as a cost of doing business, and they must be ready to work closely with knowledgeable counsel to evaluate the integrity of any patents they hold as well as the validity of any patent claims with which they are presented.

July 22, 2010

Legal Considerations in Software IP Issues - Damages

Software copyright plaintiffs typically seek both permanent injunctive relief as well as damages. Recovery of statutory damages under 17 U.S.C. § 504 often hinges on whether the copyrights claimed to have been infringed before or after discovery of the alleged infringement. However, plaintiffs in competing works litigation typically seek an actual damages award, because a potential actual damages recovery often is greater. In addition, the marginal costs of developing the necessary factual record to support an actual damages award are not significant, because the underlying elements of the claim already require the devotion of significant time and effort to evidence collection and presentation. Under 17 U.S.C. § 504, a plaintiff may recover the actual damages it suffered as a result of the infringement or any profits of the infringer attributable to the infringement. Under 17 U.S.C. § 504(b), the plaintiff could recover any profits of the infringer that are attributable to the infringement. Under the statute, “in establishing the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” Those damages could be substantial, depending on the amount of business and profit the plaintiff is able to demonstrate is attributable to use of its works. Claims for attorneys’ fees also usually are the norm, though, again, recovery may depend on whether the copyrights at issue were registered before or after discovery of the alleged infringement. Costs also may be recoverable.

Competing works cases often involve one or more primary, individual alleged infringers as well as the corporate entities with which they are associated. If the plaintiff is able to establish any actual damages as a result of infringement, all defendants could be held jointly and severally liable for those damages. In addition, the plaintiff in the action may seek to hold the individual defendants liable for the “profits” they made independently as a result of the alleged infringement. Specifically, the plaintiff could attempt to recover a portion of the individuals’ income earned while developing and/or selling the competing work at issue.

If you have received a notification from a copyright owner who is seeking damages against you, you should contact experienced counsel to preserve your legal rights.

August 6, 2008

Digital Reproduction May not Violate Copyright

The Eleventh Circuit has held that a digital reproduction of a copyrighted image may, under certain circumstances, be a privileged revision of the work that does not violate the creator’s copyright. In an en banc decision, the sharply divided court in Greenberg v. National Geographic Society, 2008 WL 2571333 (11th Cir. 2008) (en banc), rejected a claim by a photographer that a digital reproduction of his work that had previously appeared in print did not, in and of itself, constitute infringement where the digital reproduction merely reproduced the original print version.

Jerry Greenberg is a freelance photographer who had some of his photographs published in four issues of the National Geographic Magazine. For decades, the National Geographic Society has been reproducing its back issues in bound volumes, microfiche, and microfilm. In 1997, National Geographic produced “The Complete National Geographic,” a thirty-disc CD-ROM set containing every monthly issue of the magazine since 1888. The CD-ROMS contained each magazine as it was originally published, reproducing each page. The CD-ROMS also included a short opening montage and a program that allowed users to search, zoom into particular pages, and print.

Greenberg sued National Geographic, alleging that it infringed his copyrights by reproducing the print magazine issues that included his photographs. The district court granted summary judgment in favor of National Geographic, holding that because the CD-ROMS constituted a revision of the print issues of the magazine, the reproduction was privileged under 17 U.S.C. section 201(c) of the Copyright Act and therefore did not constitute infringement. A panel of the Eleventh Circuit disagreed and reversed that decision. After a second appeal, the Eleventh Circuit granted rehearing en banc to address the question of whether National Geographic’s use of the photographs was a privileged revision.

By a 7-5 majority vote, the Eleventh Circuit held that National Geographic’s reproduction of Greenberg’s photographs was privileged under section 201(c). Section 201(c) provides that ”copyright in each separate contribution to a collective work is distinct from copyright in the collective work as a whole, and vests initially in the author of the contribution. In the absence of an express transfer of the copyright or of any rights under it, the owner of copyright in the collective work is presumed to have acquired only the privilege of reproducing and distributing the contribution as part of that particular collective work, any revision of that collective work, and any later collective work in the same series.” A magazine is considered to be such a collective work. According to the court, section 201(c) is intended primarily to prevent publishers from revising the contribution of the author or including it in a new anthology or an entirely different magazine or other collective work without the author’s consent.

Greenberg claimed that the CD-ROMS constituted an entirely new collective work, such that section 201(c) did not apply. The court, however, concluded that the digital reproduction of the magazines was nothing more than a revision of the collective work. The court noted that the Supreme Court had previously recognized that reproducing a magazine on microfilm was privileged under section 201(c). By analogy, a digital reproduction is similarly privileged. The court rejected the notion that adding a computer program that allowed users to search and access individual pages somehow altered the collective works, concluding that “the revision of a magazine by reproducing it in its original context in a new ‘distinct form’ – i.e., a digital version – is not a difference that would undo a publisher's privilege under § 201(c).” The dissenters strongly disagreed with the majority’s conclusion, concluding that the CD-ROMS did constitute a new collective work to which the privilege of section 201(c) did not apply.

June 18, 2008

Promptly Register Your Copyrights or Lose

Companies and individuals with copyrighted materials should make certain to register their copyrights with the U.S. Copyright Office as soon as practical after the material has been published. If an application for registration is not made within three months of publication, the copyright owner will lose the right to recover statutory damages and attorney’s fees. The recent decision in Thomas M. Gilbert Architects, P.C. v. Accent Builders and Decelopers, LLC, 2008 WL 2329709 (E.D. Va. 2008), demonstrates the wisdom of promptly registering a copyright.

Thomas M. Gilbert Architects, P.C., an architecture firm in Richmond, Virginia filed suit against Accent Builders, a developer of townhome projects. Gilbert authored plans for the townhome project and registered those plans with the U.S. Copyright Office on August 16, 2007. The Certificate of Registration lists July 17, 2003 as the date of first publication of the plans. In November of 2007, Gilbert sued Accent claiming that Accent had infringed on Gilbert’s copyrights by copying and modifying the plans, distributing copies of the modified plans to subcontractors, and using the modified plans to construct additional townhomes. In its complaint, Gilbert sought statutory damages.

The court granted summary judgment in favor of Accent on Gilbert’s claim for statutory damages. Under the Copyright Act, the owner of a copyright may seek two types of damages – (1) actual damages and infringement profits or (2) statutory damages. But statutory damages are not available to every owner of a copyright. Specifically, under 17 U.S.C. § 412(2), statutory damages may not be awarded for any infringement that began after the first publication of a work and before the effective date of its registration unless the work is registered within three months of its initial publication.

Even if acts of infringement occur after the work is registered, the result is the same. For purposes of section 412, infringement commences “when the first act in a series of acts constituting continuing infringement occurs.” The court noted that Accent began infringing Gilbert’s copyrights before May 2006, and Gilbert did not register its copyrights under August of 2007. Accordingly, Gilbert was barred as a matter of law from seeking statutory damages. It should be noted that section 412 also applies to an award of attorney’s fees under 17 U.S.C. § 505, although the court in Gilbert did not rule out an award of fees on that grounds.

May 29, 2008

Don’t Ignore Copyright Infringement Allegations

It’s never a good idea for a business or individual accused of copyright infringement to simply ignore the allegations, hoping they’ll go away. This is particularly true when the copyright holder files a lawsuit seeking damages, as the defendant in Broadcast Music, Inc. v. Spring Mount Area Bavarian Resort, LTD., 2008 WL 2152060 (E.D. Pa. 2008), recently learned. Indeed, a failure to respond to allegations of copyright infringement may result in a finding that the infringement was willful, leading to a larger damages award.

BMI is a collection of music recording companies, licensing companies, and affiliated artists that own the copyrights to various popular songs. Spring Mount operates Crazy Carol’s Sports Bar located in Schwenksville, Pennsylvania. BMI alleged that Crazy Carol’s performs, or causes to be performed, songs whose copyrights are owned by BMI. Between August 2005 and May 2007, BMI sent numerous “cease and desist” letters to Spring Mount demanding that Spring Mount honor BMI’s copyrights and also placed nearly fifty telephone calls to Crazy Carol’s in an attempt to address the issue. BMI finally sent a representative to Crazy Carol’s to determine whether it was continuing to violate the copyrights. During a four-hour period, the representative documented extensive violations of the copyrights. Had Crazy Carol’s entered into a typical licensing agreement with BMI, licensing fees owed from August 2005 would have totaled approximately $10,000.00.

Crazy Carol’s neither responded nor ceased the activity, and BMI filed suit against Spring Mount and an individual officer of Spring Mount for copyright infringement. BMI sought statutory damages, injunctive relief, costs, and attorney’s fees. Defendants did not answer the complaint or otherwise appear, and the clerk entered a default against Defendants. BMI then moved for default judgment, seeking statutory damages in the amount of $2,000.00 for each of eight violations, an injunction prohibiting further copyright infringement by Defendants, and more than $5,000.00 in attorney’s fees and costs.

Because Defendants had not responded, the court accepted BMI’s allegations as true and found that Defendants were liable for eight instances of copyright infringement. The court also found that “Defendants’ default and their decision not to defend against these allegations are grounds for concluding that their actions were willful.” The court noted that this finding was also supported by evidence indicating that Defendants continued to infringe on the copyrights months after being notified. According to the court, “Plaintiffs provided Defendants with clear and unambiguous notice that they were infringing Plaintiff’s copyrights, and Defendants nonetheless persisted in their unlicensed use.” Defendants’ “intransigence prior to the initiation of this litigation,” coupled with their refusal to appear, “indicate a conscious decision to ignore this problem in the hope that it will simply go away.”

That decision proved costly to Defendants. Under the Copyright Act, a court may increase the award of statutory damages up to $150,000.00 when it finds the infringement was committed willfully. The court concluded that the requested award of $2000.00 per infringement, although higher than the minimum statutory damages amount of $750.00, was just and appropriate under the circumstances. Similarly, the court found that it was appropriate to award attorney’s fees and costs and also allow interest on the damages, costs, and fees “as a further incentive to Defendants to promptly and finally resolve this matter.”

The result in Broadcast Music is a clear reminder that it is rarely a good idea to ignore a copyright infringement allegation because the refusal to respond to an allegation may be used as evidence that infringement was willful, resulting in a higher damages award.

May 14, 2008

Arbitrators Cannot be Disqualified Based on Voluntary Disclosures

In a case of first impression, the California Court of Appeal has rejected an attempt to disqualify an arbitrator after the arbitrator volunteered information that was not required to be disclosed under the rules and statutes governing arbitration. In Luce, Forward, Hamilton & Scripps, LLP v. Koch, 2008 WL 1886606 (Cal. App. 2008), the Court of Appeal, Fourth Appellate District, held that the arbitrator could not be disqualified based on information he voluntarily disclosed orally during the proceedings.

Luce Forward filed a breach of contract suit against four former clients who had retained the firm to represent them in a complex securities litigation. Other than their initial retainer, the former clients did not pay Luce Forward any fees, and after filing suit, Luce Forward successfully compelled arbitration under the fee agreements, which contained an arbitration clause. Judge J. Richard Haden, a retired Superior Court judge with the Judicial Arbitration and Medication Services (“JAMS”) was selected as the arbitrator. As required by the rules, the Judge Haden sent the parties a written disclosure indicating that he had served as mediator in three cases in which Luce Forward was a party and attorneys at the firm participated as counsel in those mediations. The judge indicated that the mediations did not concern issues arising in this case and stated that he did not believe that his prior work would impact his ability to be fair. None of the parties challenged the disclosure.

After the arbitration commenced, the judge stated that after reviewing the witness list and the pleadings the weekend before the arbitration, he discovered that he had served on the board of a local trial lawyers’ association with one of the witnesses and one of the firm’s lawyers. Koch then requested that the judge disqualify himself, but the judge denied that challenge. Ultimately, the judge issued an award in favor of the law firm, and the award was confirmed by the superior court.

The Court of Appeal rejected Koch’s contention that Judge Haden was required to disqualify himself based on the disclosures made during the arbitration. According to the court, “Judge Haden was not legally required to make any disclosures pertaining to” the witness of the attorney where “there was no indication Judge Haden had a personal relationship, or close friendship” with either of them. There was no evidence of a business relationship, and serving on a volunteer board or participating in the same professional organizations did not create one. Generally, no disclosure is required when there has been slight or attenuated contact because “arbitrators cannot sever all their ties with the business world” or the legal community. The court noted that “under the defendants’ theory, an arbitrator could be disqualified during arbitration for orally revealing even the most attenuated contact with a party’s counsel or witness, such as occasionally shopping at the same grocery store.”

Because Judge Haden was not required to make the disclosures, he also was not obligated to disqualify himself after voluntarily disclosing the relationships. The judge complied with the disclosure obligations under the statutes, and an arbitrator may only be disqualified “when the disclosure is legally required.”

Full Opinion Text:

Master Service Agreements

The master service agreement for MSP's defines the terms and conditions of the relationship between the MSP and its client related to all managed services and project based work. There are several critical provisions that are necessary to protect the MSP's legal rights in a master service agreement. The indemnification provision of the master service agreement is one of the most frequenty negotiated by MSP's and their clients.

The indemnification provision of a master service agreement sets forth the risks that each party will be undertaking in the event of a claim or loss arising out of or relating to the services being provided. The indeminication section of a master service agreement frequently will say "MSP agrees to defend, indemnify, and hold customer harmless for any and all claims . . . ." End-users frequenly seek broad indemnification language from the MSP defining the scope of claims covered as broadly as possible. The MSP should be careful not to assume legal risks that can be adverse to its business in the event of a claim by it customer or a third-party. We recommend that all MSP's carry professional liability insurance and that the indemnity provisions in the master service agreement are carefully tailored to the coverages provided under the insurance contract.

For example, if the MSP has Managed Service Professional Liability insurance, the indemnity provision in the MSP Master Service Agreement should be drafted so the MSP agrees to contractually provide the same indemnities that the insurance company covers. By tailoring the indemnification to the language in the professional liability insurance, the MSP is able to offer broad indemnification to its clients without undertaking risks for which insurance has not been obtained.

April 30, 2008

No Fiduciary Relationship Between Inventor and Party That Agrees to Develop and Patent the Invention

Inventors and researchers often enter into agreements with other parties to develop, patent, and commercially exploit their inventions. But does such an agreement create a fiduciary relationship or is it nothing more than a simple contractual relationship? The answer to this question is critical – if there is a fiduciary relationship, a breach of that relationship gives rise to a tort claim and a potential recovery of punitive damages. But if the relationship is merely contractual, punitive damages would not be available. In City of Hope National Medical Center v. Genentech, Inc., 2008 WL 1820916 (Cal. 2008), the California Supreme Court held that such an arrangement should be “treated like an ordinary contractual agreement, a breach of which supports only contract and not punitive damages.” In so holding, the Court invalidated a $200 million punitive damages award that City of Hope had won at trial.

The case arose from a scientific discovery by two scientists employed by City of Hope. The scientists developed a groundbreaking process of genetically engineering human proteins that enabled the production of large quantities of various medicines. Genentech sent a proposal to City of Hope to provide funding for further development, and the parties entered into an agreement under which Genentech would provide funding, use the results in the manufacture of medicines, and secure and hold patents as they emerged. In 1999, City of Hope sued Genentech for breach of fiduciary duty and breach of contract. The jury found that Genentech had breached its fiduciary duty to City of Hope, acted with fraud and malice, and also breached the contract. The judgment awarded City of Hope $300,164,030 in compensatory damages and $200 million in punitive damages. The Court of Appeals affirmed.

The Supreme Court noted that the case was very complex, with “25,567 pages of reporter’s transcript plus 12,267 pages of clerk’s transcript and . . . 18 friend-of-the-court briefs.” The court affirmed the part of the judgment awarding City of Hope $300,164,030 in damages for Genentech’s breach of contract. But because the relationship did not give rise to a breach of fiduciary duty claim, the court set aside the punitive damages award. Generally, a contract between two parties, without more, does not create a fiduciary relationship. In this case, the contract between Genentech and City of Hope was between two sophisticated parties advised by counsel.

The court rejected the notion that an agreement to develop, patent, and market an invention automatically gave rise to a fiduciary relationship, stating that “a fiduciary relationship is not necessarily created simply when one party, in exchange for royalty payments, entrusts a secret invention to another party to develop, patent, and market the eventual product.” In addition, while the secrecy of the information entrusted by one party to another may be a factor, “it does not compel the imposition of fiduciary duties by operation of law.” Accordingly, the trial court erred by instructing the jury that a fiduciary relationship necessarily arises “when a party, in return for royalties, entrusts a secret idea to another to develop, patent, and commercially develop.” Because City of Hope’s legal theory for the creation of a fiduciary relationship was invalid, the court reversed the award of tort damages against Genentech. Businesses should study this decision before deciding to entrust a new invention to another party for development.

Full Opinion Text:

April 3, 2008

Copyright Guide: Register Promptly or Lose Valuable Remedies

A federal court has issued a reminder to business owners trying to protect their intellectual property – register your copyrights as soon as possible or lose access to the most effective remedies for fighting copyright infringement. A plaintiff suing for copyright infringement may be able to recover statutory damages up to $30,000.00 (and up to $150,000.00 if the infringement was willful) as well as attorney’s fees. In FM Industries, Inc. v. Citicorp Credit Services, Inc., 2008 WL 717792 (N.D. Ill. 2008), the United States District Court for the Northern District of Illinois made it clear that statutory damages and attorney’s fees are not available when the alleged infringement of a copyright began before the copyright registration became effective.

FMI claimed that it owned the copyright in The Ultimate Debt Collection and Networking Software (“TUCANS”), a computer program that organizes debt collection data. The software also has the ability to transmit data between a debt collector and its attorneys. In May of 2001, Citicorp Credit entered into a vendor services agreement with FMI that gave Citicorp Credit the right to use TUCAN, and the agreement required that Citicorp Credit’s attorneys sign the TUCANS licensing agreement. FMI claims that in 2005, after the licensing agreement expired, one of Citicorp Credit’s attorneys continued to access data using the TUCANS system.

On summary judgment, the court concluded that FMI could not recover statutory damages or attorney’s fees. The version of TUCANS at issue was first published in 2004, but the effective date of the copyright registration was April 4, 2007. Under 17 U.S.C. § 412, a plaintiff suing for infringement cannot recover statutory damages or attorney’s fees if the infringement preceded the effective date of the registration. Statutory damages and fees are also not available if the work was published before the infringement unless the plaintiff registered the work within three months of the first publication. Because the alleged infringement began two years before the registration and because FMI had not registered the copyright within three months of the first publication, those remedies were not available as a matter of law.

It is clear that prompt registration of a copyright is an absolutely prerequisite to recovering statutory damages or attorney’s fees. The availability of such remedies is an effective tool in any effort by a company to stop infringement of its copyrights. To avoid losing access to those remedies, business should put in a place a process of making certain that their copyrights are registered as soon as practical.

March 6, 2008

California Court – No Individual Liability for Retaliation

Overruling a number of decisions by intermediate appellate courts, a divided California Supreme Court has rejected the notion that an employment discrimination plaintiff may file claims against individual defendants for retaliation. The decision in Jones v. The Lodge at Torrey Pines Partnership, 2008 WL 443670 (Cal. 2008), will foreclose the pursuit of claims against individual defendants for retaliation under California’s employment discrimination laws.

The case arose when Jones sued his employer and Jean Weiss, his supervisor, for various causes of action, including sexual-orientation harassment, sexual-orientation discrimination, and retaliation in violation of the California Fair Employment and Housing Act (“FEHA”). The trial court granted summary adjudication to the defendants on the harassment claim, finding that Jones failed to present admissible evidence of harassment by Weiss. The discrimination claim against the employer proceeded to trial, as did the discrimination and retaliation claims against Weiss, and the jury returned a verdict in favor of Jones. The trial court granted the defendants’ motions for judgment notwithstanding the verdict and for a new trial, concluding, inter alia, that an individual cannot be liable for retaliation. The Court of Appeal reversed, finding that an individual can be held liable for retaliation under FEHA. This holding was consistent with rulings made by other divisions of the Court of Appeal.

The Supreme Court, however, concluded that individuals cannot be held liable for retaliation. The court noted that as a general proposition, individuals cannot be held liable under FEHA for discrimination. Specifically, the court indicated that while employers may be liable for unlawful discrimination, “individuals working for the employer, including supervisors, are not personally liable for that discrimination.” But unlike the statutes prohibiting discrimination, the retaliation statute makes it unlawful for an employer, labor organization, employment agency “or person” to retaliate against an individual who opposes unlawful practices or files a complaint about such practices. Jones argued that because the retaliation statute includes the word “person,” the statute’s plain meaning indicates that the legislature intended that an individual could be personally liable for retaliation.

The Supreme Court disagreed. The court began by noting that the statutory language is not plain, in that it does not clearly establish that an individual is to be held personally liable for retaliation. Instead, the court concluded that the same principles it applied to discrimination cases were controlling in retaliation actions. According to the court, discrimination claims “arise out of the performance of necessary personnel management duties,” unlike harassment claims, which are based on individual actions. The decision to harass an employee falls outside an individual’s normal job duties, making individual liability appropriate, while personnel decisions and actions have to be made, even if they turn to be discriminatory. The court concluded that this reasoning, as well as other reasons for not imposing individual liability for discrimination, “apply equally to retaliation.” Three justices dissented, pointing to what they described as the clear language in the statute providing for individual liability.

Full Opinion Text:

February 19, 2008

Copyright Guide: Faster Filing Using the E-Copyright Office or “Special Handling”

Generally, it can take at least four months to receive a certificate of copyright registration from the U.S. Copyright Office. The time to process an application varies, depending on the workload of the office and the complexity of a particular application. But there may be times when your business can’t wait that long. For instance, if litigation over a copyright is imminent and you have not yet registered it, your ability to file suit in federal court and seek all available damages and remedies will depend on when the certificate of registration issues.

There are methods available to shorten the amount of time between the filing of an application for registration and the issuance of a certificate by the Copyright Office. The simplest and cheapest method is to use the new e-Copyright service now being tested. Scott & Scott, LLP is a member of the Copyright Offices’ beta testing program for electronic filing of copyright applications. By using the on-line filing system, copyright applications may be filed with a reduced fee of $35 per application (versus $45 for mailed applications). Our experience indicates that by using electronic filing, we can usually reduce the time it takes to receive a registration to approximately one month after the application is submitted. As with any beta testing program however, there are no guarantees.

If you need your registration certificate as soon as possible, the Copyright Officer offers a “special handling” program for expedited registration. Under the “special handing” program, the Copyright Office promises to process the claim, when possible, within 5 working days. “Special handling” is expensive and is only available in certain circumstances. Instead of the normal $45 (or $35 electronic) application fee, an expedited application must be accompanied by a $685 fee. According to the Copyright Office, special handling is granted only in specific circumstances: (1) pending or prospective litigation, (2) matters involving customs, or (3) contract or publishing deadlines that necessitate the expedited issuance of a certificate. When filing an application for expedited service, the application must be accompanied by a letter stating why there is a need for special handing, and that need must full within the three categories recognized by the Copyright Office. The application must also include signed declaration certifying that the information in the request for special handing is correct. Requests for expedited service must be sent to a special address. More information regarding “special handling” may be found here:

Trademark Guide: International Registration using the Madrid Protocol.

If your business is interested in registering its trademarks outside the United States, you should consider using the international registration system available under the Madrid Protocol. This system offers the opportunity to file one application through the USPTO, pay one set of fees to the USPTO (in U.S. Dollars), and have the mark registered in any of the other countries that have signed the Protocol without having to file separate applications in each of the countries.

The system of international registration of marks is governed by two treaties, the Madrid Agreement and the Madrid Protocol. More than 70 countries have become part of the Madrid Protocol system, and the United States became a member of the Madrid Protocol in 2003. A full list of Protocol members may be found here:

For an American company, a Madrid Protocol application must be based on an application or a pre-existing registration on file with the USPTO. An international application is filed with the USPTO and forwarded to the International Bureau of the World Intellectual Property Office (“WIPO”) in Geneva, Switzerland. After verifying the basic filing requirements, WIPO will enter the mark in its international trademark register and send copies of the application to the trademark offices in the Madrid Protocol-member countries designated in the international application. Each of the designated countries will have up to 18 months in which to approve or refuse the request for registration, applying their own national standards for whether the mark may be registered. For instance, a pre-existing mark in a country may result in a denial of the request. As with any trademark application, it is therefore wise to conduct a full-scale search for existing marks and applications that may conflict with the one you are trying to register.

If the registration requirements have been met, WIPO will publish your mark in its International Gazette and will issue an international registration that covers the designated countries. The registration is renewable for 10-year terms and can also be extended to other countries by filing another application.

A registration through the Madrid Protocol system provides the same level of protection as a mark obtained directly through a country’s national trademark registration office. By using the system and filing one application through the USPTO, a business can save considerable time and money. Unless a conflict arises, it will not be necessary to consult with local counsel in each of the countries. Assignments, name changes, and renewals may also be handled through a single filing.

Depending on the status of your mark, direct registration in other countries may still be the best method for international registrations. After conducting a thorough search of international databases and considering your particular business needs and goals, a trademark attorney will be able to recommend whether direct registration is still the preferred option. But when considering international registration, your business should at least look into the opportunity presented by the Madrid Protocol system to streamline the process for expanding protection for your mark around the world.

February 13, 2008

Trademark Guide: Why do I Need to “Police” My Trademark?

Businesses often make the mistake of assuming that once they acquire a federally registered trademark, they are protected. But having a federally registered trademark does not automatically protect the mark. The use of a trademark has to be “policed” – that is, the trademark owner is obligated to locate and investigate unauthorized uses of the mark. By not doing so, the owner risks losing the mark altogether.

Trademark law places the burden of policing a mark on the owner. While a trademark owner need not pursue every infringing use of its trademark, the owner must pursue infringers to the extent necessary to ensure that the mark does not lose its distinctiveness and does not become diluted by widespread use. From a business standpoint, widespread use of the same or similar marks adversely affects the perception of consumers. When consumers lose the sense that certain goods or services connected with a mark all come from the same source, the mark can become generic or be considered to have been abandoned.

It is important to police a mark to avoid losing the protection given under the law. “If a ‘trademark’ symbol is used as a generic name of a product or service, it ceases to function to identify a single source of that generic thing . . . . Sometimes a mark becomes abandoned to generic usage as a result of the trademark owner’s failure to police the mark, so that widespread usage by competitors leads to a generic usage among the relevant public, who see many sellers using the same word or designator.” Thomas McCarthy, McCarthy On Trademarks And Unfair Competition § 17:8 (2007).

Even an incontestable mark may be lost: “Indeed, an incontestable mark may be deemed abandoned when the registrant licenses the mark and fails to police the license. See Warner Bros. Inc. v. Gay Toys, Inc., 724 F.2d 327, 334 (2d Cir.1983).” A defendant bears a “high burden of proof” to show abandonment through failure to police. Warner Bros., Inc. v. Gay Toys, Inc., 724 F.2d 327, 334 (2d Cir.1983). The law is clear that “a trademark owner’s failure to pursue potential infringers does not in and of itself establish that the mark has lost its significance as an indicator of origin.” Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1080 (5th Cir.1997) (citations omitted). Where, however, a party can show that widespread use of similar designs has resulted in a “loss of trade significance,” the defense of abandonment is made out. See id.

The importance of policing a mark cannot be overstressed. It makes no business sense to go to the time and trouble of developing a brand and having it registered, only to have it lost when others use the same mark without consequences.

February 6, 2008

Insurer can Perfect Subrogation Appeal by Filing Notice Under Insured’s Name

The Texas Supreme Court has recently issued a decision requiring appellate courts to liberally construe attempts by litigants to invoke appellate jurisdiction. Unlike the federal courts, which generally take a strict approach to jurisdictional issues, Texas companies and litigants should be aware that in the wake of Warwick Towers Council of Co-Owners v. Park Warwick, L.P. 2008 WL 204504 (Tex. 2008), appellate jurisdiction can be invoked even when there are errors or imperfections in the notice of appeal or related documents.

The dispute in this case arose out of a flood. The Warwick Towers, a condominium project, is located across the street from the Warwick Hotel in Houston. The hotel has a flood barrier system designed to prevent rainwater from entering the hotel’s basement. The condominium owners contended that during a severe storm in 2001, the hotel failed to use its flood barrier system, allowing rainwater to invade the condominium’s basement through an underground tunnel. The condominium’s insurer, St. Paul Fire & Marine, paid approximately $1 million as a result of the water damage. The condominium owners sued the hotel, alleging claims for negligence, nuisance, and trespass, and St. Paul asserted its subrogation rights in the lawsuit. The trial court granted summary judgment in favor of the hotel, dismissing the nuisance, trespass, and subrogation claims.

After the condominium owners settled the negligence claim, St. Paul filed a notice of appeal in its insured’s name. The notice did not mention St. Paul by name, but in the docketing statement filed pursuant to Texas Rule of Appellate Procedure 32.1 on the same day as the notice of appeal, the appellant was identified as ‘Warwick Towers Council of Co-Owners by and through St. Paul Fire & Marine Insurance Company.” All other appellate documents filed in the case were similarly styled. After the case was briefed and argued, the Court of Appeals issued an opinion holding that the merits of the appeal were immaterial because St. Paul had not named itself as the appellant in the notice of appeal.

The Supreme Court disagreed. According to the court, under Texas law, “the factor which determines whether jurisdiction has been conferred on the appellate court is not the form or substance of the bond, certificate, or affidavit, but whether the instrument was filed in a bona fide attempt to invoke appellate court jurisdiction.” An appellate court must also allow a party to amend or refile an instrument when the appellant has timely filed a document in a bona fide attempt to invoke appellate jurisdiction. By timely filing a notice of appeal in the name of its insured and by identifying its interest in the docketing statement, “St. Paul made a bona fide attempt to appeal . . ..” The court of appeals erred when it did not allow St. Paul an opportunity to amend the notice of appeal and not reaching the merits of the case.

January 28, 2008

Texas Supreme Court – Insurer Must Show Prejudice to Deny Coverage for Delay in Giving Notice

A copyright infringement suit has led to a change in Texas law regarding when an insurer may deny coverage after a policyholder fails to give prompt notice that a potential claim exists. In PAJ. Inc. v. Hanover Insurance Co., 2008 WL 109071 (Tex. 2008), the court held that to deny coverage to policyholders who delay in reporting claims, an insurer must demonstrate that the delay prejudiced the insurer.

PAJ, a jewelry manufacturer, purchased a commercial general liability policy from Hanover. The policy covered, among other things, liability for advertising injury. The terms of the policy required PAJ to notify Hanover of any claim or suit brought against it “as soon as practicable.” In 1998, PAJ was sued for copyright infringement and, initially unaware that the Hanover policy provided coverage for such disputes, PAJ did not notify Hanover until four to six months after the suit was filed. After Hanover denied coverage based on PAJ’s failure to promptly notify it of the dispute, PAJ filed a declaratory judgment action against Hanover. The parties stipulated that PAJ did not notify Hanover “as soon as practicable” and that Hanover was not prejudiced by the delay. The trial court granted summary judgment in favor of Hanover, and the court of appeals affirmed, holding that Hanover was not required to show prejudice before it could deny coverage.

In a 5-4 decision, the Supreme Court sided with PAJ. In arguing that it should not be required to show prejudice, Hanover contended that the prompt notice provision was a condition precedent to providing coverage. The court rejected this assertion, noting that “when a condition would impose an absurd of impossible result, the agreement will be interpreted as creating a covenant rather than a condition.” The court concluded that a denial of coverage without a showing of prejudice would be such a result, imposing “draconian consequences for even de minimis deviations from the duties the policy places on the insureds.” In reaching its conclusion, the court also noted that the timely notice provision “was not an essential part of the bargained-for exchange under PAJ’s occurrence-based policy.” Distinguishing such a policy from a claims-made policy, the court recognized that with respect to occurrence-based policies, a notice requirement “is subsidiary to the event that triggers coverage. The decision in PAJ will make it more difficult for insurers to deny coverage, particularly under occurrence-based policies, without demonstrating that they were prejudiced by a delay.

Full Opinion Text:

January 23, 2008

Should I Copyright my Website?

Website owners may spend countless hours getting their content just right and then leave themselves vulnerable to having that content used by others without authorization. A business or individual that wants to protect the substantial investment made in a website should consider spending a little money to gain a lot of protection by having the website copyrighted. The benefits of registration far out way the minimal cost.

The federal courts have given computer programs the same copyright status as literary works. And copyright law recognizes that the contents of a website may be copyrighted. According to the Copyright Office, “the original authorship appearing on a website may be protected by copyright. This includes writings, artwork, photographs, and other forms of authorship protected by copyright.” In addition to registering the text of your website, you should consider registering the copyrights for individual images if you own them.

Perhaps the most important reason for promptly copyrighting your website is that a copyright registration may allow you to recover statutory damages and attorneys. But this must be done quickly. When you register your website within three months after publishing it or before an infringement occurs, you can seek both statutory damages and attorney's fees in lawsuit against an infringer. If the website has not been timely registered, you will be limited to recovering any actual damages that you could establish as well as a portion of the infringer’s profits that were proved to derive from the infringement. It is often very difficult, if not impossible, for a copyright owner to prove actual damages. If you have registered your website, however, you would be entitled to damages set by statute, ranging from $750 to $30,000 as determined by the court, even where you are unable to prove actual damages. And if you can demonstrate that the infringement was willful, a court may award up to $150,000 in statutory damages for each violation.

Prompt registration also makes you eligible to recover attorney’s fees in an infringement lawsuit. You cannot recover attorney’s fees for a copyright infringement unless you registered your website within three months of first publication. Given the potential costs of litigation, making the infringer pay for the lawsuit can be very significant.

If you want to sue someone for infringing on the contents of your website, a failure to have registered will, at the very least, delay the process. Because having a registered copyright is a prerequisite to filing suit in federal court, you would have to wait until a registration certificate had issued before filing suit. Given the current workload at the Copyright office, it would in all likelihood take four months or more after your application is filed because a Certificate of Registration was issued and you could proceed to federal court.

Registration also definitively establishes the fact of the copyright on the public record. In addition, if you register your work within five years of its publication, it is considered to be prima facie evidence in court establishing (1) the validity of your website copyright and (2) the facts as stated in your Certificate of Registration issued by the Copyright Office.

Registration may also be beneficial if you’re hoping to avoid litigation. When an infringement is discovered, the usual procedure is to send a “cease and desist” letter identifying the infringement and demanding that the infringer stop using your content. If you can include the fact of a federal copyright registration in that letter, along with a notice that the infringement may result in an award of statutory damages and attorney’s fees, it is far more likely that the “cease and desist” letter will convince the infringer to stop using your content before it becomes necessary to file suit.

If the content of your website changes regularly, you should establish a procedure for regularly registering the website. Because registration for a published work is retroactive to the publication date if the application is filed within three months after the work is first published, the most complete protection can be obtained by register a copyright at least once every three months.

It should be noted that a domain name is not protected by copyright law. The Internet Corporation for Assigned Names and Numbers (ICANN), a nonprofit organization that has assumed the responsibility for domain name system management, administers the assignation of domain names through accredited registers.

January 11, 2008

Scott & Scott, LLP Selected for On-line Copyright Registration System

The American copyright registration system, currently an entirely paper-based operation, is on the verge of going electronic, and Scott & Scott, LLP has been selected to be part of that revolution. The United States Copyright Office is testing a new on-line web-based copyright registration system. Called “eCO,” for “electronic Copyright Office,” the system is currently in beta testing on the Copyright Office’s website. As a participant in the beta-testing program, Scott & Scott, LLP will be able to register copyrights electronically for a reduced fee of $35 for electronic filings.

The system may only be used for basic registration claims for literary works, visual arts works, performing arts works, and sound recordings. The system will allow registrants to submit applications, deposit copies, and fees electronically. According to the notice published by the Copyright Office, “in addition to reducing processing time lags and operational costs in the long term, eCO will provide for a streamlined application experience for users.” The Copyright Office intends, at a later date, to expand the system to cover additional registration claim types and services. According to the website, the expanded system will cover “serials, group registrations, vessel hull designs, mask works, renewals, and corrections and amplifications of existing registrations.”

Scott & Scott LLP, already a leader in protecting its clients’ intellectual property assets, intends to offer on-line registration as part of its intellectual property services. The system will allow the firm to register copyrights more quickly and efficiently, saving clients both time and money.

The eCO system may be accessed at the following website:

January 4, 2008

Trademark Infringement Plaintiffs Seeking Statutory Damages Cannot Also Recover Attorney’s Fees

A recent decision by the Ninth Circuit will affect the ability of companies seeking to recover for trademark infringement and counterfeiting to also be awarded their attorney’s fees. In K&N Engineering, Inc. v. Bulat, 2007 WL 4394416 (9th Cir. 2007), the court held that when a business chooses an award of statutory damages under the federal trademark laws instead of seeking actual damages, attorney’s fees cannot be recovered. This decision will certainly impact strategy decisions that will be made by parties involved in trademark litigation.

K&N Engineering designs, manufactures, and distributes aftermarket automotive air filters and related products. The company’s stylized logo, which is the basis for two of K&N’s registered trademarks, appears on decals included with many of K&N’s products. K&N also separately distributes such decals to enthusiasts through an internet promotion. K&N became aware that Bulat was selling unauthorized decals bearing the K&N logo on eBay. K&N filed suit in federal court alleging trademark infringement, counterfeiting, and dilution, as well as related state-law claims. In addition, K&N sought statutory damages under 15 U.S.C. § 1117(c). The district court granted K&N’s motion for summary judgment and awarded $20,000.00 in statutory damages and $100,000.00 in attorney’s fees. Bulat appealed and argued, inter alia, that K&N’s election to receive statutory damages under 15 U.S.C. § 1117(c) precluded an award of attorney’s fees.

The Ninth Circuit agreed. The court concluded that section 1117 as a whole “lays out an integrated scheme for plaintiffs in trademark infringement actions to recover damages and attorney’s fees.” Fees are available under section 1117(a) only in “exceptional cases,” where the court finds that the defendant acted maliciously, fraudulently, deliberately, or willfully. Section 1117(b), in contrast, provides for treble damages plus attorney’s fees in every case involving counterfeiting, absent extenuating circumstances. A plaintiff may also choose to forego actual damages and seek statutory damages under section 1117(c), which makes no provision for attorney’s fees. The court held that by electing to recover statutory damages, K&N gave up any right to seek an award of attorney’s fees because there was no statutory basis for making such an award.

Full opinion text:$file/0655393.pdf?openelement

Eight Predictions for 2008

2007 was an exciting and dynamic year for the software asset management industry. As we enter a new year, the software industry will continue to evolve. Here are my predictions for what will happen in 2008.

1. BSA expands its “no-fine” self-audit program
I will remember 2007 as the year that the BSA increased its reward program for “anti-piracy” leads to up to $1,000,000. With approximately fifty-five million dollars in global revenue showing on its most recent tax return, BSA will continue to be the most important software police organization in the world. Recently, BSA has created a new audit flavor, it’s a self-audit with a twist. Targets are asked to conduct an audit, provide invoices for software purchased as a result of the audit and the BSA agrees to close its file. I call this the “no-fine” self-audit because once the audit is conducted and materials produced to BSA, the file is in fact closed without protracted settlement negotiations over fines and other terms. I predict that the “no-fine” audit will be used with greater frequency 2008.

2. Microsoft Expands SAM Engagement Program
Microsoft’s SAM initiatives have replaced what used to be contractual audits. Under this program, Microsoft hires a consultant to assist the customer in conducting and audit that is the results of which are reported to Microsoft. As many clients continue to struggle to manage compliance with Microsoft licensing, Microsoft will continue to invest time and resources in various SAM initiatives. Although, I have been a critic of the certain aspects of Microsoft’s SAM Engagement, I think publishers like Microsoft that help customers deal with SAM challenges will be most successful in the long run. I think the number of variety of global SAM engagements will increase dramatically in 2008.

3. Adobe to Focus Attention on Fonts
In the recent weeks, we have started to see BSA audit letters specifically requesting audit information regarding installed fonts. Depending on the nature of your business, you may be receiving files that contain proprietary fonts licensed by your company vendors, clients, and partners when they send you documents. Frequently, these fonts wind up remaining on your computers systems creating a potential compliance issue. Adobe has an extensive portfolio of fonts that are used in its industry leading design products. I think that in 2008 the focus on font licensing compliance will continue.

4. Industry Consolidation Accelerates
As we continue to experience the economic ripple effects of the sub-prime meltdown, I think there will be an increased credit squeeze in 2008. As smaller publishers find it harder to borrow funds to fuel growth, continued industry consolidation should occur in 2008. These same economic factors may lead to increased acquisition and divestiture work for software asset managers in all industries.

5. Autodesk Stays Aggressive
In addition to participating in audits conducting by the SIIA and BSA Autodesk maintains its own “anti-piracy” program implemented exclusively by Donahue Gallagher & Woods law firm. While other publishers search for kinder and gentler enforcement strategies, I predict that Autodesk will continue to be aggressive in its approach to enforcement working through the pre-eminent anti-piracy attorneys to implement its heavy-handed strategy.

6. End-Users Benefit from Soft Economy
If the economy weakens and revenue pressure on software publishers increases, end-users will enjoy greater negotiating and bargaining power. The smartest companies will negotiate aggressively with the software industry to secure favorable pricing and licensing terms custom tailored to their business needs. In my experience, senior management at software publishers are more likely to make licensing and pricing concessions when there is a new transaction and considerable cash on the table. A soft economy will force publishers to make concessions to end-users in 2008.

7. Resellers Expand Asset Management Services
To stay competitive, software resellers have had to offer value added tools and services to assist their customers with managing the hardware and software assets they sell. The smartest resellers are learning that the more asset management tools and services they can provide the greater wallet share they will enjoy for hardware, software, and services. Dell’s purchase of ASAP Software and Insight’s purchase of Software Spectrum have started a trend that will continue in 2008.

8. Third-Party Commercial Access Licenses Go Mainstream
In 2007 Microsoft greatly expanded its reseller network for its Service Provider License Agreement Program. This program provides commercial access licenses to Microsoft technology. Traditional client access licenses (CAL) are for internal use and access only. If you provide direct or indirect access to third parties including your customers, vendors, and business partners you should consider whether you need SPLA licensing. In 2008, third party access licensing will become increasingly important under Microsoft SPLA as well as other major publishers licenses.

Robert J. Scott is the managing partner of Scott & Scott, LLP.

January 2, 2008

No “Famous” or “Well-Known” Marks Doctrine in New York

The New York Court of Appeals has rejected the application of the “famous” or “well known” marks doctrine under New York law. Companies concerned about infringement of unregistered marks in New York state should be aware that claiming their mark is “famous” or “well-known” will not be sufficient to state a common law claim for unfair competition when a competitor uses the mark in New York. Instead, a business will have to demonstrate that in New York, there is actual good will attached to the name by New York residents.

ITC operates a five-star restaurant named Bukhara in New Delhi, India. According to the court, the restaurant “has attained some measure of renown among those with an avid interest in fine cuisine” and has been named as one of the 50 best restaurants in the world. ITC, however, has had little luck in capitalizing on the restaurant’s prestige. While it opened or franchised restaurants under the Bukhara name, most of those restaurants, including ones in the United States, have closed. ITC obtained a U.S. trademark in 1987 but has not operated a restaurant in the U.S. since 1997.

In 1999, some former employees of the New Delhi Bukhara restaurant opened the Bukhara Grill in Manhattan and later opened a second location. The Manhattan restaurant features many of the New Delhi restaurant’s signature dishes and replicates much of its décor. ITC filed suit in federal court against the Manhattan restaurant for trademark infringement, unfair competition, and false advertising under federal and New York law. The district court ruled that ITC could not pursue trademark or trade dress infringement claims because it had abandoned its mark and dress. The court also rejected ITC’s contention that it could nevertheless pursue claims under the “well known” or “famous” marks doctrine, a controversial and little-used doctrine that gives common law protection to marks that are famous or well-known. On appeal, the Second Circuit certified two questions to the New York Court of Appeals regarding the famous marks doctrine and the viability of ITC’s unfair competition claim.

In ITC Limited, v. Punchgini, Inc., 2007 WL 4334177 (N.Y. 2007), the Court of Appeals held that ITC could pursue a claim for unfair competition on a theory of misappropriation. Under New York law, a common law unfair competition claim may be based on palming off or misappropriation. New York, however, has not recognized the “famous” or “well-known” marks theory doctrine. The Court of Appeals explicitly stated that it was not recognizing this doctrine or any new theory of liability. Instead, New York recognizes a claim for unfair competition based on the idea that for certain kinds of businesses, goodwill attached to the name of the business has value and the name may not be misappropriated to compete unfairly against a party in New York. The court also recognized that such good will “can, and does, cross state and national boundary lines.”

To pursue a claim based on misappropriation of a famous foreign mark, a plaintiff must demonstrate that it does have goodwill associated with its mark in New York state. “At the very least, a plaintiff’s mark, when used in New York, must call to mind its goodwill. Otherwise, a plaintiff’s property right or commercial advantage based on the goodwill associated with its mark is not appropriated in this state when its unregistered mark is used here.” According to the court, at a minimum, consumers in New York must primarily associate the mark with the foreign plaintiff. In assessing whether such goodwill exists, a court should consider, among other things, public statements or advertising, direct evidence such as surveys, and evidence of actual overlap between customers of the New York defendant and the foreign plaintiff. ITC makes it plain that the fact that a “famous” foreign mark has been copied is not sufficient – the plaintiff must demonstrate that the mark has value in New York before a claim may proceed.

Full Opinion Text:

Texas Workforce Commission Decisions Have Res Judicata Effect

Texas employers should review a recent decision by the Texas Supreme Court that will affect the resolution of wage claims made under the Texas Payday law. In a case of first impression, the Texas Supreme Court has held that a final adjudication of a wage claim by the Texas Workforce Commission denying the claim precludes the subsequent filing of a common law wage claim in state court. The decision in Igal v. Brightstar Information Technology Group, Inc., 2007 WL 4276545 (Tex. 2007), emphasizes for all companies with employees in Texas the importance of responding forcefully to wage claims made to the TWC, as a victory in that forum will not prevent an employee from later pursuing the same claim in court.

Igal was terminated by Brightstar and contended that under his employment agreement, he was entitled to a post-termination salary. 1989, the Texas Legislature amended the Texas Payday Law to provide for an administrative procedure under which a claimant could file a wage claim with the TWC. Accordingly, Igal filed a claim with the TWC, asserting a violation of his employment agreement and claiming unpaid wages. The TWC concluded that Igal’s claims failed on the merits and that it lacked jurisdiction because Igal filed his claim more than 180 days after his wages became due for payment. Instead of filing a motion for rehearing or seeking judicial review of the TWC’s decision, Igal sued Brightstar in a Texas state court for breach of contract and declaratory judgment. The trial court granted summary judgment for Brightstar, holding that res judicata barred Igal’s claims, and the Court of Appeals affirmed.

The Supreme Court agreed, concluding that “res judicata attaches to TWC’s final administrative decision.” Res judicata bars the relitigation of claims that have been finally adjudicated on the merits in a prior action. The court concluded that res judicata does apply to claims previously determined by an administrative agency. In deciding wage claims, “TWC acts in a judicial capacity.” Because the parties “had an adequate opportunity to litigate their claims through an adversarial process in which TWC finally decided disputed issues of fact,” res judicata applied.

The court rejected Igal’s contention that the TWC procedure was only intended to be an alternative, and not an exclusive, remedy. According to the court, agencies and courts may both “provide remedies for injuries actionable under the common law.” The Payday Law was intended to provide an alternate remedy to employees when it would be too difficult to pursue a traditional lawsuit. When an employee chooses this alternative, that employee cannot later relitigate the same claims in a court. The holding in Igal will therefore prevent employees who are unsuccessful in a TWC proceeding from pursuing the same claims against their employers in a Texas court.

Full Opinion Text:

December 17, 2007

Applying for a Trademark When a Conflicting Trademark has Not Yet Been “Registered”

When a business applies for a trademark, registration is usually denied when a competing trademark has previously been registered. A company applying for a trademark, when faced with that situation, may then file a petition to cancel the conflicting registration. The application will then be suspending pending a resolution of the petition to cancel. But if the conflicting mark is still in the registration process, the applicable procedures will change and petition to cancel is not an option.

Once an application for registration of a trademark has been submitted to the US Patent and Trademark Office, it is sent to an examining attorney with the USPTO. The examining attorney, in reviewing the application, will initially search the USPTO’s automated records to determining whether there are any conflicting applications or registrations. “Conflicting” applications or registrations are marks filed by a different applicant that may ultimately require a refusal of registration under §2(d) of the Trademark Act, 15 U.S.C. §1052(d), due to a likelihood of confusion. Registration will generally be refused when the conflicting mark has previously been registered.

An examining attorney, however, cannot refuse registration under §2(d) of the Trademark Act based on an earlier-filed application for a conflicting mark until the mark registers. Therefore, when the examining attorney has examined the later-filed application and determined that it is in condition to be approved for publication or issue or in condition for a final refusal, but for the conflict between the marks, the examining attorney will suspend action on the later-filed application until the earlier-filed application matures into a registration or is abandoned. 37 C.F.R. §2.83(c); In re Direct Access Communications (M.C.G.) Inc., 30 USPQ2d 1393 (Comm’r Pats. 1993). Because the conflicting mark has not been “registered” yet, a petition to cancel the registration cannot be filed.

This situation may often occur in situations when the conflicting application is made under 15 U.S.C. § 1051(b) based on an intention to use a trademark in commerce (as opposed to applications based on prior use of the mark in commerce). If such an application is not opposed and meets the requirements, it will not be immediately registered. Instead, a Notice of Allowance will be issued with the proviso that the mark will not be registered until it has been used in commerce and the applicant files a Statement of Use. The Statement of Use must be filed within six months or the application will be deemed abandoned. The applicant can request up to five six-month extensions of this time period, and the later-filed application may remain suspended during that time period.

The potential delay serves as a reminder that a party seeking trademark protection should not delay in filing an application even when it appears that no one else has been using the mark in commerce. An “intent to use” application by another party can delay the process of securing trademark protection even when your business can clearly demonstrate prior use.

December 11, 2007

Data Breach: How to Use Encryption to Reduce Privacy Incidents

In May of 2007 Scott & Scott, LLP commissioned the Ponemon Institute to conduct a national survey titled the Business Impact of Data Breach. Out of the 720 companies that responded, 85% reported that they had experienced a data breach and 81% indicated that they suffered a privacy notice triggering event. I was surprised by the high percentage of companies that reported a data breach and alarmed by the number of companies that had notice triggering events. Implementing programs that minimize notice triggering events is easier to accomplish than many companies may realize.

Bar Chart 1: Data breach statistics for the present sample

Contrary to popular believe, the single largest cause of data breaches is missing portable devices such as laptops representing 42% in our survey, while criminal acts such as hacking represented only 6%. Accordingly, I have been advising my clients to implement encryption technologies on laptops and PDA’s for several years.

Bar Chart 2: Probable cause of the data breach event

Most of the 38 states that currently have data privacy breach notification statutes specifically define the personal information that is subject to the statute by using the term “unencrypted” in the statute. The statutes that do not specifically exempt encrypted data in the definition of personal information have an exception for incidence where there is no reasonable probability of harm. Accordingly, if you have a laptop or PDA that is goes missing and that laptop is equipped with encryption technology you will likely have no data privacy notice obligation under state laws. Amazingly, even after suffering a data breach 46% of the companies in our survey failed to implement encryption technology.

Bar Chart 3: What organizations are not deploying after data breach

While implementing encryption in our firm, I discovered that encryption can be expensive and disruptive to business operations. In our firm, we have experienced costs exceeding $100.00 for licensing, labor costs related to installation, and performance and reliability impacts on laptops post installation. For these reasons, I was intrigued to learn that that the major hardware manufacturers Dell, Lenovo, and HP were working with the hard-drive manufacturers such as Seagate to develop hard-drives equipped with encryption technology “out of the box.” I am now advising my clients to change their standard laptop build to include these hard-drives. The quote for my new laptop from Dell includes the following description:

Hard Drive: 80GB Hard Drive 8MM, 5400RPM Latitude D430 (341-5730)

As time goes by, these drives will get faster and the gap between non-encrypted drive performance and encrypted drive performance will either go down or become less important. In the meantime, if you are concerned about data privacy, purchasing your new laptops with encrypted hard drives is one of the smartest things you can do. For additional information a copy of the Business Impact of Data Breach is available here:
A copy of Scott & Scott’s State Data Breach Notification chart is available here:

December 5, 2007

Oral Settlement Agreement Unenforceable in Texas

Businesses involved in Texas litigation should review a recent decision by the Texas Supreme Court where the court refused to enforce an oral settlement agreement. In Knapp Medical Center v. De La Garza, 2007 WL 3230144 (Tex. 2007), the court made it clear that an oral agreement settling a case cannot be enforced in a Texas court. The court concluded that Texas Rule of Civil Procedure 11, which requires that agreements related to pending litigation must be in writing, bars the enforcement of an oral agreement.

Dr. Javier De La Garza, M.D. filed suit against Knapp Medical Center, a hospital in Weslaco, Texas for defamation, business disparagement, interference with business relations, and civil conspiracy. During the trial, De La Garza’s attorney offered to settle the case based on the hospital’s insurance policy limits of $1,000,000. When he made the settlement offer, De La Garza’s attorney understood that the hospital would also contribute an additional $200,000 to the settlement. After he made the policy-limits demand, the attorney learned that in fact, the hospital did not plan to contribute the additional $200,000 to the settlement. Instead, the insurer had agreed to settle for the $1,000,000 policy limits. In open court prior to the closing arguments, De La Garza’s attorney explained to the judge that he had made the offer with the understanding that the hospital would contribute the additional $200,000. The hospital’s attorney, while acknowledging that an additional contribution had been discussed, stated that the insurer had agreed to settle the case for policy limits. Despite the disagreement, De La Garza agreed on the record to settle the underlying claims for $1,000,000, while purporting to reserve his right to collect an additional $200,000 from the hospital in another lawsuit. The judge accepted the agreement and discharged the jury. De La Garza then signed a Release that acknowledged the settlement funds as complete satisfaction of the claims asserted in the litigation.

De La Garza later filed suit against the hospital for the disputed $200,000, alleging claims for fraud and breach of an oral agreement that pre-dated the agreement that was read into the record and accepted by the court. The trial court entered judgment in favor of De La Garza and awarded attorney’s fees. The hospital appealed, contending that Rule 11 barred De La Garza’s claims. The court of appeals ignored the Rule 11 argument, concluding instead that parol testimony of one of the attorneys was sufficient to support the existence and breach of the settlement agreement.

Without hearing oral argument, the Supreme Court granted review and reversed the court of appeals’ decision, holding that the purported oral settlement agreement was unenforceable under Rule 11. Rule 11 states that “unless otherwise provided in these rules, no agreement between attorneys or parties touching any suit pending will be enforced unless it be in writing, signed and filed with the papers as part of the record, or unless it be made in open court and entered of record.” The court noted that Rule 11 “has long been a part of Texas jurisprudence” and represented “the wisdom of eschewing the verbal agreements of counsel in favor of written ones . . ..” The rule is intended to promote finalizing settlements “by objective manifestation so that the agreements do not themselves become sources of controversy.” In sum, for a settlement to be enforceable in Texas, it must comply with Rule 11.

In this case, the only agreement that complied with Rule 11 was the agreement read into the record to settle the case for $1,000,000. There was no written agreement to settle for any other amount. The hospital’s alleged agreement to contribute an additional $200,000 was neither in writing nor made in open court and entered into the record. Accordingly, it was not enforceable. The decision in Knapp serves as a reminder to Texas practitioners and litigants that compliance with Rule 11 is a necessary prerequisite to seeking enforcement of any agreement related to a pending lawsuit.

Full Opinion Text:

The Importance of License Ambiguities in Software License Disputes

Without a contractual provision to the contrary, ambiguous terms in a software license will be construed against the software publisher. Provided that there are no other business factors that would make litigation unwise, an ambiguous license agreement is the situation most likely to lead to litigation.

Construction against the Drafter
When dealing with ambiguities, it is important to determine whether the license in question contains a provision indicating that ambiguities will not be construed against the drafter. If there is no such provision, the general rule in most jurisdictions is that ambiguities in software license agreements will be construed against the drafter. If the contract is silent on construction against the drafter, it is important review any choice of law provision and determine if the specific jurisdiction follows the general rule.

Parol Evidence
The Parol Evidence Rule, which is applicable in most states, provides that when a court determines that a contractual provision is ambiguous, the parties may introduce extrinsic evidence to prove that their interpretations of the contract are consistent with the parties’ intent when entering into the contract.

In a software dispute, parol evidence will include testimony from both the software company and the end user regarding pre-contract discussions and negotiations as well as pre-contract writings including e-mails, faxes, purchase orders and draft license agreements. All of this evidence would be precluded in a contract dispute where there was no ambiguity in the contract. In such instances the court would be confined to what is called the “four corners” of the software license agreement when conducting its interpretation.

Software licenses often discuss technical matters, and are therefore frequently ambiguous. These ambiguities require the parties to develop and present extrinsic evidence in court. Typically, the evidence is developed through pre-trial discovery mechanisms such as requests for production of documents and depositions, which can be very expensive.

Triable Issues of Fact
Contract disputes, including those involving software licenses, are frequently resolved before the trial begins through motions for summary judgment. The interpretation of a non-ambiguous contract is decided as a matter of law by the court. In addition, because the parol evidence rule precludes the introduction of evidence in contravention of the plain meaning of an unambiguous contract, litigation costs are reduced because the extrinsic evidence regarding the parties’ pre-contract intent is not considered by the court.

October 23, 2007

Litigation Considerations in Software License Disputes

There are some software licensing disputes that do not lend themselves to amicable resolutions. When there are millions of dollars in controversy and each party believes that it has acted within its legal rights, litigation may be unavoidable. Many times, even when litigation seems certain, the parties evaluate the various litigation considerations and conclude that they should try pre-litigation resolution strategies to see if they can, at the very least, narrow the issues.

Amount in Controversy
Until a client understands its potential exposure in a software dispute, choosing a strategy is almost impossible. The difficulty in software disputes is that a tremendous of amount of work and analysis is required to estimate the amount in controversy.

In trade association audits conducted by the BSA and the SIIA, the amount in controversy may be relatively easy to estimate because agencies typically employ mature alternative dispute resolution processes that permit accurate estimates of not only the amount in controversy but also the probable settlement range.

The amount in controversy is much more difficult to determine in other types of audit because the contractual audit provisions contained in software licenses frequently do not specify a formula for resolving any license compliance gaps following an audit. Regardless of the nature of the dispute, helping the client determine the amount in controversy is an important role for in-house and outside counsel.

Switching Costs
Perhaps the most overlooked issue when developing a strategy for a software dispute is the costs to discontinue use of a publisher’s software and switch to a competitor’s product. High switching costs for enterprise products places the software publisher in a position of strength from a practical perspective. By contrast, low switching costs or changing business requirements places the negotiating strength in the hands of the client. For this reason, publishers who have a dominant market share, such as Autodesk, are generally more aggressive in their approach to audits and litigation than those publishers operating in highly competitive markets.

Switching costs are also critically important because most software licenses contain a termination provision that will almost certainly be invoked when litigation is commenced or just prior to litigation. Termination provisions give the publisher a great deal of leverage in litigation and if the publisher is able to demonstrate that it properly terminated a software license, can bolster the publisher’s copyright infringement claims in the litigation.

Before choosing a strategy, audit targets should work with experienced counsel to conduct a careful analysis of the licenses in question and a disciplined assessment of the alternatives to using the auditing publisher’s products.

Probability of Success on the Merits
The next step in the strategy development process is evaluating the strength of the claims
on the merits. While software license disputes are generally pled as copyright infringement claims, the license agreements define the nature of the copyright holder’s grant of authority to use its products. Most matters that proceed to litigation arise because of ambiguous language in the license agreements defining the scope of the license, and it is this ambiguity that will determine the probability of success on the merits.

No Third-Party Negligent Spoliation Tort in New York

The New York Court of Appeals has recently rejected an attempt to expand the available remedies for spoliation of evidence. The court addressed whether a plaintiff can sue a third party responsible for the destruction of evidence critical to a plaintiff’s claim against a tortfeasor. Businesses operating in New York should review the decision in Ortega v. City of New York, 2007 WL 2988760 (N.Y. 2007), where the court joined the majority of states in refusing to recognize the tort of third-party negligent spoliation of evidence.

After having it inspected at a service station, Ortega bought a used 1987 Ford minivan from a private owner. Driving down Ocean Parkway in Brooklyn, Ortega smelled fumes and pulled over. The minivan burst into flames, causing Ortega and her passenger, Manuel Peralta, to suffer severe burns. The New York City police officers who investigated the accident contacted a towing contractor to remove the vehicle from the road. The minivan was eventually transported to the New York City Police Department’s College Point Auto Pound in Queens.

Peralta filed a special proceeding against the towing company and the police department seeking to preclude destruction of the minivan until it could be inspected by Peralta. The court issued an order granting Peralta 60 days in which to inspect the vehicle and forbidding alteration or destruction of the minivan until completion of the inspection. The preservation order was served on the towing company and the police department. The police department’s legal bureau promptly forwarded a written request, along with a copy of the court order, to the property clerk at the auto pound directing preservation of the vehicle. For unknown reasons, the memo and order were either not received by the property clerk or were not properly acted upon. Instead, the vehicle was placed in a salvage auction and then, when it did not sell, it was crushed for scrap metal.

Ortega and Peralta did not pursue personal injury claims against Ford (the manufacturer of the van), the previous owner of the van, or the service station that had inspected the van. Instead, in July 2004, they sued the City of New York seeking compensation for the personal injuries they sustained as a result of the fire. Ortega and Peralta asserted, inter alia, that the City should be held liable for all damages caused by the fire because, by destroying the minivan, the City had breached its duty to preserve evidence, thereby committing the tort of negligent spoliation of evidence. The City responded by contending that the plaintiffs had failed to state a cause of action upon which relief could be granted. After the trial court dismissed the claims, the Appellate Division concluded that the plaintiffs’ claims were not viable.

The Court of Appeals affirmed, holding that New York did not recognize a claim for third-party negligent spoliation of evidence. The court noted that under New York law, a party already has a number of available remedies when evidence is destroyed. New York courts have the discretion “to provide proportionate relief to the party deprived of the lost evidence, such as precluding proof favorable to the spoliator to restore balance to the litigation, requiring the spoliator to pay costs to the injured party associated with the development of replacement evidence, or employing an adverse inference instruction at the trial of the action.” In appropriate cases, a court may “impose the ultimate sanction” of dismissing the case or striking responsive pleadings.

But the Court of Appeals refused to recognize that the destruction of evidence should be the basis of a separate tort claim. While a number of other states, including California, New Jersey, and Illinois, have recognized such a cause of action, the Court of Appeals disagreed that such a claim was available in New York. The court acknowledged the importance of discouraging the destruction of evidence, stating that “destruction of evidence by parties with a duty of preservation simply cannot be condoned, especially when that duty is imposed by court order.” The court concluded, however, that existing remedies were adequate to deter spoliation and appropriately compensate its victims.

While the destruction of the minivan placed Ortega and Peralta in a situation where discovery sanctions would be inadequate to address the problem, the civil contempt statutory scheme was available to them. The City itself conceded that if the plaintiffs had pursued a contempt claim, they would, at the very least, have been entitled to monetary damages sufficient “to reimburse them for additional investigation, research or expert expenses incurred in attempting to prove the underlying negligence claim absent inspection of the vehicle.”

The court gave other reasons for refusing to recognize the viability of a separate tort action based on the spoliation. According to the court, such a claim would be too speculative. “In a third-party spoliation case, because the content of the lost evidence is unknown, there is no way of ascertaining to what extent the proof would have benefited either the plaintiff or defendant in the underlying lawsuit and it is therefore impossible to identify which party, if any, was actually harmed.” In addition, recognizing such a tort would create significant potential liability for municipalities, which often tow and warehouse vehicles involved in accidents. The court stated that “we are not
persuaded that it would be sound public policy to create a new tort that shifts liability from responsible tortfeasors to government entities that serve as repositories of evidence that may or may not be relevant in future civil cases.” The Ortega decision makes it clear that while spoliation of evidence may still give rise to severe sanctions, the potential liability of third parties responsible for spoliation will be limited to damages available under the civil contempt statutory scheme.

Full Opinion Text:

Resolution Frameworks Used in Software License Disputes

In many instances, the parties cannot resolve a software dispute with an audit. In some of these cases, there are contractual requirements or other considerations that cause the parties to employ traditional alternative dispute resolution frameworks to bring the decision makers to the table and try to resolve the case before a trial becomes necessary.

Software publishers usually want to avoid costly litigation as much as end users do. Accordingly, a publisher may try to persuade the target to participate in mediation prior to commencing formal legal proceedings. Mediation can be valuable when there is an ongoing relationship between the parties, and the parties are interested in continuing the relationship.

One of the many advantages of mediation is that it can, relatively quickly, bring parties interested in resolution together. Mediations are typically shorter, more informal, and less costly. Parties with settlement authority attend the mediation with the goal of reaching a resolution and avoiding more formal, more costly arbitration or litigation.

In some instances, arbitration can be more favorable than litigation when resolving a
software dispute. In theory, the procedure is less formal, and in many instances, proceeds
more quickly than litigation. Either a single arbitrator or an arbitration panel considers the
issues of the matter and makes a decision that is binding on the parties. Arbitrators with
considerable software licensing experience and a general understanding of IT should be
selected for software disputes. In complex cases, the arbitrator selection process can be
time consuming and expensive.

There are also some significant disadvantages to arbitration. Initially, arbitrators are not required to follow the law when making their decisions. It is therefore sometimes difficult to accurately evaluate the probability of success on the merits. Additionally, whether and to what extent factual discovery will be permitted is almost always left to the arbitrator’s discretion. In reality, parties can spend years and hundreds of thousands of dollars arbitrating a software dispute.

Because the results in arbitration can be unpredictable, it is vital for a company to be in a position to accurately evaluate what is at risk in a software dispute to be arbitrated. The consequences for guessing incorrectly could result in an adverse award with catastrophic consequences.

October 15, 2007

Attempts to Commit Trademark “Genericide” are not Actionable

Businesses owning the rights to trademarked terms are always mindful that those rights need to be protected and policed. If a trademarked term becomes widely used in its generic sense, trademark protection may be withdrawn – a set of circumstances that has been referred to as “genericide.” In Freecycle Network, Inc. v. Oey, 2007 WL 2781902 (9th Cir. 2007), the United States Court of Appeals for the Ninth Circuit rejected a claim based on the efforts of an individual to encourage the use of a term in its generic sense in the hopes that trademark protection for that term would be denied. Companies should be mindful that under Freecycle, it may not be possible to state a claim under the Lanham Act based solely on attempts to use or to encourage the use of a trademarked term in its generic sense.

The Freecycle Network (“TFN”) is a nonprofit corporation that encourages and coordinates the reuse, recycling, and gifting of goods. On its website,, TFN coordinates the efforts of over more than 4,000 Freecycle groups worldwide. On these local group webpages, individuals may post information about items they no longer want. If another member wants the offered item, an exchange is arranged between the parties, avoiding the need to dispose of it in a landfill or otherwise.

The case arose out of the use of the term “freecycle” and attempts to gain trademark protection for that term. Timothy Oey, a member of TFN since 2004, suggested that TFN more actively police the use of term “freecycle” and pursue trademark protection for it. TFN then instituted a strict usage policy, drafted by Oey, preventing use of the term “freecycle” in any sense other than to refer to TFN or TFN’s services. While TFN claims to have consistently used the marks “Freecycle” and “The Freecycle Network” and its logo since May 2003 to refer to TFN, it also admitted that it first used the term “freecycle” and various derivations to refer more generally to acts involving the recycling of goods for free using the Internet. On January 17, 2006, TFN’s proposed mark was published for opposition in the Official Gazette, an opposition was filed the next day, and the mark currently remains unregistered.

Oey subsequently experienced a change of heart and came to believe that the term “freecycle” should remain in the public domain. He urged TFN to abandon its efforts to secure a trademark and conveyed these feelings in an e-mail to fellow TFN group moderators. Subsequently, Oey made various statements on the Internet asserting that TFN lacked trademark rights in “freecycle” because it was a generic term, Oey also encouraged others to use the term in its generic sense and to contact the USPTO to oppose the pending registration. TFN severed ties with Oey, and Oey continued to publish statements on the Internet challenging TFN’s rights to the term “freecycle.”

TFN filed suit against Oey in federal court in April 2006 alleging that Oey’s statements constituted contributory trademark infringement and trademark disparagement under section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), as well as injurious falsehood, defamation, and intentional interference with a business relationship under Arizona law.
The district court granted TFN’s request for a preliminary injunction, entering an order preventing Oey “from making any comments that could be construed as to disparage upon [The Freecycle Network]’s possible trademark and logo” and requiring that he “remove all postings from the [I]nternet and any other public forums that he has previously made that disparage [The Freecycle Network]’s possible trademark and logo.” Oey filed an interlocutory appeal of the injunction order.

The Ninth Circuit reversed and vacated the injunction. The court rejected the contention that Oey was acting improperly by encouraging others to use the term “freecycle” in its generic sense. “Where the majority of the relevant public appropriates a trademark term as the name of a product (or service), the mark is a victim of ‘genericide’ and trademark rights generally cease.” The court noted that “genericide has spelled the end for countless formerly trademarked terms, including ‘aspirin,’ ‘escalator,’ ‘brassiere,’ and ‘cellophane’.”

But the court refused to recognize a cause of action for genericide. The court held that the Lanham Act itself does not contain any provision preventing individuals or businesses from using a trademarked term in its generic sense. According to the court, the Act also does not “prevent an individual from expressing an opinion that a mark should be considered generic or from encouraging others to use the mark in its generic sense.” Instead, a claim under the Lanham Act based on the generic use of a mark may only be pursued when that use also satisfies the elements of a cause of action specified by the Act, such as infringement, false designation of origin, false advertising, or dilution. While TFN may have disagreed with Oey’s opinion, its disagreement “and frustration with his activities cannot render Oey liable under the Lanham Act.”

The court also concluded that TFN was otherwise not entitled to an injunction because it had not stated any claim under the Lanham Act. Noting that the district court’s entry of the injunction was based solely on TFN’s Lanham Act claims of trademark infringement and trademark disparagement, the court concluded that the district court’s “likelihood of success” analysis did not properly analyze the necessary elements for trademark infringement. In particular, the district court erred by not assessing whether Oey’s actions constituted a “use in commerce” as required under 15 U.S.C. § 1125(a)(1). The court concluded that based on the record, it did not appear that Oey’s statements on the Internet “were made to promote any competing service or reap any commercial benefit whatsoever.” Instead, according to the court, based on his belief that the term “freecycle” was generic, “Oey simply expressed an opinion that TFN lacked trademark rights in the term ‘freecycle’ and encouraged likeminded individuals to continue to use the term in its generic sense and to inform the PTO of their opinions.”

The court also noted that even if Oey’s statements could be construed as a “use in commerce,” that use “was not likely to cause confusion, mistake, or deceive anyone as to the connection of Oey’s services (or any other) with TFN” as required under 15 U.S.C. § 1125(a)(1)(A). The court also held that there was no cause of action for “trademark disparagement” under the Lanham Act.

In the wake of Freestyle Network, companies will not be able to use the legal system to attack generic uses of their trademarks unless they can also establish the elements of a claim that is recognized under the Lanham Act.

Full Opinion Text:$file/0616219.pdf?openelement

Reconstruction of Work Not Sufficient for Copyright

Businesses interested in copyrighting works should review a recent First Circuit decision making it clear that a prerequisite for a copyright is access to the original work. The court held that a reconstruction of the work was insufficient to meet the copyright law’s requirement that a deposit “copy” of the work be submitted with a copyright application. Companies intending to copyright a work should make certain that they maintain an original version or copyright protection may not be available.

Fernando Torres-Negrn wrote a song called “Noche de Fiesta” and made a tape recording of himself performing the song. Torres then gave the lyrics, written on a piece of paper, to a friend, along with the tape of his performance. He knew that the song would be played in public by his friend’s band. Torres, however, did not make a copy of the lyrics or the tape for himself, and he never saw the originals again. Over the next few years, the song ended up being performed by many groups and was included on a number of CD’s. None of these artists asked Toress’ permission to make the recordings.

When he learned about the wide distribution of his song, Torres submitted an application for registration of copyright to the Copyright Office in 2001. Because the application required a “copy” of the copyrighted work, Torres submitted a typed version of the lyrics. He also submitted a tape that he created in 2001, on which he had recorded himself singing the song and clapping the rhythm. Torres received a certificate of copyright on January 31, 2002. Torres then filed a copyright infringement action against numerous defendants in the District of Puerto Rico. The jury returned a verdict in favor of Torres against some of the defendants, including J & N Records, finding that J & N had infringed his copyright on “Noche de Fiesta.” The district court, however, granted J & N’s motion for judgment as a matter of law, ruling that Torres’ reconstruction of the lyrics and music did not comply with the “deposit” requirement of the copyright act.

In Torres-Negrn v. J & N Records, LLC, 2007 WL 2846117 (1st Cir. 2007), the First Circuit agreed. The court began its analysis by quoting 17 U.S.C. § 411(a), which states that “[N]o 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.” Under 17 U.S.C. § 408(b), to complete the registration process, the creator of a work must submit “a complete copy or phonorecord” of the work for which the creator seeks registration. This copy is often referred to as the “deposit copy.” The court noted that “by the time he submitted his copyright registration application, [Torres] no longer had access to either the original writing of the lyrics or the tape recording of the song.” Torres therefore submitted a reconstruction. But the court concluded that a reconstruction is not the same thing as a copy of an original for purposes of the deposit copy requirement. Citing various dictionary definitions, the court found that “a reconstruction is not a copy; a reconstruction is created without an original, whereas a copy is made from an original. Congress specified that a registration had to be accompanied by a “copy.”

Torres’ failure to include an actual copy in his registration materials was fatal to his infringement claim. The court determined that “an invalid registration (involving material errors, fraud, or an incomplete application) nullifies the federal court’s subject matter jurisdiction.” Because Torres did not submit a proper deposit copy as part of his registration, that registration was invalid. When the registration is invalid, there is no subject matter jurisdiction over an infringement claim, and it was therefore proper to enter judgment against Torres. Businesses should be aware that in the wake of this decision, federal courts will strictly enforce the deposit copy requirement.

October 5, 2007

License Termination: The Publisher’s Hammer

In some instances, publishers who suspect their intellectual property rights are being infringed will not request an audit of the target’s network. Instead, the publishers will send a legal notice to its customer attempting to terminate their license agreement and prevent the customer from using the product. Publishers often have a contractual right to terminate the license and require customers to immediately stop using the software. A sample termination provision is below.

This Software License Agreement may be terminated (a) by your giving Altova written notice of termination; or (b) by Altova, at its option, giving you written notice of termination if you commit a breach of this Software License Agreement and fail to cure such breach within ten (10) days after notice from Altova or (c) at the request of an authorized Altova reseller in the event that you fail to make your license payment or other monies due and payable. In addition the Software License Agreement governing your use of a previous version that you have upgraded or updated of the Software is terminated upon your acceptance of the terms and conditions of the Software License Agreement accompanying such upgrade or update. Upon any termination of the Software License Agreement, you must cease all use of the Software that it governs, destroy all copies then in your possession or control and take such other actions as Altova may reasonably request to ensure that no copies of the Software remain in your possession or control. The terms and conditions set forth in Sections 1(g), (h), (i), 2, 5(b), (c), 9, 10 and 11 survive termination as applicable. See

If the software product at issue is an enterprise-wide product that cost millions of dollars, an unexpected termination notice can interrupt the business and will almost certainly escalate the dispute. Furthermore, if the businesses has unanticipated switching costs associated with identifying and researching replacement software, acquisition of the software itself, and training for employees using and supporting the software, the consequences of a termination could be devastating.

October 3, 2007

Choosing the Forum for Litigating Over Covenants Not to Compete

Companies often require their employees to sign covenants not to compete as part of an employment arrangement. These covenants may include a forum-selection clause and/or a choice-of-law clause, requiring that any lawsuit arising out of the covenant be brought in a particular jurisdiction and specifying what jurisdiction’s laws are to be applied in adjudicating a dispute. Businesses with employees in Texas should consider a recent Texas Supreme Court decision enforcing a forum-selection clause in a covenant not to compete signed by a Texas resident. In In re AutoNation, Inc., 228 S.W.3d 663 (Tex. 2007), the court held that a forum-selection clause in a covenant not to compete designating Florida as the forum was enforceable in Texas. The decision means that Texans who agree to a covenant not to compete cannot count on that covenant being interpreted in a Texas court.

The case arose out of a 2003 agreement between AutoNation, a national chain of automobile dealerships, and Hatfield, a former employee who was general manager of one of AutoNation’s dealerships. As a condition of his continued employment, Hatfield was required to sign a “Confidentiality, No-Solicitation/No-Hire and Non-Compete Agreement,” which included a one-year covenant not to compete. A choice-of-law provision in the agreement stated that the agreement would be construed under Florida law, and a forum-selection clause provided that any litigation arising out of the agreement must be filed in Florida. After learning that Hatfield had resigned and accepted a position with a competitor, Auto Nation filed a suit seeking injunctive relief and damages in a Broward County, Florida state court. Before learning of the Florida action, Hatfield filed a declaratory judgment suit in a Harris County, Texas state court seeking, inter alia, a declaration that the non-compete agreement was governed by Texas law and was unenforceable.

At Hatfield’s request, the Texas trial court later signed a temporary anti-suit injunction prohibiting AutoNation from taking any further action in connection with the pending Florida law suit or filing any future litigation seeking to enforce the non-compete agreement in any non-Texas court. In its injunction order, the trial court found that “it is probable that the covenant not to compete is unenforceable in Texas.” The court of appeals, relying on the decision in DeSantis v. Wachkenhut Corp., 793 S.W.2d 670 (Tex 1990), ruled that the trial court did not abuse its discretion in issuing the injunction because in this case, “fundamental Texas public policy requires application of Texas law to the question of enforceability of a non-compete agreement.”

The Texas Supreme Court disagreed. The court noted that it is well accepted in Texas that parties have the freedom to negotiate contracts. Texas courts generally enforce forum-selection clauses, unless the opposing party clearly shows that enforcement would be unreasonable or unjust, or the clause is invalid for other reasons such as fraud or overreaching. The court disagreed with the appellate court’s reliance on DeSantis. While DeSantis and this case involved similar factual scenarios – litigation between Florida Corporations and their Texas resident Employees concerning non-compete clauses – the court explained that DeSantis actually dealt only with a choice-of-law provision rather than a forum-selection clause. In DeSantis, a Florida corporation sued a former employee in Texas for a violation of a non-compete clause. The agreement at issue between those parties included a choice-of-law provision specifying the Florida law would govern disputes. The Supreme Court in DeSantis concluded then that Texas law should govern the dispute regardless of the choice-of-law provision. In DeSantis, the court indicated that “the law governing enforcement of noncompetition agreements is fundamental policy in Texas” and “to apply the law of another state to determine enforceability of such an agreement in the circumstances of a case like this would be contrary to that policy.”

In AutoNation, however, the court clarified its holding in DeSantis, stating that there was nothing in DeSantis requiring that a suit be brought in Texas when a forum-selection clause mandates venue elsewhere. The court affirmed the necessity of judicial respect for bargained-for contractual agreements and rejected the notion that fundamental Texas policy requires that every employment dispute with a Texas resident must be litigated in Texas. According to the court, a contractual forum-selection clause is clearly enforceable in cases involving a covenant not to compete. It would be up to the Florida court to decide whether the choice-of-law provision was enforceable. In support of its conclusion, the court also noted that because AutoNation’s suit was filed first in Florida, the decision also honored principles of interstate comity. In the wake of AutoNation, companies that employ Texas residents will be able to specify the jurisdiction where disputes regarding a covenant not to compete will be heard.

September 26, 2007

Resolution Frameworks in Software License Disputes

Software publishers have an arsenal of resolution frameworks at their disposal when
seeking to enforce their contractual and intellectual property rights. These frameworks
vary in terms of cost and time and are generally relative to the seriousness of the allegations and the amount in controversy. They include:

  • License True Ups
  • Cease and Desist Letters
  • Audits
    • Self Audits
    • Independent Audits
    • SAM Engagements
    • Publisher-Staffed Audits
  • License Termination
  • Mediation
  • Arbitration
  • Litigation

License True Ups
The least adversarial software dispute resolution mechanism is a license true up. Many
software licenses contain provisions that require the end user to determine how many licenses it needs and “true up” by purchasing those licenses. True up mechanisms work best where there is an ongoing and positive relationship between the publisher and the end user and both sides have a vested interest in continuing the relationship.

A software audit is the most common software dispute resolution. The types of audits initiated by software publishers and trade associations include self audits, independent audits, software asset management (“SAM”) engagements, and publisher-staffed audits.

1. Self Audits
Self audits are the least disruptive and most predictable types software audit. They are a mechanism often employed by trade associations acting on behalf of software publishers. The trade associations, and in some instances, the publisher itself, requests that the target company conduct a self audit and report the results of the audit to the trade association or publisher.

2. Independent Audits
An independent software audit involves the use of a third-party auditor to gather the facts
relevant to the dispute. Unlike a self audit, independent audits require detailed discussions regarding confidentiality and non-disclosure agreements as well as a definition of the audit scope. Independent audits are preferred over SAM engagements and publisher-staffed audits because the auditor is usually ethically obligated to remain independent.

3. SAM Engagements
SAM engagements are also conducted by third-party auditors or consultants, but there is no obligation that the auditor in a SAM engagement be independent. Participation in a properly managed SAM engagement may be in the client’s best interest
because such engagements typically provide some flexibility and a lower total cost of resolution than self audits and independent audits.

4. Publisher-Staffed Audits
Publisher-staffed audits are the most intrusive and least impartial resolution framework. In these audits, the publisher’s employees collect information relevant to the dispute.
It is never advisable to agree to a publisher-staffed audit without examining all of the alternatives first.

License Termination
Termination of an organization’s license agreement is the publisher’s hammer and prelude to litigation. It often results in unforeseen costs to the business and escalates the dispute to higher levels.

Mediation and Arbitration
Mediation and arbitration are alternative dispute resolution processes that take place before formal legal proceedings are contemplated and may facilitate communication and out-of-court resolution.

Litigation is surprisingly uncommon between parties with ongoing business dealings of any kind. Both the publisher and business are eager to avoid the steep costs associated with litigation.

Types of Audits in Software License Disputes

A variety of resolution frameworks are available to businesses involved in a software license dispute. An audit is the most common such framework and entails an analysis of the organization’s network for software installations compared against its licenses. The types of audits initiated by software publishers and trade associations include self audits, independent audits, software asset management (“SAM”) engagements, and publisher-staffed audits.

Self Audits
Self audits are the least disruptive of all software audits. They are a mechanism often employed by trade associations acting on behalf of software publishers. The trade associations, and in some instances, the publisher itself, requests that the target company conduct a self audit and report the results of the audit to the trade association or publisher. Companies that agree to conduct a self audit must inventory the applicable software on the computers within the scope of the audit and report the number of installations, the number of licenses, and the number of license deficiencies.

When evaluating whether you should cooperate or litigate after a request for a self audit, you should consider the benefits of a self audit compared to the other types of audits. For instance, in publisher and third-party audits, you usually have a contractual obligation to participate in the audit and provide information to the auditors. When conducting a self audit, you have some control over the timing of the audit and the allocation of resources. That flexibility is not always present in other types of audits.

Additionally, outside auditors are not always required to be impartial and may submit incomplete or inaccurate audit results. For these reasons, regardless of the type of audit requested by the software publisher, companies faced with an audit should request the opportunity to provide a self audit rather than an independent audit, a publisher-staffed audit, or (usually) a SAM engagement.

Independent Audits
An independent software audit involves the use of a third-party auditor to gather the facts
relevant to the dispute. This audit method may be the most costly and time consuming option for the audit target.

Many software licenses incorporate audit provisions allowing the software publisher to request an independent audit. Such provisions must be carefully analyzed to determine the potential business impact of the audit and liability that may result from the audit.

In an independent audit, the organization has no input into the selection of the auditor, how long the audit will last, or the scope of the materials the auditors may review. The target company must also bear the costs of the audit if the auditor finds a licensing discrepancy of more than 5%. If the auditors conclude there is a discrepancy, the publisher has the contractual authority to unilaterally determine the license price for the software necessary to become compliant. Independent audits have significant business impacts and should be avoided if possible. Nonetheless, independent audits are preferred over SAM engagements and publisher-staffed audits because the auditor is usually ethically obligated to remain independent.

SAM Engagements
SAM engagements are also conducted by third-party auditors or consultants, but there is no obligation that the auditor in a SAM engagement be independent. The software publisher requests that the target allow a third party to audit its software installations and report the results directly to the publisher. In these engagements, the publisher pays the auditor, and the target is required to purchase licenses to cover any deficiencies in its software licenses. Microsoft’s SAM engagement has been extensively used in lieu of traditional software audits with mixed reviews from the end user’s perspective.

Participation in a properly managed SAM engagement may be in the client’s best interest
because such engagements typically provide some flexibility and a lower total cost of resolution than self audits and independent audits. In many instances, the publisher seeks no compensation for alleged past infringements in exchange for an agreement to come into compliance on a go-forward basis.

Publisher-Staffed Audits
Publisher-staffed audits are the most intrusive and least impartial of all software audits. In these audits, the publisher’s employees collect information relevant to the dispute. In many instances, publishers request a company’s confidential information or access to a
company’s network to conduct the audit. Although a publisher may arguably have a contractual right to request that it be allowed to examine its customers’ computer network, it is never advisable to agree to a publisher-staffed audit without examining all of the alternatives first.

September 25, 2007

The Federal Copyright Act and Potential Pre-emption

A recent appellate decision in Illinois addresses the situations in which state copyright provisions may be preempted by the federal copyright laws. The decision serves as a reminder to businesses facing copyright issues that state laws purporting to protect intellectual property may, in reality, be unenforceable because they are preempted by federal law.

Paul Williams allegedly visited a Cook County laundromat and attempted to sell CDs and DVDs from a suitcase to patrons. A laundromat attendant activated a panic button and alerted the police. After approximately 10 minutes of surveillance, the police reported that they observed 2 transactions where Williams and an individual exchanged money for what appeared to be CDs. The police discovered that Williams had between 250 to 300 CDs and DVDs perceived to be fake. At trial, an expert identified exhibits showing CDs and DVDs Williams had in his possession. There was also testimony at trial that Williams was in possession of a DVD titled “The Passion of Christ” (at the time the movie was still in theatres), and CDs by rap artists such as Too Short, Ja Rule, and various tracks from Ludacris and R. Kelly. Williams was convicted on two counts of unlawful use of recorded sounds or images, and two counts of unlawful use of identified sound or audio visual recordings, both violations of Illinois Criminal Code Statues.

In Illinois v. Williams, 2007 WL 2597661 (Ill. App. 2007), the Appellate Court of Illinois, First District, reversed on one count based on preemption but affirmed the second count, concluding that it was not preempted by federal law.

At issue were sections 16-7 and 16-8 of the Illinois Criminal Code. Section 16-7, entitled “Unlawful use of recorded sounds or images,” states in part that

“(a) a person commits unlawful use of recorded sounds or images when he
  1. intentionally, knowingly or recklessly transfers or causes to be transferred without the consent of he owner, any sounds or images recorded on any sound or audio visual recording with the purpose of selling or causing to be sold, or using or causing to be used for profit the article to which such sounds or recordings of sound are transferred.
  2. Intentionally, knowingly or recklessly sells, offers for sale, advertises for sale, uses or causes to be used for profit any such article described in subsection 17-7(a)(1) without consent of the owner.”

Section 16-7 is entitled “Unlawful use of unidentified sound or audio visual recordings,” and in part states “(a) a person commits unlawful use of unidentified sound or audio visual recordings when he intentionally, knowingly, recklessly or negligently for profit manufactures, sells, distributes, vends, circulates, performs, leases or otherwise deals in and with unidentified sound or audio visual recordings or causes the manufacture, sale, distribution, vending, circulation, performance, lease or other dealing in and with unidentified sound or audio visual recordings.”

Williams contended that the federal Copyright Act expressly preempts Illinois’ regulation of the conduct with which he was charged him and that his convictions are therefore null at void. The court construed section 301(a) of the Copyright Act as requiring the preemption of state claims when two conditions were present – “(1) the works at issue are fixed in tangible form and fall within the ‘subject matter of copyright’ . . . and (2) the legal or equitable rights granted under the state law are equivalent to the exclusive rights set forth in section 106 of the Act.” Because the recordings at issue were unquestionably fixed in tangible form, the first subject matter prong was met. In evaluating the equivalency prong, the court applied what it described as the “extra element test,” which asks whether the state law requires an additional element that is qualitatively different from those necessary for copyright infringement. In evaluating section 16-7(a)(2), the court acknowledged that this section does require a criminal mental state, which is not within the general scope of copyright, but concluded that requiring a criminal mental state for conviction does not qualify as an “extra element.” The court concluded that because section 16-7, which criminalized the sale of any sound recording without the consent of the owner, did not include any extra element beyond what was required to violate the federal law, it was preempted by the federal Copyright Act.

With respect to section 16-8, the court reached a different conclusion. In prosecuting an offender under section 16-8, the state was required to prove that the defendant was dealing in “unidentified” CDs – that is, recordings that did not include the name and address of the actual manufacturer or that listed a manufacturer that was not the true manufacturer of the recording. This critical element was not part of section 106 of the Copyright Act. Because section 16-8 incorporated an “extra element” beyond those encompassed in the federal law, it was not preempted.

September 19, 2007

Basic “Informational” Website not Sufficient to Establish Personal Jurisdiction

Companies concerned about being haled into court on the basis of internet contacts should review the recent Texas appellate court decision in Novamerican Steel, Inc. v. Delta Brands, Inc. 2007 WL 2325835 (Tex. App. – Dallas 2007, n.p.h.) In Novamerican, the Dallas Court of Appeals indicated that informational websites generally are not a sufficient basis for establishing personal jurisdiction.

DBI, a Texas company, sold a heavy gauge rotary shear to NTS, which is incorporated in Delaware. NTS is owned by Novamerican, a Canadian corporation. Neither NTS nor Novamerican had offices or employees in Texas, and neither company directly advertised or distributed marketing materials in Texas. The companies, however, did maintain a company Internet website. DBI filed a lawsuit in Texas state court claiming that NTS and Novamerican unlawfully used its design for the rotary shear and misappropriated its trade secrets. NTS and Novamerican filed a special appearance, challenging the Texas court’s jurisdiction. The trial court concluded that it did have personal jurisdiction.

The Dallas Court of Appeals reversed, holding that a Texas court not exercise personal jurisdiction over NTS or Novamerican. The court first recognized that there was no specific jurisdiction because the factual basis for DBI’s claims was not sufficiently connected to the contacts NTS and Novamerican did have with Texas.

The court also rejected DBI’s claim that a Texas court had general jurisdiction over the defendants. General jurisdiction is present when a defendant’s contacts in a form are continuous and systematic, such that the forum may exercise personal jurisdiction even if the cause of action did not arise from or relate to the activities conducted within the forum. DBI contended that NTS and Novamerican had continues and systematic contacts with Texas based, in part, on their internet website.

The court concluded that the defendants’ website was “passive” under the sliding scale-test used by Texas courts when assessing whether a website is sufficient to support the exercise of general jurisdiction over a defendant. The court explained this sliding–scale analysis as follows:

“At one end of the scale are websites clearly used for transacting business over the Internet, such as entering into contracts and knowing and repeated transmission of files of information, which may be sufficient to establish minimum contacts with a state. On the other end of the spectrum are ‘passive’ websites that are used only for advertising over the Internet and are not sufficient to establish minimum contacts even though they are accessible to residents of a particular state. In the middle are ‘interactive’ websites that allow the ‘exchange’ of information between a potential customer and a host computer. Jurisdiction in cases involving interactive websites is determined by the degree of interaction. Texas courts have used this test in determining whether an internet site is sufficient to support the exercise of general jurisdiction over a defendant.”

In this case, defendants’ website was a basic informational site listing facts about Novamerican and its subsidiaries. The website had a “contact us” page containing addresses, phone numbers, and a web-based submission form. The court noted, however, that customers did not use the website to purchase products from the defendants. Accordingly, the website was insufficiently interactive to confer general jurisdiction. In addition, the court found that a a corporate officer’s comment regarding the potential for selling products in Texas was not evidence that the defendants actually transacted business over the Internet for purposes of establishing general jurisdiction. Consistent with Novamerican, Businesses concerned about internet jurisdiction should recognize that courts will focus on the level of website interactivity in determining when an internet presence becomes a basis for exercising personal jurisdiction.

September 12, 2007

Internet Jurisdiction and the Danger of not Defending a Lawsuit

When faced with a foreign lawsuit, it is rarely good advice to suggest that a company simply ignore the proceedings and allow the plaintiff to receive an award by default in the hope that any resulting judgment might not be enforceable. A recent decision in the Seventh Circuit highlights the dangers that might arise if a business presumes that a judgment in a foreign jurisdiction might not be enforceable.

The Spamhaus Project, a British non-profit company that maintains a spammer blacklist, was sued in Illinois state court by e360 Insight. e360 Insight claimed that after it was listed as a spammer by Spamhaus, it lost several customers and suppliers. Spamhaus removed the case to federal district court and filed an answer. Spamhaus believed that the Illinois court did not have jurisdiction over it, claiming that it could only be sued in a British court. A month after filing its answer, Spamhaus, in open court, moved to withdraw its answer, and the court granted the motion. The district court entered a default judgment in favor of e360 Insight, awarded $11.7 million in damages, and ordered Spamhaus to cease its operations in the United States if it did not pay the award. The court also instructed the Internet Corporation for Assigned Names and Numbers (ICANN), an international organization that oversees the distribution of IP addresses and domain names, to suspend the domain. While ICANN claimed it did not have the power to suspend the domain, it did advise Spamhaus’ hosting company to do so.

Although Spamhaus admitted that it normally ignored foreign lawsuits, the attack on its Internet domain definitely got the company’s attention. After its domain was threatened, Spamhaus filed an appeal.

In e360 Insight v. The Spamhaus Project, 2007 WL 2445016 (7th Cir. 2007), the United States Court of Appeals for the Seventh Circuit affirmed the validity of the default judgment. The court rejected Spamhaus’ contention that the district court did not have the authority to enter a default judgment without inquiring into the factual basis for personal jurisdiction and effective service. The Seventh Circuit had previously refused to impose any such requirement on district courts, and it rejected Spamhaus’ argument that a special rule should be applied in cases involving a foreign defendant, internet-based defendant. While recognizing that such a rule might be justified where a defendant had not made an appearance, the court noted that Spamhaus had appeared but chose to withdraw its answer and allow a default to be taken. The court saw no reason “to require the district to raise sua sponte affirmative defenses, which may, of course, be waived or forfeited, on behalf of an appearing part who elects not to pursue those defenses for itself.” In upholding the default, the court was not persuaded that Spamhaus should be allowed to “escape the consequences of” its decision not to participate in the litigation.

Nevertheless, the court did give Spamhaus a second chance with respect to the damages and the injunction. The court concluded that the evidence relied on by the district court was conclusory and insufficient to support the damages awarded. The award was vacated and remanded “for a more extensive inquiry into the damages to which e360 is entitled.” With respect to the injunction, the court found that the entry of default was not a sufficient basis, by itself, for entering a permanent injunction against Spamhaus. Instead, the court remanded the case and directed the district court to assess the well-established elements necessary to support an award of injunctive relief. The court also concluded that the injunctive relief as crafted by the district court was overly broad.

While Spamhaus will have another opportunity to persuade the district court regarding damages and injunctive relief, it still faces potential liability based on the default judgment. The Spamhaus situation serves as a reminder that when faced with a foreign lawsuit, instead of ignoring the suit as a matter of course, a better strategy would be to consult with legal counsel in both jurisdictions and formulate an approach that minimizes risks without jeopardizing a party’s legal position.

September 10, 2007

Court Limits Malicious Prosecution Liability

In choosing to file a lawsuit, a business should always contemplate the possibility that it might face a subsequent claim for malicious prosecution should the litigation not be successful. Similarly, a company that has been subjected to a meritless claim may consider suing a plaintiff and its counsel for malicious prosecution. Establishing a malicious prosecution claim has always been difficult, and a recent New Jersey decision may make it even more problematic to pursue such a claim against the attorneys who filed the suit on behalf of their client.

In Lobiondo v. Schwartz, 2007 WL 2188600 (N.J. App. 2007), a New Jersey appellate court detailed the standards and circumstances that would allow a plaintiff to sue an attorney for instituting litigation on behalf of a client. Lobiondo was an owner of a beach club directly across the street from Schwartz. Lobiondo was looking to increase the club’s size, but Schwartz opposed Lobiondo’s plans. She began to communicate her written objections to local officials and to the general community. Lobiondo reacted by hiring the law offices of Giordano, Halleran & Ciesla, P.C. (the “Giordano Firm”) to file a complaint against Schwartz for defamation, intentional infliction of emotional distress, and tortuous interference with business transactions. Schwartz thereafter counterclaimed alleging malicious abuse of process, malicious prosecution, and intentional infliction of emotional distress. The trial court dismissed all the claims made by Schwartz against the Giordano Firm.

In affirming that decision, the New Jersey Appellate Division focused much of its analysis on the Giordano Firm’s potential liability for malicious prosecution. The court referenced Restatement (Third) of the Law Governing Lawyers §57(2)(2000), which provides that “a lawyer representing a client in a civil proceeding . . . is not liable to a non-client for wrongful use of civil proceedings . . . if the lawyer has probable cause for acting or if the lawyer acts primarily to help the client obtain a proper adjudication of the client’s claim in that proceeding.” The Restatement, however, also indicates that a person may be held liable when that person acts without probable cause and primarily for a purpose other than securing a proper adjudication of the claim, if the proceedings have terminated in favor of the defendant.

The court attempted to balance the attorney’s obligation to zealously represent a client, the public interest of maintaining open access to courts, and the need to deter malicious pursuit of baseless claims. The court concluded that the Restatement properly dealt with all these concerns and that its standard should be applied to the lawyer’s actions and motives in pursuing the litigation. The court held that to establish a claim for malicious prosecution against an attorney, a plaintiff must prove that the attorney (a) knew the client’s claim was baseless and either (1) knew the client was pursuing litigation for an improper purpose that also furthered the attorney’s improper purpose or (2) litigated for the attorney’s own improper purposes. In other words, absent an attorney having his or her own “improper purpose” in pursuing a claim, an attorney cannot be held liable for the initiation, continuation, or procurement of litigation.

The court concluded that in conducting such an analysis, it is irrelevant if the client advises their attorney that they have their own improper purpose for bringing suit. Absent proof that the attorney has an illegitimate purpose in filing suit on behalf of a client, the attorney is not liable for malicious prosecution. The decision in Lobiondo will make it far more difficult to successfully pursue a malicious prosecution claim against an attorney.

August 27, 2007

Liability for Deliberately Choosing Similar Trademark

A recent federal district court decision indicates that a business may be held liable when it chooses a trademark with the intent of causing confusion with an existing mark. The decision in Kerr Corp. v. Freeman Mfg. & Supply Co., 2007 WL 2344752 (N.D. Ohio 2007), indicates that choosing a mark with the intent to cause confusion may, by itself, be sufficient to establish an inference of confusing similarity. The decision gives companies yet another reason to be wary of potential legal consequences when selecting a trademark.

Beginning in the late 1970’s, Freeman Manufacturing & Supply Company (“Freeman”), developed original formulas for colored injection wax, optical soluble wax, and flake-form wax products. Kerr Corporation (“Kerr”), sold color-coded, flake-form injection waxes for jewelry and optics, which were manufactured by Freeman. In the mid 1980’s, the two companies entered into a development agreement under which Freeman would research and develop wax technology for projects proposed by Kerr in exchange for a monthly consulting fee. Freeman later began to compete with Kerr in the sale of colored wax products, flake-form wax products, and other items. Kerr marketed the colors at issue as “Tuffy Green,” “NYC Pink,” and “Flex-Plast,” while Freeman began marketing those colors as “Tuf Guy Green,” “Filigree Pink,” and “Flexible Blue.”

Kerr sued Freeman for trademark infringement under the Lanham Act, and Freeman moved for summary judgment on the claims. Kerr also asserted claims under state deceptive trade practices law and other common law causes of action. The court ruled that “Kerr’s attempt to protect basic color choices in the manufacture of products is without merit.” The court also rejected other attempts by Kerr to invoke the Lanham Act to protect its product designs, noting that “where the design feature is related to the utilitarian function of the product, such design cannot be protected.”

The court, however, did agree with Kerr that Freeman’s use of the “Tuf Guy Green” name could be a violation of Kerr’s trademark “Tuffy Green.” Kerr’s use of the fanciful modifier “Tuffy” rendered the name partially arbitrary. An arbitrary mark does not require a showing of secondary meaning, even when it involves colors.

In analyzing this issue, the court indicated that “if a party chooses a mark with the intent of causing confusion, that fact alone may be sufficient to justify an inference of confusing similarity.” The court noted that “to the ordinary consumer or reasonable juror, ‘Tuffy’ and ‘Tuf Guy’ are similar enough in appearance, spelling, and suggested meaning to result in some confusion as to origin, and the question is begged: Why else would Freeman have chosen such a similar color name, if not to confuse consumers into mistaking its product for Kerr’s?” Because a jury could conclude that the name was selected to cause confusion, it was inappropriate to grant summary judgment on that claim.

The court went on to reject the rest of Kerr’s claims regarding some of the names chosen by Freeman for its products. While color alone may sometimes meet the basic legal requirement for use as a trademark, color is generally merely descriptive. To invoke the Lanham Act, it is necessary to demonstrate that a color name has achieved a secondary meaning that distinguishes the company’s goods and identifies their source, without serving any other significant function. The court concluded that the product names “Super Pink,” “Aqua Green,” “Ruby Red,” and “Turquoise,” which were merely descriptive of wax color and quality, did not carry any secondary meaning that would support invocation of the Lanham Act.

The decision in Kerr serves as a reminder that intent in choosing a trademark can be significant. If it appears that a similar name was chosen with the intention of confusing consumers, that, by itself, may be sufficient to establish liability for trademark infringement.

Cybersquatting and Antitrust Laws

The United States Court of Appeals for the Fifth Circuit has recently dealt with the intersection of the antitrust laws and cybersquatting. The dispute arose between a number of casinos operating in Tunica County, Mississippi and the owner of various domain names that could be used to advertise Tunica area businesses. The owners of the domain names claimed that the casinos refused to deal with her company in the hopes of driving down the value of the domain names so that the casinos could later acquire the names themselves. The Fifth Circuit made it clear that such a course of conduct could indeed violate the antitrust laws. The decision in Tunica Web Advertising, Inc. v. Tunica Casino Operators Association, 2007 WL 2297464 (5th Cir. 2007), is a reminder that companies acting to protect their domain names from competitors must consider the antitrust implications of their actions.

In November of 1999, Cherry Graziosi purchased the domain names “” and “” from Network Solutions, Inc. for $140.00. Graziosi then leased the domain names to Circus Circus Mississippi, Inc. d/b/a Gold Strike Casino Resort. A user who entered either domain name was redirected to the Gold Strike Casino’s website. Graziosi later established Tunica Web Advertising, Inc. (“TWA”), which then acquired the domain name “” from another company for approximately $20,000.00. TWA leased “” to the Gold Strike Casino for $3000.00 per month. The Tunica County Tourism Commission (“TCTC”) sued Graziosi, alleging that she was a cybersquatter. The suit was settled, with Graziosi transferring the rights to “” and “” to TCTC and TCTC relinquishing any claims to the domain name “”

In May of 2001, TWA made a proposal to the TCTC to lease “” to all the Tunica County casinos collectively to advertise their businesses. Under the terms of the proposal, visitors to the domain would be redirected to the TCTC’s website, which already featured information about all the casinos. The proposal was referred to the Tunica Casino Operators Association (“TCOA”), a trade association formed by the Tunica casinos. At a meeting of the TCOA, none of the casinos agreed to TWA’s proposal. TWA later learned from a person present at the meeting that the casinos had entered into a “gentlemen’s agreement” not to do business with TWA. The apparent motivation for this agreement was to cause the value of the “” domain name to decline so that it could later be acquired by the casinos themselves. Shortly thereafter, the Gold Strike terminated its existing relationship with TWA, and the casinos all turned down later proposals by TWA to advertise on a website TWA created using the “” domain name.

TWA sued all the Tunica County casinos, the TCTC, and the TCOA in federal court alleging state and federal antitrust claims. The claims against the TCTC and TCOA were dismissed, and the district court granted summary judgment in favor of the defendants. The Fifth Circuit reversed the summary judgment order. The court concluded that there were triable issues of fact with respect to whether there was a conspiracy among the casinos. The casinos’ rejection of TWA’s initial proposal was not actionable because the proposal was made to them jointly. But the evidence of a “gentlemen’s agreement” not to do business with TWA and “” was sufficient to survive summary judgment. In particular, the court pointed to evidence indicating that the casinos collectively hoped that if they did not do business with TWA, the value of the “” domain name would decline and the casinos could buy it later. The court concluded that if TWA could substantiate these allegations, they would be enough to show either direct or circumstantial evidence of a concerted refusal to deal in violation of the antitrust laws.

The court also concluded that the casinos’ actions could constitute an illegal horizontal boycott that would be per se unlawful under the Sherman Act. Because the casinos are direct competitors of each other, an alleged agreement not to do business with TWA would clearly be a horizontal agreement. The court rejected the casinos’ contention that for a group boycott to be per se unlawful, at least one of the conspirators had to be a direct competitor. While direct competition with a victim is often part of a per se unlawful boycott, it is not an absolute prerequisite to a finding of per se illegality. The court concluded that to determine the applicability of the per se rule, the district court should analyze “(1) whether the casinos hold a dominant position in the relevant market; (2) whether the casinos control access to an element necessary to enable TWA to compete; and (3) whether there exist plausible arguments concerning pro-competitive effects.” The decision in Tunica Web Advertising certainly indicates that unrestrained battles over domain names can have significant antitrust consequences.

Opinion Text:

August 20, 2007

Federal Patent Law Preempts State Price Regulations

The Federal Circuit has held that federal patent law preempts state and local legislation intended to regulate the sale price of patented drugs. The court made it clear that the patent system is intended to create a market-based set of rewards for patent holders to promote innovation. State or local price regulation alters this system and therefore conflicts with federal law. While the decision dealt directly with drug patents, the principles established may give companies holding other patents additional protection from efforts by state or local governments to legislate how their products can be sold.

The District of Columbia City Council adopted legislation prohibiting any patented drug from being sold in the District for an excessive price. The operative section of the District’s Excessive Pricing Act states that “It shall be unlawful for any drug manufacturer or licensee thereof, excluding a point of sale retail seller, to sell or supply for sale or impose minimum resale requirements for a patented prescription drug that results in the prescription drug being sold in the District for an excessive price.” While not defining what constituted an “excessive price,” the legislation included a statement that a prima facie case of excessive pricing could be established by proving that the wholesale price of the drug was 30% higher than the comparable price in any high income country [defined as the United Kingdom, Germany, Canada, or Australia] where the product is protected by patents or other exclusive marketing rights. The law was challenged by the Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization, which contended that it was preempted by federal patent laws.

In Biotechnology Industry Organization v. Dist. of Columbia, 2007 WL 2189156 (Fed. Cir. 2007), the court held that the District’s law was preempted by federal patent law. The court first noted that while the District of Columbia is a federal territory, the general principles of preemption govern any conflict between District statutes and Congressional enactments. The court also indicated that there is no express provision in the federal patent statute that prohibits states from regulating the price of patented goods. In fact, the Federal Circuit has previously held that “the federal patent laws do not create any affirmative right to make, use, or sell anything.” Leatherman Tool Group, Inc. v. Cooper Indus., Inc., 131 F.3d 1011, 1015 (Fed.Cir.1997).

Nevertheless, the court concluded that a state or local law must yield to congressional enactments if it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” The patent laws are intended to create an incentive for innovation, and the court concluded that the District’s legislation effectively changes federal patent policy within its borders. “By penalizing high prices – and thus limiting the full exercise of the exclusionary power that derives from a patent – the District has chosen to re-balance the statutory framework of rewards and incentives insofar as it relates to inventive new drugs.” The court held that because Congress intended a market-based framework to reward innovation, the District’s price regulation scheme would distort this framework and therefore conflicted with federal patent law.

The holding only applied to patented drugs. Nevertheless, the decision may provide a mechanism for other businesses holding patents to challenge state and local regulation that alters the market-based reward system that, according to the Federal Circuit, underlies federal patent law.

Full Opinion

August 10, 2007

Website Notification of New Contract Terms is Insufficient

Businesses providing services to consumers should be aware that if they intend to change the terms of a contract, they cannot do so merely by posting new terms on a website. The Ninth Circuit has recently ruled that posting modified contract terms on a website does not create an enforceable contract. Instead, it is necessary to give proper notice, such as mailing the new terms to the customer. Otherwise, the customer will not be bound by the modified terms. The court did not address whether the posted contract modifications could become enforceable if some means of electronic assent, such as a click-wrap agreement, were used.

Joe Douglas was a customer of America Online and received long distance telephone service from AOL. AOL sold its long distance business to Talk America, which continued to provide long distance service to AOL’s former customers. Talk America added four new provisions to the service contract, including additional service charges, a class action waiver, an arbitration clause, and a choice-of-law provision requiring application of New York law. Talk America posted the revised service contract on its website but did not otherwise notify its customers that the contract had changed. Douglas, who was unaware of the new terms, continued to use Talk America’s services for four years. When he learned of additional charges that Talk America had imposed under the new terms, Douglas filed a class action lawsuit against Talk America alleging causes of action for violations of the Federal Communications Act, breach of contract, and violations of California’s consumer protection laws. Talk America moved to compel arbitration based on the modified contract, and the district court granted the motion. Douglas petitioned the Ninth Circuit for a writ of mandamus.

The Ninth Circuit granted the petition and vacated the district court’s order compelling arbitration. The district court apparently assumed that because the new contract terms were available on Talk America’s website, Douglas was aware of them. The Ninth Circuit, however, found that even if Douglas had visited the website, “he would have had no reason to look at the contract posted there.” The court noted that parties to a contract have no obligation to check the terms on a periodic basis to determine if those terms have been changed by the other party. It is well settled that one party cannot unilaterally change the terms of a contract. To change the terms of a contract, the other party’s consent must be obtained. A revised contract is nothing more than an offer, which does not bind the parties until it is accepted. When an offeree is not aware of the new terms, it certainly cannot assent to them.

The court rejected the argument that by continuing to use Talk America’s services, Douglas had agreed to the new terms. The court made it clear that assent could only be inferred if Douglas had received proper notice of the proposed changes. While notification by mail of contract modifications might be enough, posting the new terms on a website was not sufficient to establish proper notice. The court did not address whether giving notice of the new terms themselves by e-mail or advising the customer by e-mail or regular mail to visit the website to see the new terms would constitute proper notice, though this seems sensible. It is also possible that a company could post a click-wrap form on its website, requiring the customer to indicate agreement with the modified terms before using additional services. The key appears to be making certain that each customer receives some sort of individualized notification of the new terms and some activity that is indicative of assent.

Full Opinion text:$file/0675424.pdf?openelement

July 30, 2007

Federal Circuit Restricts Invalidity Counterclaims In Patent Suits

Companies charged with patent infringement often make use of the federal Declaratory Judgment Act to attack the validity and enforceability of patents. In Benitec Australia, Ltd. v. Nucleonics, Inc., 2007 WL 2069646 (Fed. Cir. 2007), the Federal Circuit limited the circumstances under which such claims may be advanced. Specifically, the court has made it plain that an actual, substantial, and immediate controversy must exist before a claim for declaratory relief will be entertained by a federal court. If the initial claim for infringement is rendered moot by dismissal or otherwise, the counterclaim for invalidity will also, in all likelihood, be dismissed unless the party asserting such a claim can establish that a substantial, actual, and real controversy still exists.

Benitec and Nucleonics are both biotechnology companies involved in “gene silencing,” where disease-causing genes are “switched off” by a mechanism other than genetic modification. Benitec sued Nucleonics for infringing a patent related to RNA-based disease therapy. Nucleonics moved to dismiss the complaint, arguing that the court did not have jurisdiction because Benitec’s claim was based on Nucleonic’s development and submission of information to the FDA. Nucleonics asserted that no controversy had actually yet arisen, given that no new drug application had been submitted to the FDA and no competing product had yet been manufactured or marketed. Nucleonics also sought leave of court to amend its answer and add declaratory relief counterclaims alleging invalidity and unenforceability based upon alleged inventorship fraud. Benitec moved to dismiss its own patent-infringement claim on the grounds that the Supreme Court’s decision in Merck KGaA v. Integra Lifesciences I, Ltd., 545 U.S. 193 (2005), expanded the pharmaceutical research exception to the patent laws, calling into question whether it did have a viable claim. The district court then denied Nucleonics’ request for leave to amend for lack of jurisdiction under the Declaratory Judgment Act.

The Federal Circuit affirmed the dismissal of Nucleonics’ counterclaims for declaratory judgment and in doing so, the court clarified the prerequisites for seeking declaratory relief. In large measure, the court’s analysis was prompted by the Supreme Court’s 2007 decision in MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007), where the Supreme Court disapproved the Federal Circuit’s previous use of the “reasonable
apprehension of imminent suit” test for determining declaratory judgment jurisdiction. The court noted that parties cannot invoke the Declaratory Judgment Act to seek what amounts to an advisory an opinion regarding “what the law would be upon a hypothetical state of facts.” Applying MedImmune, the Federal Circuit concluded that a party seeking declaratory relief under the Declaratory Judgment Act has the burden of demonstrating that when the claim is filed, there is a substantial controversy with sufficient immediacy and reality to warrant a declaratory judgment. The court did indicate that if a defendant had been charged with actual infringement of a patent, the substantial controversy requirement will be met.

While Nucleonics had been sued for patent infringement, Benitec’s subsequent dismissal of its claim proved to be Nucleonics’ undoing. The Federal Circuit made it clear that to seek declaratory relief, a substantial controversy must also continue throughout the litigation. Benitec properly dismissed its patent infringement claim because Nucleonic’s actions in developing and submitting information to the FDA prior to filing a new drug application were not a legitimate basis for asserting patent infringement. Under the Supreme Court’s decision in Merck, no infringement case would arise until after Nucleonics actually filed a new drug application with the FDA. The Federal Circuit ruled that “the fact that Nucleonics may file [a new drug application] in a few years does not provide the immediacy and reality required for a declaratory judgment.”

One judge dissented from the decision, asserting that “a different test for determining whether there is a case or controversy applies when the allegation of infringement is withdrawn during the course of litigation.” Specifically, the dissenting judge contended that under the Supreme Court’s decision in Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83, 98 (1993), if an infringement claim is mooted, an invalidity counterclaim should not be dismissed unless the patent holder demonstrates that there is no possibility of a future controversy with respect to invalidity. The Supreme Court may yet weigh in on this complex intersection of patent and declaratory judgment jurisprudence. In the meantime, the decision in Benitec will limit the circumstances under which a party charged with infringement will be able to assert a declaratory judgment counterclaim for invalidity.

Full Opinion Text:

July 24, 2007

U.S. Supreme Court Rules Changes

The United States Supreme Court has adopted a revised version of its Rules of Court that are set to take effect on October 1, 2007. The new rules will affect any business litigating before the court. Companies, trade associations, and interest groups should pay particular attention to changes in the rules governing amicus briefs.

Business interests that are not parties to pending cases are often interested in the issues being dealt with by the court. Companies often participate in cases through trade associations or otherwise by filing amicus briefs. The court has been considering adding a requirement that the first footnote of an amicus brief indicate whether counsel or a party is a member of the amicus curiae or made a monetary contribution to the preparation or submission of the brief. The final version of the rule did not impose this sweeping disclosure requirement. Instead, under new Rule 37.6, the first footnote of an amicus brief must indicate whether a party or its counsel “made a monetary contribution to the preparation or submission of an amicus curiae brief in the capacity of a member of the entity filing as amicus curiae. Such disclosure is limited to monetary contributions that are intended to fund the preparation or submission of the brief; general membership dues in an organization need not be disclosed.”

The procedure for amicus filings have also been changed. Under the new Rule 37.2, amicus briefs in favor of or in opposition to granting certiorari, which formerly were due when the brief in opposition was due, must now be filed within 30 days after the case is docketed. In cases where a respondent waives its right to file a brief in opposition to the petition but the court requests a response, amicus briefs may be filed on the date such a response is due. Anyone filing an amicus brief is now required to notify the parties of their intent to file a brief at least ten days before that brief is due. This will give the respondent an opportunity to seek an extension of time to file its response so that it can address arguments advanced in the amicus brief. Amicus briefs on the merits must be filed within 7 days after the brief for the party supported is filed or, if the brief is in support of neither party, within 7 days after the date for filing the petitioner’s brief. Under this procedure, an amicus will have an opportunity to review the completed brief of the party it is supporting before filing its own brief.

All litigants in the Supreme Court will be affected by the new rules eliminating the old page limitation for briefs and petitions in favor of word count limitations. The new word count provisions found in Rule 33 are similar to those that have been used in the Federal Rules of Appellate Procedure since the 1998 amendments to those rules. Petitions for writ of certiorari and briefs in opposition to a petition may not exceed 9,000 words, while a reply in support of a petition is limited to 3,000 words. Amicus briefs in support or opposition to a petition are limited to 3,000 words. Briefs on the merits are limited to 15,000 words, with reply briefs on the merits limited to 7,500 words. Amicus briefs on the merits will be limited to 9,000 words.

The court has, for the most part, retained its strict guidelines for how petitions and briefs are to be formatted. Documents must now be in 12-point font for text and 10-point font for footnotes, instead of the former 11-point rule for all text. The court now requires that all documents be typeset in a “Century family” font, such as Century Expanded, New Century Schoolbook, or Century Schoolbook. All parties filing merits briefs, including amicic curiae, are required to transmit electronic versions of the briefs to the court.

The court has also shortened the briefing schedule at the merits stage. Under the old rules, a respondent’s brief was due 35 days after the petitioner’s brief. New rule 25 requires that brief to be filed 30 days after the petitioner’s brief, with any reply brief due 30 days after the respondent’s brief has been filed.

Complete Text of
the Revised Rules:

July 17, 2007

No Privacy for E-mail or Website Addresses

The law governing the privacy of e-mail and internet communications continues to develop. Attempts by the government to obtain access to e-mails and website information have recently raised these privacy issues. As discussed in the June 28, 2007 posting “Does the Constitution Protect the Privacy of Your E-mails?,” the Sixth Circuit’s decision in United States v. Warshak appeared to recognize that individuals and businesses may have protected privacy interests in the contents of e-mail communications. According to the Ninth Circuit in United States v. Forrester, 2007 WL 1952390 (9th Cir. 2007), however, this expectation does not extend to all information connected with electronic communications. According to the court, certain aspects of electronic communications – to/from address information, website addresses, and the amount of data transferred – do not raise Fourth Amendment or other privacy issues. While the decisions themselves deal with the government’s ability to access e-mail information, the implications of the rulings may affect how e-mail is dealt with by companies and individuals in both civil and criminal contexts.

In Forrester, the Ninth Circuit dealt with the constitutionality of certain computer surveillance techniques. The government indicated Forrester and Alba on one count of conspiracy to manufacture Ecstasy. As part of its investigation, the government employed various methods to monitor Alba’s e-mail and internet activity, including installing what the court described as a “pen register analogue” on Alba’s computer. The only data obtained were the to/from addresses of Alba’s e-mail messages, the IP addresses of websites he visited, and the total volume of information sent to or from his computer account.

Although decided after Warshak, the Ninth Circuit indicated that it was unaware of any other decisions by federal appellate courts addressing the constitutionality of such surveillance techniques. The court went on to hold that surveillance of e-mail and website addresses was conceptually indistinguishable from government surveillance of physical mail or telephone calls. The Supreme Court has previously held that while the contents of mail and phone calls are protected, the address and telephone number information is not entitled to protection because that information is voluntarily disclosed to third parties. Accordingly, the court held that the government’s monitoring of Alba’s e-mail to/from address information and website addresses was not a search for Fourth Amendment purposes.

In the wake of Warshak and Forrester, it appears that a consensus may be developing in the federal courts. Users have no reasonable expectation of privacy in the to/from addresses of e-mails, the IP addresses of the websites they visit, or the size of the e-mails they send or receive.

Full Opinion text –$file/0550410.pdf?openelement

Are Courts Promoting Copyright Infringement?

A recent Seventh Circuit opinion illustrated that even the judiciary may sometimes be insensitive (or at least oblivious) to copyright infringement on the Internet. In Central Manufacturing, Inc., v. Brett, 2007 WL 1965673 (7th Cir. 2007), the court denied relief to a plaintiff alleging that George Brett and his company were infringing on a trademark. The court’s opinion includes a number of links to materials on the Internet. As part of the court’s discussion of the famous “pine tar” incident in 1983 involving Brett, Billy Martin, and the Yankees, the court notes that the “whole colorful episode is preserved, in all its glory, on YouTube” and links to a YouTube video. Ironically, that You Tube link now leads to a page displaying the warning “This video no longer available due to a copyright claim by MLB Advanced Media.”

“The Song Remains the Same” – Copyright, Fair Use, and Karaoke

Copyright issues can often arise in unexpected places – even in a karaoke bar. In Zomba Enterprises, Inc. v. Panorama Records, Inc., 2001 WL 1814319 (6th Cir. 2007), the Sixth Circuit addressed the interaction of copyright law and karaoke music. The defendant in Zomba does not seem to have thought about the possible effects of intellectual property law on its conduct, and it paid a heavy price for this omission. Businesses concerned about avoiding potential claims should instead consider ahead of time the potential intellectual property repercussions of conduct that might involve the protected rights of others.

The court in Zomba began its opinion by noting that while “countless people have lined up at various venues to perform their favorite songs with, and in front of, their friends,” few of the participants “with the possible exception of IP lawyers,” would ever even think about “the intellectual property regime governing karaoke.” Defendant Panorama Records certainly didn’t think about it. Beginning in 1998, Panorama manufactured and sold karaoke compact discs. Panorama hired musicians to record songs that at some time had been made popular by another artist. The discs contained a graphic element designed, to be viewed on a karaoke machine, which consisted of the text of each song’s lyrics. As the lyrics scrolled across a screen and the music, without vocals, played, karaoke participants could read the lyrics as they sang along. Panorama issued a new disc each month in a variety of musical genres. Each monthly “karaoke package” contained the top hits in that genre for the relevant month. Panorama apparently gave no thought to whether its karaoke packages might be infringing on the intellectual property rights of others.

The Copyright Act, however, affords protection to “musical works, including any accompanying words.” 17 U.S.C. § 102(a)(2). Plaintiff Zomba Enterprises publishes and holds copyrights to various songs, including music performed by pop music performers such as 98 Degrees, the Backstreet Boys, NSYNC, and Britney Spears. Zomba learned that Panorama’s karaoke packages contained unauthorized copies of some of Zomba’s songs. Zomba filed suit asserting thirty counts of copyright infringement – one count for each Zomba-owned musical composition that Panorama recorded and sold in its karaoke packages.

The Sixth Circuit rejected Panorama’s argument that its copying of Zomba’s songs should be considered “fair use” under the Copyright Act. Section 107 of the Copyright Act provides that “the fair use of a copyrighted work . . . for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright.” 17 U.S.C. § 107. In analyzing a fair use claim, a court is also to consider the purpose and character of the use, the nature of the copyrighted work, the amount and substantiality of the use in relation to the copyrighted work as a whole, and the effect of the use upon the potential market for or value of the copyrighted work.

The Sixth Circuit held that, in particular, a court assessing fair use should consider whether the use is transformative. A work is transformative and more likely to be protected by the fair use defense if it adds something new or alters the work with new expression or different character. In this case, Panorama’s hired musicians did not change the music or the words of the songs.

The court also rejected Panorama’s contentions that its use was transformative because, unlike the original songs, the karaoke packages could be used as a teaching tool and encouraged creativity. Panorama admitted, however, that karaoke is primarily a form of entertainment, and it was unable to produce any evidence that its discs had ever been used as a “teaching” tool. The court also noted that the end-user’s utilization of the discs was largely irrelevant to the fair-use analysis. According to the court, “Zomba does not challenge karaoke crooners’ renditions (atrocious or otherwise) of the relevant compositions, but rather Panorama’s decision to copy these songs onto CD+Gs and then distribute them without paying royalties.” Panorama’s use of the songs was commercial in nature, and the “creativity” of the karaoke performers did not change that fact.

Panorama also failed to prove its copying did not adversely affect the market value of Zomba’s copyrights. The court went on to conclude that Panorama’s copying was willful and sustained the district court’s award of $31,000 in damages per infringement plus attorney’s fees. For business concerned about copyright infringement, the decision in Zomba highlights the evolving law of copyrights and the limits of the fair use doctrine.

Full opinion:

July 3, 2007

California Businesses Face New Civil Rights Challenges

Businesses operating in California may find themselves being sued for practices without any prior notice. In particular, if a company in California has gender-based pricing policies, it may now be sued for civil rights violations even if the plaintiff has not previously demanded equal treatment and been refused. As the California Supreme Court itself acknowledged, this ruling may encourage “shake down” artists who seek out discriminatory pricing practices and try to extort settlements from businesses. The court, however, was willing to accept this possibility absent any change in the law being made by the legislature. In the meantime, a company doing business in California should be aware that it may be subject to suit for discrimination without prior notice.

This particular case arose out of a supper club’s practice of giving admission discounts to women. Angelucci and other plaintiffs filed a complaint against Century Supper Club for violations of the Unruh Civil Rights Act and the Gender Tax Repeal Act of 1995. The plaintiffs alleged that they patronized the supper club on several occasions and were charged an admission fee higher than that charged to women. On some visits, men were charged $20 while women were admitted free. Plaintiffs sought statutory damages under Civil Code section 52(a) for discrimination. The supper club moved for judgment on the pleadings, contending that the plaintiffs could not recover under section 52(a) because they had not alleged that they asked the supper club to be charged the same rate as female patrons. The superior court agreed and entered judgment in favor of the supper club. The court of appeal affirmed, concluding that before a claim could be made for discrimination, the plaintiffs must have made an affirmative assertion of the right to equal treatment. In support of its ruling, the court of appeal stated that this requirement ensured that the statutes would only be used to redress genuine grievances and punish genuine misconduct.

In Angelucci v. Century Supper Club, 2007 WL 1557339 (Cal. 2007), the Supreme Court reversed, holding that to assert a discrimination claim for unequal treatment against a business establishment, it is not necessary to demand equal treatment and be refused. The Unruh Act, as amended by the Gender Tax Repeal Act, prohibits businesses from charging different prices on the basis of gender, and the court noted that these provisions are intended to protect each person’s inherent right to free and equal access to all business establishments. Section 52(a) authorizes individual actions against anyone that discriminates in violation of the Act. The language of section 52(a) does not include a specific requirement that a victim of discrimination must demand equal treatment and be refused before filing suit, nor does it establish any requirement that notice and an opportunity to cure be given before a claim may be made.

The court rejected the court of appeal’s reasoning that the plaintiffs were not denied equal treatment because the supper club never refused an express demand for equal treatment. According to the court, if such a rule were in place, businesses could continue to engage in discriminatory practices, and by making exceptions for patrons who happened to challenge the practices, the businesses could avoid being sued under the Act. That rule would also prohibit suits by persons who discovered that they had been treated unequally only after the fact. The court also made it clear that injury occurs when plaintiffs present themselves for admission and are charged the nondiscounted price. Because arbitrary discrimination is per se injurious, the plaintiffs in this case had standing to bring claims because they were victims of the discriminatory practice, even though they did not challenge the practice at the time. The court did note allegations in the record that the plaintiffs and their attorneys were “professional plaintiffs” who made their living by asserting technical violations of civil rights laws against businesses and extorting settlements. While recognizing the potential for abusive litigation, the court concluded that it was up to the Legislature to determine whether the statutory requisites for filing a claim should be altered. In the meantime, businesses should be aware that if they have discriminatory pricing policies in place, those policies may result in a lawsuit even if no one has previously challenged the policies.

June 28, 2007

It’s Now Easier to Enforce Out-of-State and International Judgments in Texas

Companies concerned about being sued in one jurisdiction and having the judgment enforced in another should pay attention to a recent Texas appellate decision making it easier to enforce out-of-state judgments in Texas courts. With more businesses finding themselves doing business in more jurisdictions, both in the United States and internationally, and courts having become more willing to exercise jurisdiction based on Internet contacts, this issue has become increasingly important.

It’s often tempting to ignore a lawsuit in another jurisdiction and count on your attorneys to make it unenforceable in places where you do have assets. For instance, Texas has previously recognized a number of circumstances when its courts will refuse to enforce a judgment entered in another state. In EnviroPower, LLC v. Bear Stearns & Co, Inc., 2007 WL 1412849 (Tex. App. – Houston [1st Dist.] 2007, n.p.h.), the court made it clear that one of the ways to avoid enforcement of an out-of-state judgment – claiming the judgment is “penal” in nature – may not work very well in Texas. If your company has assets in Texas, you should be aware that a judgment entered in another jurisdiction will now be easier to get enforced in a Texas court. The decision also highlights the dangers of discovery misconduct and establishes that the consequences of such misconduct may follow you from state to state, or at least to Texas.
The case arose out of a contract dispute between Bear Stearns and EnviroPower. Bear Stearns filed suit in New York state court for breach of contract and quantum meruit, claiming that EnviroPower failed to pay it for services performed and expenses incurred. EnviroPower apparently did not play nicely when it came to responding to discovery. In fact, the New York court found that EnviroPower intentionally withheld documents, and as a sanction, the court struck EnviroPower’s answer. The New York court then held an evidentiary hearing and entered a judgment awarding Bear Stearns $1.3 million in damages.

EnviroPower had assets in Texas, so Bear Stearns filed its New York judgment in the Harris County, Texas district court. EnviroPower filed a motion to vacate the judgment, which was denied. The Houston First District Court of Appeals rejected EnviroPower’s claim that the judgment was not enforceable. Under the Full Faith And Credit Clause of the federal constitution, a state must give the same force and effect to a judgment of a sister state that it would give its own judgments. Under Texas law, when a judgment creditor files an authenticated copy of a foreign judgment, this satisfies its burden of presenting a prima facie case for enforcement of the judgment, even where the judgment is taken by default. Texas courts recognize exceptions to this rule, however, when a judgment is interlocutory, when it is subject to further modification, when the rendering state lacked jurisdiction, when the judgment was procured by fraud or is penal in nature, or when limitations has expired under Texas Civil Practice and Remedies Code section 16.066.

EnviroPower argued that the New York judgment was not enforceable because it was based on “death penalty” discovery sanctions, which had the effect of allowing the plaintiff to basically take a default. Specifically, EnviroPower claimed that by striking its answer as a discovery sanction, the sanction for discovery misconduct was penal in nature and not enforceable in a foreign jurisdiction. Generally, the question of whether another state’s actions are penal in nature turns on whether the purpose was to punish an offense against the public justice of the state or to afford a private remedy to a person injured by the wrongful act. The Texas court noted that death penalty sanctions serve as a remedy for parties harmed by another party’s wrongful actions during litigation and as a deterrent to others who might abuse discovery procedures during litigation. Such sanctions are not designed as punishment for and deterrence of a wrong to society as a whole. While death penalty sanctions are obviously a “penalty” for the litigants involved, they are not “penal” sanctions for purposes of the Full Faith and Credit Clause. The decision in Enviropower may also have consequences in international commercial law situations, particularly international contract law disputes. In the future, litigants trying to avoid an out-or-state or international judgment will not be able to avoid the consequences of their discovery misconduct by claiming that a foreign judgment based on discovery sanctions is unenforceable.

June 18, 2007

U.S. Supreme Court: Notice of Appeal Deadlines Cannot be Extended by Courts

A recent U.S. Supreme Court decision sends a strong message – if you intend to appeal a decision, don’t wait around. If you miss the deadline, even a federal court won’t be able to fix the problem. In Bowles v. Russell, 2007 WL 1702870 (U.S. 2007), the Supreme Court held that federal district courts do not have the power to extend the deadline for filing a notice of appeal beyond the time period established in the Federal Rules of Civil Procedure. If the deadline is not met, the right to appeal will be lost permanently because appellate jurisdiction may not be changed by the courts. In making its decision, the Supreme Court overruled two precedents allowing courts to extend the deadline for invoking appellate jurisdiction in “exceptional circumstances.”

Bowles arose out of a habeas proceeding, but the holding applies in all civil appellate cases. After being given a sentence of 15 years to life for murder by an Ohio jury, Bowles filed a habeas corpus petition in the federal district court. This application was denied. Under Federal Rule of Appellate Procedure 4(a)(1)(A) and 28 U. S. C. § 2107(a), Bowles had thirty days in which to file his notice of appeal but did not meet this deadline. Subsequently, Bowles filed a motion to reopen the period during which he could file his notice of appeal pursuant to under Rule 4(a)(6) and 28 U.S.C. § 2107(c). These provisions allow district courts to extend the filing period for 14 days from the day the district court grants the order to reopen when certain conditions are met. The district court granted Bowles’ motion to reopen the filing period but instead of extending the time period by 14 days, as Rule 4(a)(6) and § 2107(c) allow, the district court gave Bowles 17 days to file his notice of appeal. Bowles filed his notice on the sixteenth day of that time period, within the time allowed by the district court’s order but after the 14-day period allowed by Rule 4(a)(6) and § 2107(c). The Sixth Circuit ruled that Bowles appeal was untimely and the Supreme Court agreed.

In a 5-4 decision written by Justice Thomas, the Supreme Court noted that filing a timely notice of appeal is “mandatory and jurisdictional.” If a notice of appeal has not been timely filed, there is no appellate jurisdiction over the case. The authority to extend the time for filing an appeal comes from 28 U.S.C. § 2107(c), which specifies only a 14-day extension of the time period. The Supreme Court made it clear that statutory time limits are jurisdictional. Only Congress has the power to determine the lower federal court’s subject matter jurisdiction, and appellate jurisdiction cannot be altered by court order. The Supreme Court stated that “because Congress decides whether federal courts can hear cases at all, it can also determine when, and under what conditions, federal courts can hear them.” As an example, the Supreme Court pointed to its own certiorari procedures, which recognize that the 90-day time limit for filing a petition is based on a statute. When a cert petition is not timely filed, the Supreme Court has repeatedly held that the failure to do so is jurisdictional.

The Supreme Court applied the same reasoning in holding that the time limits for filing a notice of appeal must be strictly enforced and cannot be varied by court order. Bowles argued that in any event, the court should recognize an exception with respect to appellate jurisdiction in his case, given that he relied on a federal court order in filing his late notice of appeal. The Supreme Court held that the federal courts did not have the authority to create an equitable exception to the statutes and rules governing appellate jurisdiction. In doing so, the court overruled Truck Lines, Inc. v. Cherry Meat Packers, Inc., 371 U. S. 215 (1962), and Thompson v. INS, 375 U. S. 384 (1964), two earlier U.S. Supreme Court cases applying a “unique circumstances” doctrine allowing for equitable relief from a jurisdictional deadline. The court overruled both decisions “to the extent they purport to authorize an exception to a jurisdictional rule.” The Supreme Court recognized that the result in this case might be harsh but stated that Congress could change the rules governing appellate jurisdiction if it wished to. Writing for the four dissenters, Justice Souter rejected the notion that the notice of appeal deadline was mandatory and jurisdictional and asserted that courts could allow for equitable exceptions to the appellate jurisdiction deadline.

In the wake of the Supreme Court’s decision in Bowles, even if a federal court issues an order extending the time in which to file a notice of appeal, businesses and individuals planning to appeal a federal district court decision should know they still have to meet the statutory deadline and cannot rely on the federal court’s order. Otherwise, there will be no appellate jurisdiction, and the right to appeal will be permanently lost.

Opinion text:

June 15, 2007

Calculating Potential Damages Exposure for Patent Infringement Just Got Harder

Companies attempting to measure their potential exposure for patent infringement should review a recent decision by the Federal Circuit. Business often calculate their exposure based on the concept of a “reasonable royalty,” and look at the terms on which the patent holder has previously licensed the technology. Such an established royalty is usually the best measure of potential exposure. In a case addressing the issue of damages in a patent infringement case involving the burgeoning field of genetically modified crop seeds, the Federal Circuit has expanded the definition of what constitutes a reasonable royalty. The court indicated that in calculating the ”reasonable royalty,” a court may also consider costs and charges beyond those that the patent holder has labeled as royalties, as well as other benefits received by the infringer as a result of using the patented technology. When assessing potential patent infringement damages, businesses should consult with counsel before attempting to assess how a damages award might be calculated.

This important case arose out of a seemingly prosaic set of facts involving a dispute between a farmer and a seed company. While Paris Hilton might view farming as part of “The Simple Life,” American agribusiness is actually a high-tech industry with complex legal issues. Indeed, Monsanto Company v. McFarling, 2007 WL 1502080 (Fed. Cir. 2007), is the third opinion issued by the Federal Circuit in a closely watched dispute between a farmer and Monsanto. Monsanto developed a system for weed control using genetically modified crops that are resistant to the effects of certain herbicides. When the genetically modified seeds are planted, farmers are able to spray the herbicide on their fields to kill the weeds while sparing the resistant crops, making weed control more efficient. Monsanto patented this technology.

When McFarling purchased genetically modified soybean seeds from Monsanto in 1998, he paid a license fee and signed a “Technology Agreement” that included a promise not to replant seeds that were produced from the purchased seeds or to supply those seeds to others for replanting. The terms of the Technology Agreement also included payment of a $6.50 “technology fee” per bag of seeds and required the farmer to purchase seeds from an authorized distributor. Despite this agreement, McFarling saved seeds from the 1998 crop and planted those seeds in 1999 and did the same thing in 1999, saving soybean seeds from that crop and planting them in 2000. The saved seeds contained the patented genetic traits, and McFarland did not pay any license fee for 1999 or 2000.

In a previous decision, the Federal Circuit held that McFarling infringed on Monsanto’s patent by saving seeds and replanting them. The court also previously held that the liquidated damages provision in the agreement between Monsanto and McFarling was invalid. At trial, the jury returned a damages verdict of $40 per bag of saved seed. Under 35 U.S.C. § 284, damages for patent infringement are to be adequate to compensate for the infringement and must not be less than a reasonable royalty for use of the invention. McFarling argued that because Monsanto had charged a $6.50 “technology fee” to licensees who purchased the seeds under its Technology Agreement, that fee constituted the established reasonable royalty for use of the technology and should be used as an upper limit on his potential exposure.

The court stated, however, that the technology fee was actually only part of the royalty being charged by Monsanto. By requiring a farmer to purchase seeds only from an authorized distributor, which would charge between $19 and $22 per bag of seeds, Monsanto had elected to impose an additional royalty, although it was not labeled as such. The court concluded that the total out-of-pocket cost to the farmer – the technology fee plus the cost of the seeds purchased from an authorized distributor – should be characterized as a royalty payment for purposes of calculating the reasonable royalty and damages. To decide otherwise would create a windfall for infringers, who would have a huge advantage over other farmers by paying only the technology fee without having to purchase seeds from distributors. The court also held that it was reasonable for the jury, in calculating damages, to consider the benefits Monsanto’s damages conferred on farmers such as McFarling, such as the savings on weed control measures.

By allowing courts to consider charges and costs beyond what a patent holder has labeled as a royalty or technology fee, as well as the economic benefits conferred on the infringer by the technology, the decision in McFarling may lead to higher damages awards in patent infringement cases. It will certainly make it more difficult for businesses concerned about infringement claims to calculate their potential exposure.

June 6, 2007

Supreme Court to Decide if Parties Can Agree to Judicial Review of an Arbitration Award

The United States Supreme Court has recently agreed to address the question of whether parties may contractually agree to alter the standard for reviewing arbitration awards. Because so many business contracts, software licenses, and other agreements now include provisions requiring the parties to submit their dispute to binding arbitration instead of filing a lawsuit, business should pay careful attention to this case, as the court’s decision will have significant implications. The court will decide whether the parties to an arbitration agreement have the freedom to contract for meaningful review of an arbitration award in a court. This will be particularly significant if the decision to agree to arbitration was premised on the availability of meaningful judicial review after an arbitration award has been made.

By statute, such review is not now available, and parties who consent to arbitration will find themselves at the mercy of the arbitrator, whose decision, as a practical matter, is unreviewable. Under the Federal Arbitration Act, which applies if an agreement containing an arbitration clause involves interstate commerce, an arbitrator’s decision may only be vacated, modified, or corrected by a court under very limited, rarely applicable circumstances. See 9 U.S.C. § 10 & 11. Indeed, under the FAA, an arbitration award will still be confirmed and converted into an enforceable judgment even if the award was based on clear legal or factual errors. See Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 994 (9th Cir. 2003) (en banc). Many states have enacted similar provisions limiting the scope of review of arbitration awards for agreements governed by state law.

In an attempt to avoid this potentially frightening result and create an opportunity for meaningful review of an erroneous arbitration awards, businesses have begun to include in their arbitration agreements provisions purporting to establish different standards under which an award will be reviewed. For instance, the parties to an agreement may specify that an arbitration award is reviewable for legal errors or must be supported by substantial evidence. It is not clear, however, that such provisions are enforceable. The Ninth and Tenth Circuits have held that parties may not expand the judicial review provisions found in the FAA, reasoning that allowing such an expansion would threaten the independence of arbitration. See Kyocera, 341 F.3d at 998; Bowen v. Amoco Pipeline, Inc., 254 F.3d 925, 936 (10th Cir. 2001). California courts have similarly held that under the FAA and the California arbitration statutes, an agreement to expand judicial review is unenforceable, though the California Supreme Court is currently considering the validity of those decisions. See Cable Connection, Inc. v. Directv, Inc., 53 Cal.Rptr.3d 318 (Cal. 2006). In contrast, the First, Fourth, Fifth, and Sixth Circuits have held that parties may contract for more expansive judicial review, concluding that the parties’ agreement with respect to arbitration must be enforced.

The Supreme Court has now granted certiorari in a case presenting the issue of whether such contractual provisions are enforceable. On May 29, 2007, the court granted the petition in Hall Street Assoc. v. Mattel, Inc., No. 06-989. The court will address the specific question of whether the Ninth Circuit erred when it held that the FAA “precludes a federal court from enforcing the parties’ clearly expressed agreement providing for more expansive judicial review of an arbitration award than the narrow standard of review otherwise provided for in the FAA.” The case will not be set for argument until the next court term, which begins in October 2007. In the meantime, businesses concerned about the limited reviewability of arbitration awards should still consider including clauses providing for expanded judicial review. Given that such provisions may be invalidated, however, businesses may want to re-examine whether they really want to agree to arbitration in the first place, knowing that an erroneous decision by an arbitrator may be the final word.

May 30, 2007

Federal Circuit Considers Attorney-Client Privilege Waiver in Patent Infringement Cases

Businesses concerned about pending or potential patent infringement suits should pay careful attention to a case now pending in the Federal Circuit that may affect what strategies should be employed in dealing with infringement issues. The Federal Circuit has taken the unusual step of ordering an en banc hearing in In re Seagate Technology, LLC, 214 Fed. Appx. 997 (Fed. Cir. 2007), to address the scope of the attorney-client privilege waiver that may arise when a party sued for willful patent infringement raises advice of counsel as a defense. The court’s answers to these questions could radically alter how parties defend themselves in patent infringement cases.

Plaintiffs asserting an infringement claim often allege that the infringement was willful. If proven by clear and convincing evidence, treble damages may be awarded. As a defense to a claim of willful infringement, defendants often contend that they relied on legal advice before they engaged in any activity that might infringe on another’s patent rights. Seagate raised that defense in an infringement lawsuit in which the plaintiffs sought $800 million in damages. Courts have routinely held that raising that defense waives the attorney-client privilege with respect to the subject matter of the opinion on which the defendant relies. The district court in Seagate also held that this waiver extended beyond communications with counsel who gave the opinion to encompass communications with separate trial counsel and in-house counsel and also constituted a waiver of the work produce privilege.

Seagate asked the Federal Circuit to address whether a party’s assertion of the advice-of-counsel defense constituted a waiver of the attorney-client privilege with respect to that party’s trial counsel or waived the work produce privilege. In a footnote in In re EchoStar, 448 F.3d 1294 (Fed. Cir. 2006), the Federal Circuit stated that the privilege waiver does extend to advice given after litigation begins, and like the district court, a number of courts have relied on this dicta to support extending the waiver to communications involving trial counsel.

In an unusual move, the court itself raised a separate question of whether the court should re-examine the 24-year-old decision in Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed.Cir.1983), imposing a fundamental duty of due care to avoid infringement when a company or party has notice of another’s patent rights. Courts have generally interpreted that duty as requiring a party to obtain a legal opinion on the validity of those patent rights before engaging in or continuing any infringing activity. The court appears to be concerned about the impact of imposing such a duty should it agree with the district court that relying on such an opinion as a defense to a willfulness claim waives the any privilege for work product and attorney-client communications after the infringement opinion was given. The case has generated a great deal of interest, and more than a dozen amicus briefs have been filed. Oral argument is set for June 7, 2007. The decision in Seagate will be of interest to any business that may face a potential patent infringement suit.

May 21, 2007

Avoiding Jurisdiction Based on Internet Contacts

Businesses haled into a Texas court should be able to argue, based on the Texas Supreme Court’s decision in Moki Mac River Expeditions v. Drugg, 2007 WL 623805 (Tex. 2007), that even if they did have contacts with Texas, such as e-mail communications or a website, the connection between those contacts and the subject matter of the plaintiff’s claim is too attenuated to support an exercise of personal jurisdiction. While many courts have seemed eager to exercise long arm jurisdiction on the basis of websites and other internet contacts, the Texas Supreme Court has bucked this trend by placing some strong new limitations on when it will be appropriate to exercise jurisdiction over an out-of-state business based on such contacts. The Druggs’ son was killed during a river rafting expedition in Arizona organized by Moki Mac, a Utah based river-rafting outfitter. The Druggs reviewed Moki Mac’s brochures and website and decided to send their son Andy on the expedition. After he was fatally injured, the Druggs filed suit in Texas for wrongful death due to Moki Mac’s negligence and for intentional and negligent misrepresentation. The lower courts denied Moki Mac’s jurisdictional challenge.

The Texas Supreme Court reversed, holding that a Texas court did not have jurisdiction over the nonresident company because its contacts with Texas were not substantially connected with the operative facts of the litigation. Moki Mac had not established continuous and systematic contacts with Texas. Accordingly, for Texas courts to exercise to exercise personal jurisdiction over Moki Mac, (1) Moki Mac must have made minimum contacts with Texas by purposefully availing itself of the privilege of conducting activities in the state, and (2) Moki Mac’s liability must have arisen from or been related to those contacts. The court noted that Moki Mac did purposefully avail itself of the privilege of conducting business in the Texas market by directly marketing to Texas residents, regularly advertising in Texas, soliciting Texas residents using direct-marketing e-mail campaigns, and establishing channels of regular communication with its Texas customers.

Nevertheless, the court concluded that because Moki Mac’s liability did not arise from its contacts with Texas and was not related to those contacts, there was no personal jurisdiction. The court explained that there must be a substantial connection between those contacts and the operative facts of the litigation. That connection did not exist in this case because the operative facts of the case focused on the guides’ conduct of the expedition and whether they exercised reasonable care in supervising Andy. Those events, which would be the focus of any trial, all took place in Arizona. While the contents of Moki Mac’s brochures and website might have had some connection with the operative facts that led to Andy’s death, the court found that this connection was not sufficiently direct to meet due process concerns. Under Moki Mac, businesses may be able to argue that websites, e-mail marketing, and other advertising in a state is insufficiently related to personal injury claims occurring outside the state to support an exercise of jurisdiction.

May 14, 2007

California Appellate Deadlines in Limited Jurisdiction Cases

The deadlines for filing a notice of appeal in limited jurisdiction civil cases have been clarified by the amendments to the California Rules of Court that took effect at the beginning of 2007. In limited civil cases, decisions are appealed to the appellate division of the superior court and not to the Court of Appeal. If you want to appeal a judgment in a limited civil case, you need to be aware that the deadlines for appealing a decision in a limited civil case are significantly shorter than in unlimited civil cases. The appellate deadlines in appeals in unlimited jurisdiction cases have not changed. In civil appeals, a notice of appeal must be filed within 60 days of the date notice of entry is served by the clerk or by a party or, if no notice was served, within 180 days of the date the appealable judgment or order was entered. (CRC 8.104.) The rules regarding appeals in limited civil cases were previously not clear because the appellate rules had not been amended to reflect the unification of the municipal and superior courts. Courts usually pointed to former Rule 122(a), a 1964 rule for “Appeals from Municipal and Justice Courts in Civil Cases,” and applied that rule to appeals in limited civil cases.

The reorganization of the rules includes new rules specifically applicable to appeals in limited civil cases. Rule 8.751 provides that a notice of appeal must be filed on or before the earliest of (1) 30 days after the clerk mails a notice of entry, (2) 30 days after a party mails a notice of entry, or 90 days after entry of the judgment or appealable order. Under Rule 8.752, if a motion for new trial is filed, the time to file a notice of appeal is extended until 15 days after entry of the order denying the motion or denial of the motion by operation of law, but in no event may the notice of appeal be filed later than 90 days after the date of entry of the judgment. A cross appeal must be filed within 10 days after the trial court clerk mails a notification of the first appeal or within the time period otherwise prescribed by local rules. These short deadlines cannot be extended by the court or by agreement. When appealing in a limited civil case, these deadlines must be honored or your appeal will be dismissed for lack of jurisdiction.

What Lessons Can a Company Learn from the SCO Litigation?

It is no surprise that the open source software community has been shaken by the litigation begun by SCO. To begin with, Caldera Systems, the corporate entity now doing business as SCO, originated as an open source company whose only product was based on Linux. Therefore, the open source software community feels betrayed by a company whose interests it once shared and supported.

If SCO wins it fundamental claim that it owns the underlying source code to UNIX, the open source software community will lose control over one of its most used programs. To the open source software community, the loss comes not only in the UNIX source code but the many man-hours invested by subsequent developers in customizations and derivations built on the original UNIX source code.

Because the open source software community depends on the free exchange of intellectual property within the source code, a system that works only if each developer that contributes to the whole has sufficient access to the intellectual property, a win for SCO could threaten the very model of open source software. The open source software model breaks when one developer contributes an infringing work, because as SCO has claimed, every user thereafter is infringing.

What does this mean for a company using or developing open source software? First, a company must know that it may be liable for copyright infringement even without knowledge that a work was subject to copyright infringement. Like any other software the company uses, the company must know where the software originated from. However, unlike most software programs where the company has assurance from a license that the vendor owns the copyright in the source code and the company, through the license, is allowed to use the software, with open source software the SCO litigation means that a company must complete some due diligence regarding the chain of title of the source code of the open source software to ensure that there are no other intellectual property claims to the source code.

May 8, 2007

Supreme Court Grants Summary Judgment Based on Video Evidence

The Supreme Court’s decision in Scott v. Harris, 2007 WL 1237851 (U.S. 2007), may give appellate courts more freedom to decide issues on summary judgment that might previously have been left for resolution by juries. The factual scenario in Scott v. Harris would have made a fascinating episode of “Cops.” A Georgia county deputy attempted to pull over Harris after clocking him at 73 miles per hour in a 55 mile per hour zone. Harris instead sped away initiating a chase down mostly two-lane roads at speeds exceeding 85 miles per hour. Deputy Scott joined the chase in his patrol car and radioed his supervisor for permission to employ a PIT maneuver, where the pursuing vehicle pulls alongside the fleeing vehicle, makes contact with the fleeing vehicle’s side, steers sharply into that vehicle and then, by applying its brakes at the right moment, causes the fleeing vehicle to either spin out or exit the roadway. Deputy Scott received permission but decided not to employ the PIT maneuver, instead applying his push bumper to the rear of Harris’ vehicle. Harris lost control of his car, which ran down an embankment, overturned, and crashed, rendering Harris a quadriplegic. Harris filed suit under 42 U.S.C. § 1983 contending that Scott and others used excessive force in violation of his Fourth Amendment rights during the high-speed chase car chase. The District Court denied Scott’s summary judgment motion on his qualified immunity claim, and the Eleventh Circuit affirmed. The Supreme Court, in an 8-1 decision, reversed and held that as a matter of law, Scott’s attempt to terminate the case by forcing Harris of the road was reasonable, and he was therefore entitled to qualified immunity.

While significant with respect to Fourth Amendment jurisprudence, the decision in Scott v. Harris also signals a willingness on the part of the Supreme Court to allow appellate courts when presented with certain types of evidence (like video records) to decide factual issues as a matter of law. In this case, there was a videotape record of the car chase. The justices themselves reviewed the video and even posted it on the Supreme Court’s website for downloading.

In summary judgment practice, a court is tasked with viewing the evidence in a light most favorable to the nonmovant. Justice Scalia, writing for the court, concluded, however, that the videotape blatantly contradicted Harris’s version of the facts, such that no reasonable jury could adopt his version. It was therefore permissible for the appellate court to conclude, as a matter of law, that Scott did not act unreasonably. Of course, as Justice Stevens pointed out in his descent, both the district court and the Eleventh Circuit had seen the same videotape and reached different conclusions regarding whether the tape resolved the factual issues as a matter of law. In decrying their decision to resolve the factual issues themselves based on the video, Justice Stevens repeatedly referred to the justices in the majority as “jurors” in his strongly worded descent.

In future cases where video evidence is available, parties will be able to cite Scott v. Harris for the proposition that a court, and not a jury, is capable of deciding issues that were traditionally left for the jury to resolve, particularly where the video evidence contradicts the nonmovant’s version of the facts. As Justice Scalia stated, “when opposing parties tell two different stories, one of which is blatently contradicted by the record, so that no reasonable jury could believe it, a court should not adopt that version of the facts for purposes of ruling on a motion for summary judgment.” Scott v. Harris, 2007 WL 1237851 at *4. This may be particularly significant on appeal, where at least five circuits have held that a federal appellate court has the authority to affirm entry of summary judgment on any ground presented by the record, whether or not the issue was raised, briefed, or argued in the district court. See Iverson v. City of Boston, 452 F.3d 94, 98 (1st Cir.2006); Cromwell Assocs. v. Oliver Cromwell Owners, Inc., 941 F.2d 107, 111 (2d Cir.1991); Reasonover v. St. Louis County, Mo., 447 F.3d 569, 578 (8th Cir. 2006); Bones v. Honeywell, Int’l, Inc., 366 F.3d 869, 875 (10th Cir.2004); Banner v. United States, 238 F.3d 1348, 1355 (Fed. Cir. 2001). The appellate review procedure approved in Scott v. Harris could allow an appellate court to decide a case as a matter of law based on video evidence where that evidence discredits the nonmovant’s version of events.

April 26, 2007

Other Ideas for Protecting Employee Privacy Rights in Personal Information Stored on Business Computers

The issue of employee privacy rights in data stored on an employer’s computer is a difficult one. If an employee displayed framed family photos on her desk, an employer would not refuse to turn those photos over to the employee upon termination. These days, the employee is just as likely to keep such photos as jpegs or gifs on her PC at work, along with many other types of personal information, from correspondence to recipes. Allowing a terminated employee access to that computer after termination does present practical difficulties, and a business that chooses this method of avoiding liability for breach of employee privacy rights should implement safeguards to prevent the former employee from compromising company security or having access to trade secrets and other valuable business information.

A company could adopt a policy prohibiting employees from storing personal information on a company computer, though this may be impractical to enforce. A number of courts have held that an employee has no privacy expectation in workplace computer files where company guidelines and policy explicitly inform the employee that no expectation of privacy exists. See, e.g., Muick v. Genayre, 280 F.3d 741, 743 (7th Cir.2002); United States v. Simons, 206 F.3d 392, 398 (4th Cir.2000); Thygeson v. Bancorp, 2004 WL 2066746 (D. Or. 2004); Kelleher v. City of Reading, 2002 WL 1067442 (E.D. Pa. 2002). A company could adopt such a policy, which could be used as evidence that when the employee stored in the information, the employee was aware that she had no privacy interest in that electronic data and that the information no longer belonged to her.

It might also be helpful to require employees to acknowledge in writing that any information stored on a company computer belongs to the company and that they have no privacy interests in such information. The Thyroff decision did not indicate whether or not Northwest Mutual had such a policy in place. It is also not clear whether a court might conclude that whether or not there was a privacy expectation, the employee still had a property right in the information that could be enforced in an action for conversion. Nevertheless, a company’s litigation position would in all likelihood be strengthened by implementing and enforcing a policy regarding storage of personal data on company computers.

April 23, 2007

Defending Trademark Infringement Claims – Use In Commerce

To show that a mark is used in commerce, a plaintiff must prove that the mark “is used or displayed in the sale or advertising of services and the service are rendered in commerce.” 15 U.S.C. § 1127(2). The issue in internet marketing cases is whether using a mark to generate search-result links and sponsored links is considered use “in commerce.” If you are faced with a trademark infringement claim related to internet marketing it is important to evaluate this defense.

In Merck & Co. v. Mediplan Health Consulting, Inc., 425 F. Supp. 2d 402, 415 (S.D.N.Y. 2006), the defendant used the plaintiff’s mark, “ZOCOR” as a search-engine keyword to generate sponsored links. The court found that as a matter of law, this type of use was not use in commerce, but rather “an internal use of the mark.” Based on the plaintiff’s failure to show use of the mark in commerce, the court dismissed the plaintiff’s trademark claim and declared that use of “a key word to trigger the display of sponsored links is not use of the mark in a trademark sense.” Id.

A successful defense based upon no use in commerce can result in an early disposition of a case because unlike many trademark infringement defenses this is a legal issue decided by the court on a pre-trial motion to dismiss or for summary judgment.

Defending Cybersqautting Claims – Unrelated Goods

In order to win under Anti-Cybersquatting statute, a plaintiff must prove the defendant (a) had a “bad faith intent to profit from the mark,” and (b) registered or uses a domain name that is “identical or confusingly similar” to the mark in question. 15 U.S.C. § 1125(d)(1)(A)(i)-(ii). Much of this turns on whether the defendant operates in the same goods as the plaintiff.

For example, in Bally Total Fitness Holding Corp. v. Faber, 29 F. Supp. 2d 1161 (C.D. Cal. 1998), the defendant operated a website under the name “,” a website dedicated to complaints about the plaintiff’s Bally’s health-club business. The court found that even though the plaintiff and the defendant both hosted websites on the internet using the term “BALLY” in the domain name, the parties did not operate in “related goods.” Id. at 1163. The court concluded “[n]o reasonable consumer comparing Bally’s official web site with [the defendant]’s site would assume [the defendant]’s site to come from the same source, or thought to be affiliated with, connected with, or sponsored by the trademark owner.” Id. at 1163-65.

When faced with a claim under the Anti-Cybersquatting statute it is very important to evaluate an argument that the defendant does not operate related goods.

Defending Cybersqautting Claims – Unrelated Goods

In order to win under Anti-Cybersquatting statute, a plaintiff must prove the defendant (a) had a “bad faith intent to profit from the mark,” and (b) registered or uses a domain name that is “identical or confusingly similar” to the mark in question. 15 U.S.C. § 1125(d)(1)(A)(i)-(ii). Much of this turns on whether the defendant operates in the same goods as the plaintiff.

For example, in Bally Total Fitness Holding Corp. v. Faber, 29 F. Supp. 2d 1161 (C.D. Cal. 1998), the defendant operated a website under the name “,” a website dedicated to complaints about the plaintiff’s Bally’s health-club business. The court found that even though the plaintiff and the defendant both hosted websites on the internet using the term “BALLY” in the domain name, the parties did not operate in “related goods.” Id. at 1163. The court concluded “[n]o reasonable consumer comparing Bally’s official web site with [the defendant]’s site would assume [the defendant]’s site to come from the same source, or thought to be affiliated with, connected with, or sponsored by the trademark owner.” Id. at 1163-65.

When faced with a claim under the Anti-Cybersquatting statute it is very important to evaluate an argument that the defendant does not operate related goods.

April 19, 2007

What is open source software?

On the highest level, open source is the principle to allow free access to the intellectual property of the design of products to promote creativity. The term is now most often associated with software. Open source software is source code that is made available to the general public with relaxed or no intellectual property restraints that would keep another person from customizing the source code for their particular use or from building on the original source code to make use of the software for their particular use.

In early 1998, the industry leaders of the open source movement met at an event that would later become known as the “Open Source Summit.” This meeting led to the organization of the Open Source Initiative, a non-profit corporation formed to advocate the benefits of open source software. According to the Open Source Initiative, whether software can be considered open source really depends on the distribution terms of the open source software.

To meet the standards of the Open Source Initiative, the distribution terms of open source software must meet the following criteria:

1. The open source software license cannot restrict any party from selling or giving away the software as a component of another software program containing programs from several different sources and the license cannot require any fee for sale.

2. The open source software must include source code and must allow distribution of the source code.

3. The open source software license must allow modifications and derivative works, and, importantly, must allow the modifications and derivative works to be distributed under the same terms as the license of the original software.

4. The open source software license may restrict source code from being distributed in modified form only if the license allows distribution of patch files with the source code for the purpose of modifying the program at build time. The license must permit distribution of software built from modified source code.

5. The open source software license cannot limit use to any person or group of people.

6. The open source software license cannot limit use in any field, such as for commercial purposes.

7. The rights attached to the open source software must apply to all whom the program is redistributed without the need for execution of an additional license.

8. The open source software license cannot be specific to a product.

9. The open source software license cannot place restrictions on other software that is distributed with the open source software.

10. The open source software license cannot demand that a specific technology be used with the software.

April 18, 2007

It Pays to Read Your EULA

Not long ago a small software company offered a big cash reward to anyone who read the End User License Agreement (or EULA) for their software product. The catch: you have to read the EULA to even know about the offer.

PC Pitstop buried a clause in their EULA that offered the reward to anyone who sent a message to the enclosed email address. The point was to prove that people rarely, if ever, read their software licenses. They were right – four months and 3,000 downloads later, one sharp-eyed end user finally wrote in and claimed the $1,000 prize. See

Software developers are well aware of the fact that the end users who buy their products rarely read their license agreements. Many people are surprised to discover that the EULAs for their software might contain provisions granting the software company the right to conduct an onsite software audit with no notice, waive important consumer rights or other draconian measures which they would never knowingly agree to.

But this trend is changing as more IT professionals discover the importance of understanding their EULAs. Before Windows VISTA was released, Microsoft made the EULA publicly available. Not long after the IT community was in an uproar over some of the proposed provisions, including one that only allowed the end user to transfer the installation to a new system once (upgrading your existing system could constitute such a transfer as well). After that, you’re done. Want to transfer that software twice, or make a couple of upgrades? Go buy another copy of Windows then. That was essentially what the new license stated.

So what happened when the IT community raised their concerns? Not long afterwards, Microsoft removed the EULA and replaced it with a new, more user friendly version. See

This is an important development; as IT professionals and attorneys continue to scrutinize these agreements, software developers will increasingly bring their licenses in line with consumer expectations. These examples prove that it can (literally) pay to read those license agreements.

When should a company seek a software patent rather than copyright protection for software?

The primary benefit of a software patent is the broad protection provided by the patent laws. An owner of a software patent may prevent all others from making, using, or selling the patented invention. In connection with software, an issued software patent may prevent others from utilizing a certain algorithm without permission, or may prevent others from creating software programs that perform a function in a certain way.

In contrast, copyright law can only prevent the copying of a particular expression of an idea. In connection with computer software, copyright law can be used to prevent the total duplication of a software program, as well as the copying of a portion of software code, which would be literal infringement. Copyright law does provide some protection against non-literal infringement; however, courts have recently been reluctant to interpret copyright protection of computer software in a broad manner. In addition, the basic tenet of copyright law is that copyright will protect only the expression of an idea, and not the idea itself. Therefore, copyright law will not prevent the creation of a competing program that utilizes the same ideas as an existing program if the expression (the code) is different.

As a result, a software patent can provide much greater protection to software developers than copyright law. The benefits of obtaining patent protection can be extraordinary. As more developers understand the potential of software patents, more patents are being issued. According to the Software Patent Institute, thousands of software patents are being issued every year, covering such areas as business software, expert systems, compiling functions, operating system techniques, and editing functions.

There are limitations to obtaining a software patent. A patent can only be issued when an invention is new, useful, and nonobvious. In addition, obtaining a software patent can be an expensive process, costing ten thousand dollars or more. The choice of whether to pursue a software patent or copyright protection for software should be made by comparing the value of the program to the cost of the patent application process and the likelihood of obtaining significant patent protection.

About Rob Scott

This page contains an archive of all entries posted to Business and Technology Law in the Rob Scott category. They are listed from oldest to newest.

Keli Johnson is the previous category.

Many more can be found on the main index page or by looking through the archives.

Powered by
Movable Type 3.32