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CHAPTER 11: INTELLECTUAL PROPERTY

INTRODUCTION

STRATEGIC IMPORTANCE OF INTELLECTUAL PROPERTY

Legally astute managers recognize that intellectual property (IP) is an essential part of their business. As Horatio Gutierrez, a vice president and deputy general counsel in Microsoft’s intellectual property and licensing group, observed: “We’re moving toward a global economy where the true strategic asset is IP.” 1  According to Professor Brian Love from Santa Clara University: “A large patent portfolio deters competitors from filing suit in the same way that an arsenal of nuclear weapons deters war.” 2

Intellectual property  is any product or result of a mental process that is given legal protection against unauthorized use. There are four basic types: patents, copyrights, trademarks, and trade secrets. The Semiconductor Chip Protection Act of 1984 created a fifth, highly specialized form of intellectual property, the registered mask work. Each type of intellectual property is protected in a different way.

International piracy, or the unauthorized reproduction and distribution of patented, copyrighted, or trademarked goods, costs America’s economy more than $100 billion per year and has caused the loss of thousands of jobs. 3  According to industry executives, piracy not only depletes the profits of American companies but can also, in the case of counterfeit drugs, threaten people’s lives.

CHAPTER OVERVIEW

This chapter describes the law of patents, copyrights, mask work rights, trademarks, and trade secrets in detail. The chapter concludes with a discussion of international intellectual property protection and the growing trend toward harmonization of national laws.

11-1: PATENTS

A  patent  is a government-granted right to exclude others from making, using, selling, or importing an invention. Article I of the U.S. Constitution specifically grants Congress the power “to promote the Progress of Science and useful Arts, by securing for limited times to … Inventors the exclusive Right to their … Discoveries.” There are three types of patents in the United States: utility, design, and plant patents. The patent holder is not required to personally make use of the invention. After a period of time, the patent expires, and the invention is dedicated to the public.

U.S. patent laws are revised from time to time, most recently in 2011 by the Leahy–Smith America Invents Act (AIA). 4  Further revisions were under consideration by Congress in 2014.

The Patent and Trademark Office (PTO), an agency of the U.S. Department of Commerce, is responsible for issuing patents. The PTO issued its first patent in 1790. Since that time, the PTO has issued more than 8 million patents. It granted 302,948 patents in 2013, a 72% increase from the number of patents issued in 2000.  5  The types of patents issued by the PTO have varied dramatically over the years, particularly in the last century. The top ten private-sector utility patent recipients for 2013 are identified in  Exhibit 11.1 .

EXHIBIT 11.1: Top Ten Private-Sector Utility Patent Recipients for the 2013 Calendar Year

Organization	Number of patents in 2013
International Business Machines	6,788
Samsung Electronics	4,652
Canon Kabushiki Kaisha	3,820
Sony	3,073
Microsoft	2,659
Panasonic	2,582
Toshiba	2,365
Qualcomm	2,103
LG Electronics	1,945
Google	1,851

SOURCE: U.S. Patent & Trademark Office, Patenting by Organizations (Utility Patents) 2013, available at  http://www.uspto.gov/web/offices/ac/ido/oeip/taf/topo_13.pdf .

11-1a: Requirements for Utility Patents

To be eligible for a  utility patent , the most frequently issued type of patent, an invention must be (1) novel, (2) useful, (3) nonobvious, and (4) patentable as to subject matter. To be patentable as to subject matter, the invention must be (1) a process, machine, manufacture, or composition of matter, or (2) a novel, useful, and nonobvious improvement thereof. If two individuals independently create the same invention, then the U.S. patent will generally go to the first to file the patent application as long as the application is filed in a timely manner. If the PTO issues a utility patent, the patent owner has the exclusive right to exclude others from making, using, selling, and importing the invention for a nonrenewable period of twenty years from the date on which the patent application was filed.

Novel

An invention is  novel  if it was not anticipated—that is, not previously known or used by others. Even if the invention is novel, it will be denied patent protection if its novelty merely represents an obvious development over existing technology, also referred to as  prior art .

In general, patent protection is unavailable in the United States if “the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.” 6  This is called the  statutory bar . There are two important exceptions, however. First, if the original inventor disclosed the invention or sold it before filing a patent application, then that inventor can still obtain a patent as long as he or she files a patent application within one year of disclosure or sale. Second, if the person who disclosed or sold the invention or filed a patent application derived it from the original inventor’s work, then the patent will go to the original inventor even if the person who derived the invention from the original inventor’s work filed his or her patent application first, as long as the original inventor files his or her application within one year after public disclosure or sale by the other person.

Nonobvious

When deciding whether an invention is nonobvious, the courts consider the scope and content of the prior art, differences between the claimed invention and the prior art, the level of ordinary skill in the art, and secondary indicia of nonobviousness. 7  A combination of two inventions can be nonobvious if there is no prior art suggesting that they be combined. 8

Useful

To be approved, an application for a utility patent must satisfy the utility requirement—that is, the invention must have a practical or real-world benefit.

Patentable Subject Matter

There are four categories of patentable subject matter: process, machine, manufacture, and composition of matter. There is no protection for nonstatutory subject matter, such as abstract ideas (rather than specific applications of ideas), mental processes, naturally occurring substances, arrangements of printed matter, scientific principles, or laws of nature.

Biotechnology

In the landmark case Diamond v. Chakrabarty, 9  a microbiologist obtained patent protection for his invention of a live, human-made, genetically engineered bacterium capable of breaking down crude oil. Quoting from legislative history stating that the patent statute should include “anything under the sun that is made by man,” 10  the Supreme Court extended patent protection to the new organism.

The Supreme Court recognized that its decision in Chakrabarty would determine whether research efforts would be “accelerated by the hope of reward or slowed by the want of incentives.” 11  The availability of patents made it possible for small biotechnology firms to attract venture capitalists and other investors, thereby spawning a whole new industry.

In 1987, the PTO confirmed that nonnaturally occurring, nonhuman, multicellular living organisms

animals) are patentable subject matter. The PTO issued a patent in 1988 on a transgenic mouse that was engineered to be susceptible to cancer.

In the following case, the Supreme Court limited the patenting of naturally occurring human gene sequences.

CASE 11.1: A CASE IN POINT: IN THE LANGUAGE OF THE COURT

Association for Molecular Pathology v. Myriad Genetics, Inc.

Supreme Court of the United States

133 S. Ct. 2107 (2013).

FACTS

Myriad Genetics, Inc. discovered the exact location and sequence of two human genes (BRCA1 and BRCA2) on two chromosomes. Mutations in these genes can dramatically raise a woman’s risk of developing breast and ovarian cancer. Myriad then developed medical tests to detect mutations in these genes and applied for and obtained various patents on both the tests and the genes themselves. Myriad asserted that the patents gave it the exclusive right to isolate the BRCA1 and BRCA2 genes and to synthetically create BRCA cDNA (complementary DNA).

After other entities developed their own, cheaper tests to detect the BRCA genes, one of the parties that had initially agreed to stop testing filed suit, in cooperation with patients, advocacy groups, and physicians, seeking a declaration that Myriad’s patents on the genes were invalid under 35 U.S.C. § 101.

ISSUES PRESENTED

Is isolated DNA eligible for patent protection? Is synthetically created complementary DNA eligible?

OPINION

THOMAS, J., writing for the Supreme Court of the United States:

This case … requires us to resolve whether a naturally occurring segment of deoxyribonucleic acid (DNA) is patent eligible under 35 U.S.C. § 101 by virtue of its isolation from the rest of the human genome. We also address the patent eligibility of synthetically created DNA known as complementary DNA (cDNA). … For the reasons that follow, we hold that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated, but that cDNA is patent eligible because it is not naturally occurring. …

. …

I

B

. …

… [C]laim 1 [of Myriad’s ‘282 patent] asserts a patent claim on the DNA code that tells a cell to produce the string of BRCA1 amino acids. …

Claim 2 of the ‘282 patent operates similarly. … Importantly, SEQ ID NO:1 lists only the cDNA exons in the BRCA1 gene, rather than a full DNA sequence containing both exons and introns. …

Claim 5 of the ‘282 patent claims a subset of the data in claim 1. … Similarly, claim 6 of the ‘282 patent claims “[a]n isolated DNA having at least 15 nucleotides of the DNA of claim 2.” This claim operates similarly to claim 5, except that it references the cDNA-based claim 2. …

C

Myriad’s patents, if valid, give it the exclusive right to isolate an individual’s BRCA1 and BRCA2 genes. … The patents would also give Myriad the exclusive right to synthetically create BRCA cDNA. …

But isolation is necessary to conduct genetic testing, and Myriad was not the only entity to offer BRCA testing after it discovered the genes. …

. …

II

A

Section 101 of the Patent Act provides:

“Whoever invents or discovers any new and useful … composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title.”

We have “long held that this provision contains an important implicit exception[:] Laws of nature, natural phenomena, and abstract ideas are not patentable.” Rather, “‘they are the basic tools of scientific and technological work’” that lie beyond the domain of patent protection. As the Court has explained, without this exception, there would be considerable danger that the grant of patents would “tie up” the use of such tools and thereby “inhibit future innovation premised upon them.” This would be at odds with the very point of patents, which exist to promote creation.

The rule against patents on naturally occurring things is not without limits, however, for “all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas,” and “too broad an interpretation of this exclusionary principle could eviscerate patent law.” … [P]atent protection strikes a delicate balance between creating “incentives that lead to creation, invention, and discovery” and “imped[ing] the flow of information that might permit, indeed spur, invention.” …

B

It is undisputed that Myriad did not create or alter any of the genetic information encoded in the BRCA1 and BRCA2 genes. The location and order of the nucleotides existed in nature before Myriad found them. Nor did Myriad create or alter the genetic structure of DNA. Instead, Myriad’s principal contribution was uncovering the precise location and genetic sequence of the BRCA1 and BRCA2 genes within chromosomes 17 and 13. The question is whether this renders the genes patentable.

Myriad recognizes that our decision in Chakrabarty 12  is central to this inquiry. … The Chakrabarty bacterium was new “with markedly different characteristics from any found in nature,” due to the additional plasmids and resultant “capacity for degrading oil.” In this case, by contrast, Myriad did not create anything. To be sure, it found an important and useful gene, but separating that gene from its surrounding genetic material is not an act or invention.

Groundbreaking, innovative, or even brilliant discovery does not by itself satisfy the § 101 inquiry. … Myriad found the location of the BRCA1 and BRCA2 genes, but that discovery, by itself, does not render the BRCA genes “new … composition[s] of matter,” that are patent eligible.

. …

Nor are Myriad’s claims saved by the fact that isolating DNA from the human genome severs chemical bonds and thereby creates a nonnaturally occurring molecule. Myriad’s claims are simply not expressed in terms of chemical composition, nor do they rely in any way on the chemical changes that result from the isolation of a particular section of DNA. Instead, the claims understandably focus on the genetic information encoded in the BRCA1 and BRCA2 genes. If the patents depended upon the creation of a unique molecule, then a would-be infringer could arguably avoid at least Myriad’s patent claims on entire genes (such as claims 1 and 2 of the ‘282 patent) by isolating a DNA sequence that included both the BRCA1 or BRCA2 gene and one additional nucleotide pair. Such a molecule would not be chemically identical to the molecule “invented” by Myriad. But Myriad obviously would resist that outcome because its claim is concerned primarily with the information contained in the genetic sequence, not with the specific chemical composition of a particular molecule.

. …

C

cDNA does not present the same obstacles to patentability as naturally occurring, isolated DNA segments. As already explained, creation of a cDNA sequence from mRNA results in an exons-only molecule that is not naturally occurring. Petitioners conceded that cDNA differs from natural DNA in that “the non-coding regions have been removed.” They nevertheless argue that cDNA is not patent eligible because “[t]he nucleotide sequence of cDNA is dictated by nature, not by the lab technician.” That may be so, but the lab technician unquestionably creates something new when cDNA is made. cDNA retains the naturally occurring exons of DNA, but it is distinct from the DNA from which it was derived. As a result, cDNA is not a “product of nature” and is patent eligible under § 101 [except in certain instances]. …

RESULT

Because isolated DNA is a naturally occurring segment of DNA, it is not eligible for patent protection. In contrast, synthetically created DNA (cDNA) is eligible for patent protection because it is created “by man” and is not naturally occurring.

CRITICAL THINKING QUESTIONS

1.

Before the patent was ruled invalid, Myriad had positioned itself as the sole entity providing the test for the BRCA1 and BRCA2 gene mutations, allowing it to charge more than $3,000 per test. The excessive cost was a barrier to many women with no insurance or poor insurance coverage. Was it ethical for Myriad to charge a cost-prohibitive amount for what many have called a “life-saving test”? How does an entity recoup its costs to discover such a test and at the same time act ethically? Are the two mutually exclusive?

2.

If a small company cannot patent a gene it isolates while trying to develop a test for a certain disease, there is nothing to keep a larger company from developing and marketing that test more quickly and perhaps more inexpensively. Thus, smaller companies might be hesitant to invest substantial sums in research because the rewards might not be there at the end of the day. Can this type of situation be remedied?

Computer Software

The law’s embrace of software patents began in 1981, when the Supreme Court held that if a “claim containing a mathematical formula implements or applies that formula in a structure or process which, when considered as a whole, is performing a function which the patent laws were designed to protect (e.g., transforming or reducing an article to a different state or thing), then the claim [may be patentable].” 13  After this decision, developers successfully acquired software patents at a quickening pace.

Most software code is not published, so much of the relevant prior art is not accessible to the PTO examiners. Third parties can, however, submit relevant information to the patent examiners, thereby increasing the “scope of access to prior art in key areas like software patents” by “allow[ing] the USPTO to tap directly into the U.S. innovation community.” 14

Business Method Patents

In recent years, some of the most criticized patents have been patents on “business method” inventions, particularly in connection with the Internet and electronic commerce. Some of the most “notorious” e-commerce business method patents include  Amazon.com’s  patent for the “one-click” shopping system,  Priceline.com’s  patent for the online reverse auction, and Microsoft’s patent on “e-commerce.”

In Bilski v. Kappos, 15  the U.S. Supreme Court held that a business process explaining how buyers and sellers of commodities in the energy market could use hedging to protect themselves against unfavorable price fluctuations was not patentable. The Court rejected, however, a categorical exclusion of business method patentability, noting that the term “method” was included within the Patent Act’s definition of the word “process.”

In this case, the inventors were seeking a patent for the concept of hedging risk and the application of that concept to energy markets. The Court treated both as abstract ideas for which no patent protection was available: “Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.” 16

In 2014, the Supreme Court held that a business method patent is not infringed unless all the claimed infringing activities are performed by the same party. 17

Akamai Technologies, Inc., the exclusive licensee of a patent that claimed a method of delivering electronic data using a content delivery network (CDN) to store Web site content, sued Limelight Networks, Inc., claiming that its CDN infringed on Akamai’s patent. The Supreme Court held that because one of the steps in Limelight’s CDN (“tagging,” or designating, the content for storage) was performed by Limelight’s customers, and not by Limelight, there was no direct infringement of the patent.

11-1b: Design Patents

A  design patent  protects any novel, original (rather than nonobvious), and ornamental (rather than useful) design for an article of manufacture. Design patents protect against copying the appearance or shape of an article, such as a computer tablet, a perfume bottle, a typeface, or the icons and screen displays used in computer programs. A design dictated by function rather than aesthetic concerns cannot be protected by a design patent, but it may be protectable by a utility patent. A design patent has a duration of fourteen years from the date on which the patent application is filed.

Traditionally, design patents have rarely been used in the United States; other forms of protection, such as unfair competition law, have been relied on instead. Recently, however, the use of design patents has been increasing, in part because the application process is simpler and less expensive than for utility patents.

11-1c: Plant Patents

Plant patents  protect any distinct and new variety of plant that is asexually reproduced (that is, not reproduced by means of seeds). The variety must not exist naturally. Thus, a plant patent will not be issued to someone who merely discovers a wild plant not previously known to exist. Once a plant patent is granted, the patent owner has the exclusive right to exclude others from asexually reproducing, using, or selling the plant. Obtaining a plant patent does not foreclose securing a utility patent for the same plant. 18  Like utility patents, plant patents have a duration of twenty years from the date the application is filed.

11-1d: Obtaining Patent Protection

To obtain patent protection in the United States, the inventor must file a patent application with the PTO. Each patent application contains four parts: the specifications, the claims, the drawings (except in chemical cases), and a declaration by the inventor.

Specifications

The  specifications  must describe the invention (as defined by the claims) in its best mode and the manner and process of making and using the invention, in such a way that a person skilled in the relevant field could make and use it. The description of the  best mode  must be the best way the inventor knows to make the invention at the time of filing the application. All descriptions must be clear, concise, and exact.

Claims

The  claims  (the numbered paragraphs at the end of the patent) describe the elements of the invention that the patent will protect. Any element not specifically set forth in the claims is unprotected by the patent. Thus, drafting the claims is crucial to obtaining adequate protection.

Drawings and Declaration by the Inventor

The drawings must show the claimed invention. The declaration by the inventor must state that the inventor has reviewed the application and believes he or she is the first inventor of the invention. The inventor must also make full disclosure of any known relevant prior art. Knowing the prior developments assists the patent attorney in drafting the claims to avoid the prior art; it also permits the patent examiner to determine whether the patent is novel or would have been obvious to those familiar with the relevant field.

Review by Patent Examiner and Patent Issuance

In the vast majority of cases, the patent examiner will reject the initial application as being precluded by prior inventions or otherwise failing to meet the statutory requirements. The inventor may then either present arguments (and, in extreme cases, evidence) to contest the rejection or seek to amend the application to overcome the examiner’s objections. If the application is finally rejected, the inventor can refile the application as a continuation application or appeal to the PTO’s Board of Appeals and subsequently to the U.S. Court of Appeals for the Federal Circuit. The inventor alternatively has the option of suing the director of the PTO in the U.S. District Court for the District of Columbia. If the examiner agrees that a patent should be issued, and the examiner and applicant agree on the precise language of the claims, then a patent will be issued.

Post-grant Review

A third party, such as a competitor, can petition the PTO to review the validity of a patent after issuance in a process called a post-grant review. Such a review must be requested within nine months after the issuance of the patent. After that nine-month period elapses, a third party may seek inter partes review, but such a proceeding requires a higher standard of proof and is limited to challenges based on prior art patents and printed publications. In addition, a party can bring a derivation proceeding in which it claims the applicant derived or stole the invention from the original inventor. Post-grant review is designed to eliminate invalid patents more promptly than judicial review in litigation.

Provisional Patent Applications

Inventors can file provisional patent applications without formal patent claims. The provisional application provides a low-cost way to establish an early filing date for the later, nonprovisional patent application, and it allows the inventor to utilize the term “patent pending.” A provisional application must be followed by a nonprovisional application within twelve months.

11-1e: Patent Litigation

Patent litigation is a high-stakes game for both established market participants and new entrants, but the prohibitive cost of patent litigation can make it much more difficult for small companies to recover damages from larger firms. Some corporations purposely lengthen and complicate the discovery process in order to strain the resources of their smaller challengers. Nevertheless, patent rights can provide a David with an effective means to strike down a Goliath. For example, a jury awarded i4i Limited Partnership, a thirty-employee firm, $290 million after finding that Microsoft infringed i4i’s patent on a method for editing computer documents. 19

Patent infringement suits increased from approximately 2,300 in 2009 to more than 4,700 in 2012. 20  Patent cases are typically protracted. Unlike in Germany, which has a separate court dealing only with patent issues, patent cases in the United States proceed through the “regular” trial court system, which has been described as “horribly inefficient and horribly expensive.” 21

In an effort to prevent frivolous patent litigation, President Obama issued five executive actions and seven legislative recommendations in 2013. They are designed to increase transparency, so the targeted entity can determine exactly who owns the patent; to allow trial judges to award attorney fees for abusive litigation; to improve training for patent examiners; and to better protect off-the-shelf purchasers from liability when the patented product is used for its intended purpose. 22

11-1f: Types of Patent Infringement

A U.S. patent may be infringed in three ways: directly, indirectly, or contributorily.

Direct Patent Infringement

Direct patent infringement  is the making, use, or sale of any patented invention within the United States during the term of the U.S. patent. Direct infringement can be committed innocently and unintentionally. When an accused device or process does not have precisely each element of a particular claim of a patent (that is, the patent is not literally infringed), but the patented invention is replicated in a product or process that works in substantially the same way and accomplishes substantially the same result, a direct infringement may be found under the  doctrine of equivalents . In 2002, the U.S. Supreme Court narrowed the reach of this doctrine so that it is now effectively available only to inventors who did not amend their patent applications in order to satisfy patentability requirements. 23  Because the patent examiner asks the majority of patent applicants to amend their applications to satisfy these requirements, the doctrine of equivalents now provides patent owners with considerably less recourse against competitors who design around their patents.

Indirect Patent Infringement

Indirect patent infringement , also referred to as  inducement to infringe , is a party’s active inducement of another party to infringe a patent. For example, if a film studio encouraged consumers to play its DVDs on a brand of player that it knows violated Philips’s data compression patents, then that would constitute active inducement to infringe.

Contributory Patent Infringement

Contributory patent infringement  occurs when one party knowingly sells an item with one specific use that will result in the infringement of another’s patent. For example, if a company sells a computer add-on card for a specific use that will infringe another’s patent, the sale is a contributory infringement even though the add-on card itself does not infringe any patent.

11-1g: Defenses to Patent Infringement

A defendant to a patent-infringement action may claim a variety of defenses, including (1) noninfringement of the patent, (2) invalidity of the patent, (3) misuse of the patent, or (4) innocent infringement.

Noninfringement

The defense of  noninfringement  asserts that the allegedly infringing matter does not fall within the claims of the issued patent. Courts compare the specific language of the patent claims with the allegedly infringing matter. If the allegedly infringing matter is not described by the patent claims, the defense of noninfringement is successful. The doctrine of  file-wrapper estoppel  prevents a patent owner from asserting any claim interpretation at odds with the application on file with the PTO.

The proper construction of the words in patent claims is a matter of law for the court, not the jury, to decide. 24

The Supreme Court reasoned that “[t]he construction of written instruments is one of those things that judges often do and are likely to do better than jurors unburdened by training in exegesis.” 25

Invalidity

A patent is presumed to be valid, but a court may find it invalid if (1) the invention was not novel, useful, or nonobvious when the patent was issued; (2) the patent covers nonstatutory subject matter, such as an abstract idea, a scientific principle, or a mental process; (3) a statutory bar was created by a publication or sale of the invention prior to the filing of the patent application; or (4) any other requirement of the patent law was not met. Thus, for example, if a third party discloses an invention before an applicant discloses it or files a patent application, then the applicant is barred from getting a patent on the disclosed invention (unless the third party stole the invention from the inventor-applicant).

Patent Misuse

Even if the defendant has infringed a valid patent, the defendant has a defense if it can prove that the patent holder abused its patent rights and therefore has lost, at least temporarily, its right to enforce them. Improperly expanding the physical or temporal scope of a patent constitutes  patent misuse . For example, forcing a party to sign a license agreement that calls for royalty payments beyond the expiration of the patent would be a patent misuse. Seeking to enforce a patent obtained through inequitable conduct might also be a patent misuse. Requiring a licensee to purchase non-patentable products as a condition to obtaining a license for patented products is no longer treated as patent misuse; but, as discussed in  Chapter 16 , it may, under certain limited circumstances, be an illegal tie under the antitrust laws.

The patent holder is barred from recovering for any infringement of its patent during the period of misuse. If the patent holder later “purges” itself of the misuse, it may recover for any subsequent infringement.

Innocent Infringement

A defendant may claim innocent infringement if the patented item did not carry adequate notice of its patent status. Although this is not a complete defense to patent infringement, a patent owner cannot recover damages arising out of infringement occurring before the defendant received actual notice of infringement. In the case of physical products, notice is normally given by putting the patent number on the product or its packaging. For intangible patented items, such as business processes, the patent owner generally does not need to provide any patent marking to recover damages for the full period of infringement. 26

First Sale (Patent Exhaustion) Doctrine

Under the  first sale doctrine  (also known as the  patent exhaustion doctrine ), an authorized sale of a patented article exhausts the patent holder’s exclusive rights as to that article, to the extent that the article embodies the invention. As a result, the patent holder is precluded from obtaining any further royalties or imposing any further restrictions on the article or its subsequent sale or transfer. For example, the owner of a patent on eyeglass frames cannot use the patent law to prevent a distributor from selling the frames to a discounter.

In Bowman v. Monsanto Company, 27  the Supreme Court held that the patent exhaustion doctrine does not permit a farmer to reproduce Monsanto’s patented genetically modified soybean seeds by replanting and then harvesting more seeds than he initially bought without the permission of the patent holder. Monsanto sold the seeds under a licensing agreement that permitted the seeds to be planted in “one (and only one)” season and expressly prohibited the buyer from saving any harvested soybeans to replant. The Court explained that the exhaustion doctrine “restricts a patentee’s rights only as to the ‘particular article’ sold; it leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item.” The exhaustion doctrine permitted the farmer to resell the patented soybeans he harvested, feed them to his animals, or consume them himself. But he was prohibited from making additional patented soybeans without Monsanto’s permission, which was precisely what he did. By harvesting many more soybeans that he had bought initially, the farmer violated Monsanto’s patent rights.

ETHICAL CONSIDERATION

Critics have accused Monsanto of “bio-serfdom.” Is that a fair charge?

11-1h: Remedies for Patent Infringement

If a valid patent has been infringed, the patent holder may seek preliminary and permanent injunctive relief and damages, as well as court costs and attorneys’ fees.

Injunctive Relief and the Perils of Patent Trolls

A patent holder may seek a preliminary injunction to prevent any further infringement of the patent pending the court’s ultimate decision. Most courts, however, are reluctant to grant injunctive relief before they have determined that a valid patent has actually been infringed.

For many years, U.S. courts granted permanent injunctive relief almost as a matter of right after a finding of infringement. This gave so-called patent trolls tremendous leverage “to charge exorbitant fees to companies that seek to buy licenses to practice the patent.” 28  The term  patent troll  is generally understood to refer to a nonpracticing entity that purchases one or more patents with the intent to enforce the patents against infringers, rather than to manufacture the patented product or supply the patented service. It has also been used to refer to a company that files patent applications covering new technologies, waits for others to develop and create markets for these technologies, and then sues these newcomers for patent infringement after they are locked into using the patented technologies.

A patent troll operates much like any other firm that seeks to exploit its patent portfolio except that the troll focuses on extracting money from existing users of the patent rather than practicing or seeking out new applications for the patented technology. The patent troll often starts by sending demand letters to smaller companies, hoping that early settlements with these companies will encourage others to agree to take licenses as well. Patent trolls also profit from the realization that, for some companies, it is cheaper to settle a nuisance suit than to go to court.

Patent trolls prefer the more flattering label “patent assertion entities” (PAEs) and maintain that they are protecting inventors’ rights to licensing fees. Their critics describe them less favorably, however, noting that the patents involved are often of “dubious value or questionable relevance” and that the trolls “hold on like a terrier until they get license fees.” 29

In 2006, Research in Motion (RIM), maker of the BlackBerry smartphone, paid $612.5 million in royalties to patent troll NTP to avoid an injunction that would have shut down the BlackBerry wireless e-mail service. 30

NTP was a one-person firm that had no employees and made no products. In the early 1990s, NTP filed for, and ultimately obtained, a series of patents premised on wireless e-mail. NTP then sat back and waited for others to develop the wireless e-mail market. During the litigation, the PTO reexamined all seven of NTP’s patents and had issued notices rejecting all of them by the end of 2005. After the court refused to delay the litigation pending the final outcome of the reexamination process, however, and with the threat of another injunction looming over its head, RIM agreed to settle the case. 31  RIM would not be able to recover any of the $612 million it paid NTP even if the PTO eventually overturned NTP’s patents.

In 2006, the U.S. Supreme Court ruled in eBay Inc. v. MercExchange, L.L.C. 32  that the “right to exclude others from making, using, offering for sale, or selling the invention” 33  granted by the Patent Act did not justify a general rule in favor of permanent injunctive relief when patent infringement is found. Because the Patent Act provides that injunctive relief may issue only “in accordance with the principles of equity,” 34  a plaintiff must satisfy the traditional four-factor test to obtain a permanent injunction. These factors require demonstrating that (1) an irreparable injury exists; (2) the remedies available at law, such as monetary damages, are inadequate; (3) an injunction is appropriate given the balance of hardships between the plaintiff and the defendant; and (4) the public interest would not be disserved by a permanent injunction. In short, the decision to grant or deny injunctive relief in patent cases lies within the equitable discretion of the district court, which must be exercised consistent with the traditional four-factor injunctive relief test.

The Supreme Court’s decision in eBay Inc. v. MercExchange was rendered several months after RIM settled its case with NTP. Had NTP been required to meet the traditional four-factor test for equitable relief, RIM would almost certainly have paid far less than $612.5 million, whether in a negotiated settlement or in a judicial award of damages.

In 2013, the House of Representatives passed the Innovation Act, 35  which is designed to reduce nuisance lawsuits filed primarily by patent trolls. The bill would require the party bringing suit to disclose the owner of the patent, to detail exactly how the patent is being violated, and to pay a successful defendant’s legal costs. 36  The bill would also require courts to address the validity of the patent before discovery begins in an effort to minimize legal costs. The Senate was not expected to take up the bill until late 2014. Under current law, if the Federal Trade Commission (FTC) determines that patent assertion entities are filing frivolous lawsuits and making demands for payments to license “questionable patents,” the FTC can initiate enforcement proceedings against the trolls. 37

In 2014, the U.S. Supreme Court held that taking an abstract idea and finding a way to implement it through a generic computer application does not transform the abstract idea into a patent-eligible invention. 38  Some believe the decision will reduce lawsuits by patent trolls, who often bring suit using this “technique.” 39

Damages

Damages may be awarded based on (1) the patent holder’s lost profits (in the case of a patent holder practicing its invention), (2) the infringer’s profits, or (3) a reasonable royalty for the infringer’s use of the invention. To this, court costs, as fixed by the court, may be added. The court also has discretion (1) to increase the damages award by up to three times for intentional or willful infringement and (2) to award attorneys’ fees in exceptional cases.

The historic instant-camera litigation between Polaroid Corporation and Eastman Kodak Company illustrates the potential for large damages awards for patent infringement. In the 1970s, Kodak sought a license from Polaroid to produce instant cameras and film, but the parties never reached an agreement. When Kodak nonetheless introduced an instant camera and film in 1976, Polaroid sued for patent infringement. A federal district court held that Kodak had infringed twenty claims of seven Polaroid patents and enjoined Kodak from any further infringements. The injunction terminated Kodak’s instant-camera business, leaving it with $200 million worth of useless manufacturing equipment and $600 million in losses. 40  Kodak was ordered in 1990 to pay Polaroid $910 million for infringing its patents, including $454.2 million in lost profits and royalties and $455.3 million in interest. 41

11-2: COPYRIGHTS

A  copyright  is the legal right to prevent others from copying an original expression embodied in any original work of authorship fixed in a tangible medium. Copyright protects the expression, not the underlying ideas, in the work. The owner has exclusive rights to reproduce, distribute, display, and publicly perform the work as well as the exclusive right to create  derivative works —that is, works based on the copyrighted work.

The United States Copyright Act of 1976 requires that the material for which copyright protection is sought be original (not copied) and fall within one of the following categories: (1) literary works; (2) musical works; (3) dramatic works; (4) pantomimes and choreographic works; (5) pictorial, graphic, and sculptural works; (6) motion pictures and other audiovisual works; and (7) sound recordings. Best-selling novels, award-winning films, off-the-shelf software packages, and compact discs are all copyrightable works. So are restaurant menus, digital videodiscs, designer linens, plush toy animals, and cereal boxes, as well as original blogs and photographs posted on YouTube.

The act requires that the works be fixed in a tangible medium from which they can be perceived, reproduced, or communicated. For example, stories may be fixed in written manuscripts, computer software on computer memory chips, songs on digital recorders, and the staging of a play on video. Copyright does not extend to names, familiar phrases, government publications, standardized information, or facts.

In addition to being fixed, the works must be sufficiently original—have some degree of creativity—to qualify for protection. As mentioned, facts are not copyrightable. A compilation of facts may be eligible for copyright protection, but only to the extent that the selection, coordination, or arrangement of the facts is original. As the U.S. Supreme Court explained in Feist Publications, Inc. v. Rural Telephone Service Co., “[t]he sine qua non of copyright is originality.”  42  In that case, Feist, a publisher of a rural telephone directory, unsuccessfully sued Rural Telephone for copying its listings in its rival telephone directory. Feist argued that because it had invested substantial time and effort in compiling and arranging the factual listings, the data were copyrightable. The Supreme Court rejected this “sweat of the brow” argument, holding that originality is the critical element of copyright protection and that the alphabetical arrangement of the phone listings was not sufficiently original to entitle Feist to copyright protection.

If an author can establish the fixity and originality of a work, copyright protection is automatic and entitles the author to the exclusive economic rights to (1) reproduce the copyrighted work, (2) prepare derivative works based on the copyrighted work, (3) distribute copies or phonore-cords of the copyrighted work to the public, (4) perform the copyrighted work publicly, and (5) display the copyrighted work publicly.

11-2a: Ownership and Scope of Copyright Protection

The creator of the work—or, in the case of a work made for hire, the party for whom the work was prepared—is the author of the copyrighted work. A work is deemed a  work made for hire  when either (1) an employee created the work within the scope of employment or (2) the work is in one of nine listed categories and is specially commissioned through a signed writing stating that the work is a “work made for hire.”

The author of a copyrighted work can transfer ownership by an assignment of copyright. Parties that commission independent contractors to produce works that fall outside the nine listed categories, such as computer programs, often seek copyright assignments.

The advent of nonprint media and electronic databases led to disputes between freelance writers and photographers on one side, and the newspapers and magazines that buy their work on the other, about who owns the electronic or digital rights. The Supreme Court ruled that the owner of a copyright for a collective work (in this case, the publisher of the newspaper or magazine) has the right to revise the individual works, but it does not automatically have the right to republish them in an electronic database. This ruling underscores the importance of negotiating an assignment of rights that clearly applies to any known or future media. 43

11-2b: Expression Versus Idea

The Copyright Act prohibits unauthorized copying of the protected expression of a work, but the underlying ideas embodied in the work remain freely usable by others. As the Supreme Court stated in Feist, “copyright assures authors the right to their original expression, but encourages others to build freely upon the ideas and information conveyed by a work.”  44  In particular, section 102 of the act excludes from copyright protection any “idea, procedure, process, system, method of operation, concept, principle or discovery, regardless of the form in which it is described, explained, illustrated, or embodied.” For example, the use of buttons on a video camera labeled “Play” and “Fast Forward” would be an unprotectable method of operation. 45

When an idea and its expression are inseparable, the  merger doctrine  dictates that the expression is not copyrightable. If it were, the copyright would confer a monopoly over the idea. Thus, a manufacturer of a karate video game cannot keep a competitor from producing another video game based on standard karate moves and rules. The manufacturer can, however, keep a competitor from copying any original graphics it has used in the game, as long as they are separable from the idea of karate or a karate video game.

11-2c: Useful Article Doctrine

The  useful article doctrine  provides that copyright protection does not extend to the useful application of an idea. The Copyright Act defines pictorial, graphic, and sculptural works to include “works of artistic craftsmanship insofar as their form but not their mechanical or utilitarian aspects are concerned.” For example, blank forms used to record, rather than convey, information are considered noncopyrightable useful articles.

If the expression of a pictorial, graphic, or sculptural work cannot be identified separately from and exist independently 

If the expression of a pictorial, graphic, or sculptural work cannot be identified separately from and exist independently of such utilitarian aspects, courts will deny copyright protection to the whole work. An example of an article whose expression is separable from its utilitarian aspects would be a lamp that incorporates a statue of a woman in its base. An example of an article whose expression is not separable from its utilitarian aspects is the layout of an integrated circuit. Although a drawing of the circuit is copyrightable, the actual circuitry is not copyrightable, because it is impossible to separate the utilitarian aspect of the circuit from its expression or layout. It is the layout of the circuit that enables the circuit to operate correctly. The circuit may be patentable, however. In addition, the layout or topography of the circuit may be protectable as a registered mask work under the Semiconductor Chip Protection Act of 1984. 46

11-2d: Term of Copyright Protection

If the author of a copyrighted work is a known individual, the term is the life of the author plus 70 years. 47  For a work made for hire or for an anonymous or pseudonymous work, the term is the lesser of 95 years after first publication or 120 years after creation of the work.

11-2e: Copyright Formalities: Registration and Notice

U.S. copyright law does not require authors to either register their works with the Copyright Office or affix a notice to the works themselves, but it confers substantial benefits on those who do.

Copyright Registration

U.S. copyright owners cannot sue for infringement until they register with the Copyright Office. Statutory damages and attorneys’ fees are available only if either (1) the work was registered prior to the infringement at issue or (2) the owner registered the work within ninety days after first publication. Availability of statutory damages (up to $30,000 per infringement or up to $150,000 per willful infringement) can be particularly important for a start-up—or a more established company selling a new product—because the absence of historical sales can make it very difficult to prove actual damages. Registration also creates a legal presumption of ownership and copyright validity, which can be extremely helpful to a plaintiff in a copyright-infringement suit.

Copyright Notice

Although copyright notices are not mandatory for works first published after March 1, 1989, use of a notice precludes an infringer from claiming innocent infringement in mitigation of actual or statutory damages. 48  Proper U.S. copyright notice for works distributed within the United States includes these elements: “Copyright” or “Copr.” or “©,” the year of first publication, and the name of the copyright owner.

11-2f: Types of Copyright Infringement

Copyright infringement occurs when a party copies, modifies, displays, publicly performs, or distributes a copyrighted work without the owner’s permission. The plaintiff in a copyright-infringement suit must show (1) that the work in question is substantially similar to the protected expression, not merely similar in the ideas contained in the work, and (2) that the alleged infringer had access to the plaintiff’s work. Copyright infringement may take three forms: direct, contributory, or vicarious.

Direct Copyright Infringement

Direct copyright infringement  occurs when the copyright owner alleges that the defendant violated at least one of the five exclusive rights of the copyright holder. For example, the Princeton University Press and other publishers successfully sued a Michigan copy shop for direct infringement when the copy shop reproduced and sold excerpts of a variety of copyrighted works selected by professors without obtaining the publishers’ permission to do so. 49

In the following case, the court considered whether transmissions of individual broadcast television programs to individual customers, through technology utilizing customers’ antennas, was a public performance in violation of the Copyright Act.

CASE 11.2: A CASE IN POINT: SUMMARY

American Broadcasting Companies, Inc. v. Aereo, Inc.

Supreme Court of the United States

134 S. Ct. 2498 (2014).

FACTS

Two groups of holders of copyrights to broadcast television programs, including WNET, Fox Television Stations, Inc. and American Broadcasting Companies, Inc. (ABC), sued Aereo, Inc. for various copyright violations, including infringement of their public performance right.

Aereo, in exchange for a monthly fee, allowed its subscribers to watch broadcast television over the Internet and on mobile devices. Using individual antennas, Aereo’s users could watch a program currently being broadcast “nearly live, that is, almost contemporaneously” with the program being shown over the air. (There was a delay of approximately ten seconds.) A subscriber also had the option of recording the program and watching it later (similar to using a digital video recorder). The service had three significant features: (1) an individual antenna was assigned to each user, meaning an antenna was never shared, even if two subscribers were watching the same program at the same time; (2) an individual copy of the program the subscriber requested was located in each user’s personal directory; and (3) each copy of a program requested by a subscriber was accessible only to the subscriber who requested the program. Thus, one subscriber could not view the copy that another subscriber had requested. Aereo did not have a license from the copyright holders authorizing it to record or transmit their broadcasts. (Note that a cable system can retransmit copyrighted works only if it pays a compulsory license fee.)

In their lawsuit, the plaintiffs sought a preliminary injunction barring Aereo from transmitting the programs.

ISSUE PRESENTED

Does Aereo “perform” when it transmits “live” broadcasts? If so, does it do so “publicly?”

SUMMARY OF OPINION

The U.S. Supreme Court explained that the Copyright Act of 1976 gives a copyright owner the “exclusive righ[t]” to “perform the copyrighted work publicly” and that the act’s Transmit Clause defines that exclusive right as including the right to:

“transmit or otherwise communicate a performance … of the [copyrighted] work … to the public, by means of any device or process, whether the members of the public capable of receiving the performance … receive it in the same place or in separate places and at the same time or at different times.”

To perform a work publicly means, among other things, to transmit a performance of the work to the public. The question, therefore, was whether Aereo transmitted a performance when a subscriber watched a show using Aereo’s system, or whether the only transmitter was the subscriber. Aereo argued that it did not perform but merely supplied equipment that emulated a home antenna and a digital recorder device, and that such equipment responded to the subscribers’ directives. In short, Aereo argued that the subscribers performed when they used the equipment to stream the programs to themselves.

The Court disagreed, writing that an entity that “engages in activities like Aereo’s performs.” The Court explained that to “perform” an audiovisual work means to “show its images in any sequence or to make the sounds accompanying it audible.” As a result, both the broadcaster and the viewer of the program perform.

Aereo further argued that it did not perform “publicly,” asserting that the performance it transmitted was the performance created by its “act of transmitting.” Because each performance was capable of being received by one and only one subscriber, Aereo claimed that its transmittals were private. The Court dismissed the argument, noting that such “technological differences” did not make Aereo’s commercial objectives any different from those of cable companies, nor did they impact the viewing done by subscribers. Viewers did not care whether their broadcasts came from a large, multisubscriber antenna or from one small dedicated antenna, or whether they received the broadcasts instantaneously or after a few seconds’ delay.

The Court ruled that when an entity communicates the same contemporaneously perceptible images and sounds to multiple people, it transmits a performance to all of them regardless of the number of discrete communications involved. Such subscribers constitute “the public” within the meaning of the Transmit Clause because they comprise a large number of people who are unrelated and unacquainted.

RESULT

The Supreme Court held that Aereo performed the broadcasters’ copyrighted works publicly in violation of the Copyright Act.

COMMENT

The Court wrote that it did not believe its “limited holding” would discourage or control the emergence or use of different kinds of technologies, noting that the doctrine of “fair use” could help to prevent inappropriate or inequitable applications of the Transmit Clause. The Court also stated that it could not answer issues that were not before it, such as the legality of cloud computing or remote storage. The dissenting opinion of Justice Scalia, in which Justices Alito and Thomas joined, noted that “Aereo does not ‘perform’ at all” and that the majority had used an improvised standard (“looks-like-cable-TV”) that will “sow confusion for years to come.”

CRITICAL THINKING QUESTIONS

1.

What do cases like this one mean for companies that distribute CD burners, MP3 players, and other technologies that are frequently used by their customers to infringe? What does this decision mean for companies like YouTube?

2.

What does this decision mean for Aereo?

Contributory Copyright Infringement

A party may also be liable for  contributory copyright infringement —inducing, causing, or materially contributing to the infringing conduct of another with knowledge of the infringing activity. Recent case law on contributory infringement is based on the seminal Supreme Court decision in Sony Corp. of America v. Universal City Studios, Inc. 50  In 1984, Universal City Studios alleged that Sony, by manufacturing and selling the Betamax videocassette recorder, contributed to the infringement of Universal’s copyrights on programs broadcast over the public airwaves, which viewers could copy using their VCRs. The Court held that the sale of copying equipment does not constitute contributory infringement if the product has substantial noninfringing uses. In Sony’s case, the trial court had found that time-shifting of television programs by private, noncommercial viewers, so they could view the programs later, was such a substantial noninfringing use. As a result, Sony’s manufacture and sale of VCRs did not contributorily infringe on Universal’s copyrights. 51

Courts have generally held that providing a hyperlink to a copyright-protected work is not, standing alone, copyright infringement, because the hyperlink itself does not create a copy of the copyrighted work. For example, a copyright owner unsuccessfully sued an individual who had sent an e-mail that included a hyperlink to a website from which the e-mail recipient accessed and downloaded copyright-protected textbooks. 52  The court ruled that sending the e-mail with the hyperlink did not constitute a copyright violation because “the link was not itself a digital copy of any of the protected materials, and did not contain a copy of any of those materials.”

Under some circumstances, however, use of a hyperlink can result in infringement. In Intellectual Reserve, Inc. v. Utah Lighthouse Ministry, Inc., 53  the defendants posted copyrighted material on their website. After a court ordered them to remove the material, the defendants posted three website addresses on their website telling users where they could access and download the material. The plaintiffs moved for a preliminary injunction, arguing that the defendants were liable for contributory infringement. The court held that the defendants had “actively encouraged” infringement of the protected material and granted the injunction.

Vicarious Copyright Infringement and Active Inducement to Infringe

A defendant may face  vicarious copyright liability  for a direct infringer’s actions if the defendant (1) has the right and ability to control the infringer’s acts and (2) receives a direct financial benefit from the infringement. Unlike contributory infringement, vicarious infringement does not require that the defendant know of the primary infringement. Although “direct financial benefit” certainly includes receiving a percentage of the value of each illegal sale, it is not limited to such per-unit arrangements. A defendant may also be liable if it actively induces copyright infringement by another.

The Napster case, which involved the online sharing of copyrighted music, illustrates how the Sony–Betamax principle of “substantial noninfringing use” and vicarious liability principles apply to peer-to-peer networks. In Napster’s original system, users downloaded free file-sharing software from the Napster website that enabled them to (1) make MP3 files stored on their hard drives available to other Napster users, (2) search for MP3 files stored on other users’ computers, and (3) transfer exact copies of those files from one computer to another. By uploading MP3 file names to Napster network servers, users added to the collective library of files available for transfer to any user logged in to Napster. The music industry brought suit, claiming that Napster had engaged in contributory and vicarious copyright infringement when it, in effect, matched those seeking a particular song with users having a copy of that song on their computer.

Because there can be no contributory or vicarious liability without direct infringement by a third party, the U.S. Court of Appeals for the Ninth Circuit first considered whether Napster’s users had engaged in direct infringement. 54  Napster argued that its users had not directly infringed but had, instead, engaged in a fair use of the material, so-called “space-shifting.” The Ninth Circuit disagreed, holding that the users had engaged in wholesale, commercial copying of copyright-protected works. The court then found Napster liable for both contributory and vicarious infringement. Napster contributorily infringed because it knowingly encouraged and assisted its users’ direct infringement. Napster met the two-prong test for vicarious liability as well: (1) The availability of the infringing material attracted customers, thereby increasing the user base on which Napster’s future revenues depended, and (2) Napster’s ability to control access to its servers and its hub-and-spoke software was sufficient to give it the requisite right and ability to supervise the infringing activity.

This and subsequent court decisions contributed to Napster’s demise and its conversion into a paid subscription service, but the file-sharing seed had been planted. Grokster, StreamCast, and other systems arose to take Napster’s place. Unlike Napster, these companies provided free software that allowed users to connect to a decentralized file-sharing network of computers. There was no centralized server, and  any computer on the network could function as a server if it met the technical requirements. Neither Grokster nor StreamCast maintained control over entry to the network.

A number of music publishers and motion picture studios (the copyright owners) then sued Grokster and StreamCast (the software distributors) for contributory and vicarious liability, claiming that the software distributors enabled users of their software to illegally copy and transmit copyrighted materials. The U.S. Court of Appeals for the Ninth Circuit found Grokster not liable for contributory or vicarious infringement. 55  The Ninth Circuit held that the software distributors were not contributory infringers because, unlike Napster, they did not provide the “site and facilities” for infringement or otherwise materially contribute to the users’ direct infringement. Similarly, the software distributors were not vicariously liable because, unlike Napster, they did not operate an integrated service and therefore had no ability to block access to infringing users.

The U.S. Supreme Court reversed, holding that Grokster and the other defendants could be held secondarily liable because they had actively induced copyright infringement. 56  The theory, which had theretofore been applied only in patent cases, requires intent to promote infringement as shown by “clear expression or other affirmative steps taken to foster infringement,” the distribution of a device suitable for infringing use, and evidence of actual direct infringement by a third party. The Court concluded that the defendants were not passive recipients of information regarding the infringing use of their software; instead, each defendant had as its objective that its software be used for infringing uses and clearly and actively encouraged such infringement. 57  The Court distinguished Sony Corp. v. Universal City Studios because in that case there was no evidence that Sony had expressed any intent to promote infringing uses of its VCRs.

11-2g: Defenses to Copyright Infringement

Defenses to copyright infringement claims include the doctrines of fair use, first sale, and copyright misuse.

Fair Use Doctrine

The  fair use doctrine , embodied in section 107 of the Copyright Act, provides that a person may infringe the copyright owner’s exclusive rights without liability if the person uses the copyrighted material while engaging in such activities as literary criticism, social comment, news reporting, education, scholarship, or research. To decide what constitutes fair use, courts balance the public benefit of the defendant’s use against any detrimental effect on the copyright owner’s interests. In doing so, they consider (1) the purpose and character of the use (including whether it was for profit), (2) the economic effect of the use on the copyright owner, (3) the nature of the work used, and (4) the amount of the work used.

If the new work is deemed transformative, then there is no infringement. For example, artist Derek Seltzer sued the rock band Green Day for copyright infringement in 2013. 58  Seltzer had created “Scream Icon,” a drawing of a screaming, contorted face that was made into posters, some of which were hung as “street art” on walls in Los Angeles. Roger Staub, a photographer and video designer, saw one of the walls, took a picture that included a “weathered, slightly defaced, and torn” Scream Icon poster, and used it in a four-minute video he created for one of Green Day’s songs about religion and violence. The video was “dominated by an unchanging, but modified, Scream Icon”: Staub had cut the Scream Icon face from his photograph, spray-painted a large, red cross on the face, added black streaks, and changed the contrast and color. Scream Icon was still, however, “clearly identifiable.” Green Day asserted a fair use defense, and the Ninth Circuit agreed, affirming the district court’s grant of summary judgment for Green Day.

The court looked at the purpose and character of the use and determined that the work was transformative, even though no significant physical changes had been made to the original image. Here, the video image showed a “new expressive content or message.” 59  The plaintiff acknowledged that the video image “tainted” the work’s original message and made his work “synonymous” with lyrics and video he had not intended. The court added that any commercial aspects resulting from using the original work were incidental. The first factor thus weighed in Green Day’s favor.

The court also looked at the other fair use factors, finding that the work had already been widely disseminated, that Green Day’s use of the work was not excessive in light of its transformative purpose, and that the value of the work, in both existing and future markets, had not been harmed. Noting that the transformative use of the work and the absence of harm to the work’s value were the most important factors, the court concluded that Green Day’s use was fair use.

Similarly, a parody that used only as much of the lyrics and music of the original work as was necessary to make it recognizable constituted a fair use, even though the copied part was the heart of the original work. 60  The group 2 Live Crew had parodied Roy Orbison’s song “Oh, Pretty Woman.”

Fair use arguments are common in the academic environment. As mentioned earlier, a publisher successfully sued a Michigan copy shop that was in the business of preparing course readers for university professors. 61  The professors excerpted a variety of copyrighted works, which the copy shop then compiled and sold to students without the permission of the copyright owners. The U.S. Court of Appeals for the Sixth Circuit noted that the copy shop’s motivation was commercial profit, not education; the “transformative value” was slight, at best; the excerpts were substantial; and the market value of the original works was indeed harmed. As a result, the court found that the copy shop was liable for copyright infringement and enjoined it from further infringement.

First Sale Doctrine

Under the  first sale doctrine , codified in section 109(a) of the Copyright Act, a copyright owner has exhausted its statutory right to control distribution of a copyrighted item once the owner sells the item and thereby puts it in the stream of commerce. As a result, once a copyright owner sells a copyrighted product, the owner cannot prevent its resale or transfer to others. The U.S. Supreme Court has held that the first sale doctrine applies even when the product is sold outside the United States with the expectation that it will not be resold in the United States. 62  This decision dealt a blow to U.S. companies trying to combat the gray market, in which products are sold outside the normal channel of distribution, often at a discounted price. 63

In the following case, the U.S. Supreme Court considered whether the first sale doctrine applied to copies of copyrighted textbooks that were lawfully manufactured overseas and then imported to the United States and resold.

CASE 11.3: A CASE IN POINT: SUMMARY

Kirtsaeng v. John Wiley & Sons, Inc.

Supreme Court of the United States

133 S. Ct. 1351 (2013).

FACTS

John Wiley & Sons, Inc. publishes textbooks in the United States and assigns to its subsidiary John Wiley & Sons (Asia) (Wiley Asia) the rights to publish, print, and sell its English-language textbooks abroad in specified countries. Each such book includes language indicating that the book is to be sold only in the specified countries and may not be exported out of these countries.

Supap Kirtsaeng moved from Thailand to the United States to study at Cornell University. While there, he had friends and family in Thailand buy copies of foreign edition English-language textbooks, which were sold more cheaply than in the United States, and send them to him. He then resold the books at a profit.

Wiley sued Kirtsaeng for copyright infringement, alleging that the unauthorized importation of the books and their later resale violated Wiley’s exclusive right to distribute under copyright law and constituted a violation of the import prohibition. Kirtsaeng claimed that he had properly obtained the books and that the first sale doctrine allowed him to resell them in the United States.

ISSUE PRESENTED

Does the first sale doctrine of the Copyright Act apply to copies of copyrighted books lawfully produced abroad and then imported into the United States by a third party without the permission of the copyright owner?

SUMMARY OF OPINION

The U.S. Supreme Court cited 17 U.S.C. § 109(a), which provides: “Notwithstanding the provisions of section 106(3), the owner of a particular copy … lawfully made under this title, … is entitled, without the authority of the copyright owner, to sell … the possession of that copy.” (Emphasis added.) Kirtsaeng asserted that the words “lawfully made under this title” meant “in accordance with” or “in compliance with” the Copyright Act and did not impose a geographical limitation. Under his reading of the statute, the first sale doctrine gave him the right to resell the books as long as they had been manufactured with the permission of the copyright owner.

The Court agreed, finding that the wording of the statute itself favored a nongeographical interpretation, because it made no geographical references. The Court then closely examined each word in the phrase, noting various difficulties and inconsistencies in taking a geographical approach. It concluded: “In sum, we believe that geographical interpretations create more linguistic problems than they resolve. And considerations of simplicity and coherence tip the purely linguistic balance in Kirtsaeng’s, nongeographical, favor.”

Moreover, taking a geographical approach would result in “surprising consequences” that Congress was “unlikely” to have intended. For example, if one interpreted section 109(c) geographically, it would mean that someone buying a copyrighted piece of art in a foreign country could not display it in the United States without the copyright owner’s further authorization. The Court noted that the common law first sale doctrine, which had no geographic limitation, was predicated on the principle that competition, including the freedom to resell goods, is advantageous to the consumer. The doctrine also relieved courts of having to “enforce restrictions upon difficult-to-trace, readily movable goods” and protected booksellers, libraries, museums, and retailers. For example, how would a library, which circulates millions of books published abroad, feasibly and cost- effectively obtain the permission of the copyright owners to distribute such books? What would happen if a U.S. tourist bought copies of a foreign book abroad and then tried to distribute them to her friends at home? A car that included copyrightable software, made abroad with the American copyright holders’ authorizations, and later sold (with permission) in the United States, could not be resold under a geographic interpretation “without the permission of the holder of each copyright on each piece of copyrighted automobile software. Yet there is no reason to believe that foreign auto manufacturers regularly obtain this kind of permission from their software component suppliers. …” The Court also noted that the United States imported more than $2.3 trillion of goods in 2011. If fair use were geographically limited, then “many, if not all” of the sellers could face the “disruptive impact” of potential infringement suits.

Wiley characterized these “problems and threats [as] purely theoretical” and “unlikely to reflect reality,” but the Court disagreed and concluded: “The upshot is that copyright- related consequences along with the language, context, and interpretive canons argue strongly against a geographical interpretation of § 109(a).”

RESULT

Because the defendant was entitled to rely on the first sale defense, he did not infringe Wiley’s copyrights.

DISSENTING OPINION

In a lengthy dissenting opinion by Justice Ginsburg, in which Justice Kennedy joined and Justice Scalia joined in part, the dissenting justices asserted that (1) Congress did intend to provide copyright owners with authorization to segment international markets by prohibiting the importation of foreign-made copies into the United States via section 602(a)(1) and that (2) Congress did not want the exclusive distribution right of section 106(3) to be “boundless.”

CRITICAL THINKING QUESTIONS

1.

What does this ruling mean, practically, to the average student buying textbooks? How will it affect the marketing of digital textbooks?

2.

How does this decision affect the marketing strategy and the mission of a copyright owner that specifically publishes, prints, and sells books overseas at reduced prices for students in poorer nations? After this decision, is there any way a copyright owner can prevent another party from buying such books, importing them to the United States, and reselling them at a profit?

Copyright Misuse

Modeled after the patent misuse doctrine,  copyright misuse  exists when a copyright owner leverages his or her statutory copyright to gain control over areas outside the copyright’s intended scope. For example, if a copyright owner licenses its software on the condition that the licensee may not use its competitors’ products or develop complementary products, that action will constitute copyright misuse. If a court finds misuse, the copyright owner cannot enforce its copyright against infringers until the misuse has been purged.

11-2h: Remedies for Copyright Infringement

Under the Copyright Act, a plaintiff can recover both actual damages and the defendant’s profits attributable to the infringements, to the extent that these are not duplicative. Alternatively, if the copyright is registered within three months of first publication or prior to the alleged infringement, a plaintiff may elect to recover statutory damages (which are capped at $30,000 for infringement and $150,000 for willful infringement), as well as attorneys’ fees under certain circumstances. Injunctive relief, the seizure of infringing copies, and exclusion of infringing copies from import into the United States may also be available.

Although the Copyright Act does not provide a statutory right to a jury trial, a defendant in a copyright-infringement suit in which the copyright owner seeks statutory damages is entitled to a jury trial under the Seventh Amendment to the U.S. Constitution. 64  The defendant also has the right to have the jury determine the amount of statutory damages.

The Digital Millennium Copyright Act (DMCA) applies to copyright violations involving digital media. In a civil action brought under DMCA, a court may impose injunctions and award damages, costs, and attorneys’ fees. It may also order impounding, modification, or destruction of any devices or products involved in the violation. The court may punish repeat offenders by awarding treble damages.

Criminal Liability

Willful infringers may face criminal penalties as well as civil remedies. The No Electronic Theft Act punishes with fines and prison time those who copy compact discs, videocassettes, or software worth more than $1,000 without permission of the copyright holder. The law requires no proof that the defendant commercially gained from the infringement. 65  It is also a crime to fraudulently use or remove a copyright notice or to make false representations in connection with a copyright application.

 ECONOMIC PERSPECTIVE: Intellectual Property Rights and Incentives to Innovate

A basic tenet of neoclassical economic theory is that productive efficiency and allocative efficiency will be achieved through free competition by private parties interested in maximizing their own welfare. Productive efficiency exists when competition among individual producers drives all but the lowest-cost producers of goods or services out of the market. Allocative efficiency exists when scarce societal resources are allocated to the production of various goods and services up to the point at which the cost of producing each good or service equals the benefit society reaps from its use.

In general, U.S. economic policy fosters free markets in which individuals may compete. For example, the antitrust laws, discussed in  Chapter 16 , are designed to protect competition by prohibiting any individual entity or group of entities from monopolizing an industry.

The area of intellectual property is a seeming exception to the general free-market orientation of the U.S. economy. Patent laws provide inventors with the opportunity to gain a legally enforceable monopoly to prevent the manufacture, use, and sale of their inventions for a limited time.

The economic rationale for granting monopolies to inventors is based on the high value of innovation to society and the need to provide incentives to inventors. Without legal rules protecting the ownership of inventions, once a valuable new product or cost-saving technique is introduced, others could immediately copy and profit from it, even though they bore none of the cost of its creation. Technological advances are crucial to a growing economy. Development of new techniques increases productive efficiency, thereby expanding the quantity of goods and services that can be produced with a given level of societal resources. Development of new products meeting previously unfulfilled needs increases the welfare of society as a whole. Such innovation has taken on increasing importance for the United States in the international context. Although countries with lower-cost labor have a competitive advantage in the manufacture of goods with established production techniques, the United States’ competitive advantage lies in its ability to develop new technologies.

Individuals will produce innovations only up to the point at which the rewards they reap equal their costs. To ensure that innovations are produced fully up to the point at which the social cost equals the social benefit (that is, to ensure allocative efficiency), the law must guarantee to innovators a significant part of the benefit from their innovations. The U.S. solution to this problem is to provide inventors whose inventions meet the requirements for a patent with a limited monopoly to exclude others from the manufacture, use, and sale of those inventions. This system ensures that inventors can capture the full economic benefit of their inventions during the period of their monopoly and that the innovations will be freely available to others thereafter. The stringent requirements for patents are designed to prevent unnecessary restrictions on free competition. In fact, overly broad patents can actually hamper innovation.

An important secondary objective is to give the scientific community access to state-of-the-art technology. Without a legal monopoly, innovators would keep their advances secret to prevent others from copying them. Such secrecy would result in waste of scarce societal resources, as other researchers would struggle to discover what is already known.

The World Bank has identified property rights, including intellectual property rights, as one of the keys to energizing countries in transition to market-based economies. Many developing and transitioning economies have already adopted intellectual property laws similar to those of the developed nations. As the World Bank acknowledges, these laws are difficult to enforce, but enforcement will encourage the development of intellectual property and the foreign investment needed to spur growth.

The DMCA also imposes criminal sanctions of up to $500,000 in fines and up to five years’ imprisonment for violators a court finds to be willful or motivated by financial gain. Repeat offenders face increased fines (up to $1 million) and up to ten years in prison.

11-2i: Ongoing Reviews of Copyright Law

Copyright law was last reviewed on a large-scale basis in the United States in 2010, when a group of individuals well versed in copyright law released “The Copyright Principles Project: Directions for Reform.” 66  The 2010 report looked at a variety of ways in which copyright law could be reformed and updated, including giving noncommercial users of copyrighted works more insulation from liability, making the copyright registration system more efficient so that works can be more easily reused with authorization, creating safe harbors to protect online service providers from large damages claims if they voluntarily take reasonable measures to limit file sharing, awarding statutory damages more consistently, reviewing the procedures for issuing injunctions, and limiting liability for orphan works—that is, works that are no longer commercially available. 67

In 2013, Bob Goodlatte, chair of the House Judiciary Committee, announced a comprehensive Congressional review of U.S. copyright law in light of the “exponential rate” at which technology has developed. 68  In addition to addressing many of the issues considered in the 2010 report, this review was expected to focus on defining the limits of a copyright owner’s exclusive rights; examining the continuing effectiveness of the 1998 DCMA; reviewing the first sale doctrine for gray market goods in light of the John Wiley & Sons, Inc. decision; and considering whether a separate court or other body should be established to handle certain types of copyright disputes. 69  Representatives from the information technology sector—the group whose inventions have “transformed” the market for copyrighted works over the past twenty years—have “repeatedly argued that overly-broad copyright law has stifled innovation.” 70  In contrast, content providers, such as book publishers and music companies, tend to favor stronger copyright protections.

11-3: REGISTERED MASK WORKS

The Semiconductor Chip Protection Act of 1984  71  created a highly specialized form of intellectual property, the  registered mask work . A semiconductor mask is a detailed transparency representing the topological layout of a semiconductor chip. The act gives the owner copyright-like exclusive rights in the registered mask work for a period of ten years and prohibits its copying or use by others, although reverse engineering is specifically allowed. Remedies include injunctive relief, damages, and impoundment of the infringing mask and chips.

11-4: TRADEMARKS

Trademarks —words or symbols (such as brand names) that identify the source of goods or services—are also legally protected. Because trademarks tend to embody or represent the goodwill of the business, they are not legally transferable without that goodwill. Trademarks are protected for an indefinite time and can be valuable marketing and business assets. The packaging or dressing of a product may also be protected under the trademark laws as trade dress, discussed later.

Most people associate a particular trademark with the product to which it is applied, without considering how this association has been generated. For example, when consumers purchase Apple computers or smartphones, they usually do not think about how the word for a type of fruit has become representative of that particular brand of personal computer or smartphone. Trademark law concerns itself with just such questions: how trademarks are created, how trademark rights arise, how such rights are preserved, and why certain marks are given greater protection than others. 72  In 2013, the PTO registered 259,681 trademarks. 73

11-4a: Ownership and Scope of Trademark Protection

The federal trademark act, known as the Lanham Act, 74  and the Trademark Law Revision Act of 1988 75  define a trademark as “any word, name, symbol, or device or any combination thereof—(1) used by a person, or (2) which a person has a bona fide intention to use in commerce and applies to register on the principal register established by this chapter, to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown.” 76  A trademark: (1) provides an identification symbol for a particular merchant’s goods, (2) indicates that the goods to which the trademark has been applied are from a single source, (3) guarantees that all goods to which the trademark has been applied are of a constant quality, and (4) advertises the goods.

A trademark tells a consumer where a product comes from and who is responsible for its creation. A trademark also implies that all goods sold under the mark are consistent in quality. Consumers purchasing french fries at a McDonald’s restaurant, for instance, can reasonably expect them to taste as good as those sold at any other McDonald’s. The trademark does not necessarily reveal the product’s manufacturer. For example, the trademark Bose identifies a brand of speaker. We may not know whether the manufacturer is a company called Bose, but we know that all speakers bearing the Bose mark are sponsored by a single company (or its licensees).

Trademark rights are largely determined by the perceptions and associations in the minds of the buying public, so maintaining a strong trademark is essential to preserving the success of a business. The top ten global brand names for 2013 are listed in  Exhibit 11.2 .

Although most trademarks are verbal or graphic, trademark law also protects distinctive shapes, odors, packaging, and sounds. Apple, Inc. trademarked the three-dimensional shape of its iPod. 77  Both the unique shape of the Coca-Cola bottle and the sound of NBC’s three chimes have trademark protection. Color may also qualify as a trademark. The U.S. Supreme Court has articulated two principal criteria for determining whether trademark protection is available for a color: (1) the color must have attained secondary meaning so that it identifies and distinguishes a particular brand, and (2) the color must not serve a useful function, because granting trademark protection in this circumstance would amount to the grant of monopoly control. 78  A number can also be trademarked. For example, the number “81” has been registered as a trademark, as well as a service mark, by the Hells Angels Motorcycle Corporation, which has eighteen trademark registrations in the United States. 79  (“H” and “A” are the eighth and first letters of the alphabet, resulting in the “81.”  80 )

11-4b: Other Marks

Trademarks should not be confused with other forms of legally protected identifying marks, such as service marks, trade names, and certification marks.

Service Marks

A trademark is used in connection with a tangible product; a  service mark , such as Roto Rooter, is used in connection with services. The law concerning service marks is almost identical to that of trademarks.

Trade Names

Whereas a trademark is used to identify and distinguish products, a  trade name  identifies a company, partnership, or business. Trade names cannot be registered under federal law unless they are also used as trademarks or service marks. The use of a trade name—evidenced by the filing of articles of incorporation or a fictitious business name statement—gives the company using the name certain common law rights, however.

EXHIBIT 11.2: Ten Most Valuable Global Brand Names in 2013

2013 rank	2013 brand Value (in millions)	percentage change (from prior year)
1. Apple	$98,316	+28%
2. Google	93,291	+34
3. Coca-Cola	79,213	+2
4. IBM	78,808	+4
5. Microsoft	59,546	+3
6. GE	46,947	+7
7. McDonald’s	41,992	+5
8. Samsung	39,610	+20
9. Intel	37,257	−5
10. Toyota	35,346	+17
SOURCE: Best Global Brands 2013, Interbrand, available at  http://www.interbrand.com/en/best-global-brands/2013/top-100-list-view.aspx .

Certification Marks

A  certification mark  placed on a product indicates that the product has met the certifier’s standards of safety or quality. An example is the “Good Housekeeping” seal of approval placed on certain consumer goods.

11-4c: The Varying Distinctiveness of Trademarks

As shown in  Exhibit 11.3 , different types of marks fall on a distinctiveness continuum. The same word can be fanciful or arbitrary, suggestive, descriptive, or generic, depending on the product on which it is used.

Fanciful and Arbitrary Marks

Fanciful or arbitrary marks are often called strong marks because they are immediately protectable.

A  fanciful mark  is a coined term that had no prior meaning until used as a trademark in connection with a particular product. Fanciful marks are usually made-up words, such as Kodak for camera products and Exxon for gasoline.

Arbitrary marks  are real words whose ordinary meaning has nothing to do with the trademarked product—for example, Camel for cigarettes and Shell for gasoline.

Suggestive Marks

A  suggestive mark  suggests something about the product without directly describing it. After seeing the mark, a consumer must use his or her imagination to determine the nature of the goods. For instance, Chicken of the Sea does not immediately create an association with tuna fish; it merely suggests some type of seafood.

Descriptive Marks

Descriptive marks  specify certain characteristics of the goods, such as size or color, proposed uses, the intended consumers of the goods, or the effect of using the goods. Laudatory terms, such as First Rate or Gold Medal, are also considered descriptive marks, as are geographic terms and personal names.

Descriptive marks are initially unprotectable, but they can become protectable if they acquire  secondary meaning —that is, a mental association by the buyer that links the mark with a single source of the product. Through secondary meaning, a mark obtains distinctiveness. Once this occurs, the mark is granted trademark protection.

Establishment of secondary meaning depends on a number of factors, such as the amount of advertising, the type of market, the number of sales, and consumer recognition and response. The testimony of random buyers or of product dealers may be required to prove that a mark has acquired secondary meaning. For example, the term “Holiday Inn” has acquired secondary meaning because the public associates that term with a particular provider of hotel services, and not with hotel services in general.

Geographic Terms

Geographic descriptive terms are usually considered nondistinctive unless a secondary meaning has been established. Geographic terms used in an arbitrary manner are distinctive, however—for example, Salem for cigarettes and North Pole for bananas.

Personal Names

Personal first names and surnames are not distinctive. But an arbitrary use of a historical name, such as Lincoln for a savings bank, does not require secondary meaning to be protectable.

EXHIBIT 11.3: The Varying Distinctiveness of Trademarks

The same word can be arbitrary, suggestive, descriptive, or generic, depending on the product on which it is used.

Generic Terms

Trademark law grants no protection to generic terms, such as “spoon” and “software,” because doing so would permit a producer to monopolize a term that all producers should be able to use equally. It would not make any sense to permit one manufacturer to obtain the exclusive right to use the word “computer,” for example, and thereby force all competitors to come up with a new word, rather than a brand name, for the same type of product. Generic terms are not protected even when they acquire secondary meaning.

Many terms that were once enforceable trademarks have become generic. For example, “escalator” was once the brand name of a moving staircase, and “cellophane” was a plastic wrap developed by DuPont. Due to misuse or negligence by the owners, these marks lost their connection with particular brands and became ordinary words. That is why Xerox Corporation engages in substantial advertising to explain that you don’t “Xerox” a document, you “copy” it on a Xerox copier.

For terms that describe products made by only one company, the problem of  genericity —the use of the product name as a generic name—is acute. Without competitive products, buyers may begin to think of the trademark as indicative of what the product is rather than where the product comes from. Manufacturers can try to avoid this problem by always using the trademark as an adjective in conjunction with a generic noun (for example, “a Kleenex tissue,” not “a Kleenex”). Once the buying public starts using the mark as a synonym for the product, rather than as a means of distinguishing its source, loss of the trademark may be imminent.

11-4d: Creating Rights in a Trademark

U.S. trademark owners initially obtain rights by using the mark in commerce or filing an “intent to use” application with the PTO. Following use in interstate commerce, owners may obtain additional rights by federal registration. State registration requires only intrastate use.

Trademark Searches

A company about to use a new trademark should first conduct a trademark search to determine whether use of the proposed mark will constitute an infringement. The time, money, and effort spent on promotion and advertising will be wasted if use of the mark is ultimately prohibited.

There are various ways to search a mark. The PTO’s records provide information on federally registered marks; the office of the secretary of state can usually provide relevant data for that state’s registered marks. Both state and federal registrations describe the mark and the goods it identifies, the owners of the mark, the date of registration, and the date on which the mark was first used. Most of this registration material has been computerized and can be accessed online.

Searching for unregistered common law marks is more difficult. Trade and telephone directories are often a good source of common law marks. Some searches can be done by anyone using the Internet. There are also professional trademark search firms that search databases for customers. Although there is always the risk that a new mark or a common law user may be untraceable, any search is better than no search. Searching is evidence of a good faith effort to determine whether any other entity has preexisting rights in a mark.

Common Law Rights in a Trademark

Certain common law rights arise from the actual use of a trademark in commerce. A trademark is used in commerce if it is physically attached to goods that are then sold or distributed. Each subsequent use of a trademark creates greater rights, because increased sales and advertising generate greater customer awareness of the mark as representing the product. Use is also necessary to establish secondary meaning for descriptive marks.

In the United States, the first person to sell the goods under a mark usually becomes the owner and senior user of the mark. The mark is protected immediately, provided that it was adopted and used in good faith and without actual or constructive knowledge of any superior rights in the mark.

There is an exception to the rule of first use. If a subsequent, or junior, user establishes a strong consumer identification with its mark in a separate geographic area, the junior user may be granted superior rights for that area. By failing to expand its business to other parts of the country, the senior user takes the risk that a junior user may be permitted to use the same or a confusingly similar mark in a distant area. The junior user’s use must be in good faith; that is, the junior user must take reasonable steps to determine whether any preexisting mark is confusingly similar to the one it plans to use.

This geographic exception is inapplicable, however, if the senior user has applied for or obtained federal registration (discussed in the next section). Once the senior user has filed an application or has obtained federal registration, it is permitted to claim nationwide constructive notice of the mark. This precludes any use of the mark—even a good faith use—by a junior user. Even with an application pending or registration, however, the senior user may not take any action against the junior user in a geographically removed area until the senior user is likely to expand into that area.

Federal Registration

Although not a requirement for obtaining U.S. rights in a mark, registration on the federal Principal Register provides (1) constructive notice of a claim of ownership in all fifty states, which makes it easier to enjoin subsequent users; (2) prima facie evidence of ownership; (3) the “incontestable” right (subject to certain defenses) to use the mark, obtainable after five years of continuous use following registration; and (4) the right to prevent importation into the United States of articles bearing an infringing mark.

Trademarks are grouped into different classes, covering more than forty different industries and goods. When a trademark is registered, the holder of the mark must specify the particular class to which the mark belongs. Although a single trademark may be registered in more than one classification, it is also possible for the same mark to be registered by different holders for different types of products.

Certain marks that do not qualify for registration on the Principal Register may be registered on the Supplemental Register. Such registration does not afford the owner any of the above benefits, however, and should be pursued only on the advice of counsel.

The PTO handles federal registration of trademarks. An applicant may file either an “actual use” application or an “intent to use” application. For the latter, the applicant must state a bona fide intent to use the mark and must then commence use and provide the PTO with a statement of use within six months of receiving notice that its application is entitled to registration. The six-month period can be extended for up to thirty months, giving applicants a total of three years in which to file the statement of use. Registration is postponed until the applicant actually uses the mark. The applicant has priority rights, however, against any party who did not use the same mark or file an application for it before the filing date of the intent to use application.

State Registration

Although state registration does not provide as much protection as federal registration, it does offer certain benefits. In most states, registration can be obtained within a few weeks of filing and is proof of ownership of the mark. For marks that are not eligible for federal registration, state registration usually provides at least some protection as long as there has been sufficient use of the mark.

State registration cannot preempt or narrow the rights granted by federal registration. For example, a junior user with a state registration predating a senior user’s federal registration gains exclusive rights in the mark only in the geographic area of continuous usage preceding the federal registration, and not the entire state. A state trademark law that purported to reserve the entire state for the junior user would be preempted by the Lanham Act.

11-4e: Loss of Trademark Rights

Failure to use one’s mark—known as  abandonment — may result in the loss of rights. A federally registered mark that has been abandoned can be used by a junior user. Trademark searches can reveal whether a previously registered trademark has lost its enforceability. There are two types of abandonment: actual and constructive.

Actual Abandonment

Actual abandonment occurs when an owner discontinues use of the mark with the intent not to resume use. Mere nonuse for a limited period does not result in loss of protection. After two years of nonuse, however, there is a presumption of abandonment. Because protection for federally registered marks is nationwide, the abandonment must be nationwide for loss of rights to result.

Constructive Abandonment

Constructive abandonment results when the owner does something, or fails to do something, that causes the mark to lose its distinctiveness. Constructive abandonment can result when a mark lapses into genericism through improper use. It can also result from an owner’s failure to adequately control companies licensed to use its mark. Thus, a licensor should carefully exercise quality controls and approval procedures for its licensees’ products in order to ensure a consistent quality level.

11-4f: Trademark Infringement

To establish direct trademark infringement, a trademark owner must prove (1) the validity of the mark, (2) priority of usage of the mark, and (3) a likelihood of confusion in the minds of the purchasers of the products in question. A trademark owner may also allege vicarious and/or contributory infringement.

Proving validity and priority of usage is fairly straightforward if the mark is registered. (A federally registered mark is prima facie valid.) If the mark is not registered, such proof is a factual matter. Establishing likelihood of confusion involves subjectively weighing a variety of factors. These may include (l) the similarity of the two marks with respect to appearance, sound, connotation, and commercial impression; (2) the similarity of the goods; (3) the similarity of the channels of trade in which the goods are sold; (4) the strength of the marks, as evidenced by the amount of sales and advertising, and the length of use; (5) the use of similar marks by third parties with respect to related goods and services; (6) the length of time of concurrent use without actual confusion; and (7) the extent and nature of any actual confusion of the two marks in the marketplace. 81

The Federal Trademark Dilution Act of 1995 82  allows the owner of a famous mark to sue for injunctive relief from a party whose commercial use of a mark “begins after the mark has become famous and causes dilution of the distinctive quality of the mark.” Dilution can result from “blurring” or “tarnishment.”  Blurring  occurs when the nonfamous mark reduces the strong association between the owner of the famous mark and its products.  Tarnishment  occurs when the famous mark is used in connection with a particular category of goods or goods of inferior quality, resulting in damage to the positive image associated with the products bearing the famous mark. For example, use of  candyland.com  for a child pornography website tarnished the value of Hasbro’s popular trademarked “Candy Land” children’s game. 83

Damages are available only if the defendant willfully intended to trade on the reputation of the famous mark’s owner or to cause dilution of the famous mark; in this event, the trademark owner is entitled to recover its  damages and costs, as well as the dilutor’s profits. Unlike in an action for trademark infringement, relief is available even if the other mark does not cause consumer confusion as to the source of the product.

INTERNATIONAL SNAPSHOT

China, which follows a first-to-file approach, amended its trademark law as of 2014 to require trademark applicants to abide by the principles of “honesty” and “good faith.” Only “interested parties” may oppose the registration of a trademark, which should reduce cases where opposition proceedings are filed for “strategic purposes.” Finally, the new law provides for increased statutory damages of up to approximately $500,000.

SOURCE: The information in this section was derived from Horace Lam, China Amends Trademark Law: Practical Implications for Brand Owners, DLA PIPER (Dec. 5, 2013), available at  http://www.dlapiper.com/china-amends-trademark-law-practical-implications .

11-4g: Defenses to Trademark Infringement

Possible defenses in trademark-infringement cases include the first sale and fair use doctrines, nominative use, genericity, and the First Amendment.

First Sale Doctrine

The  first sale doctrine  provides that a trademark owner cannot act against resellers of products after the first sale of the product. The first sale doctrine attempts to strike a balance among (1) trademark law’s goal of allowing producers to reap the benefits of their reputation, (2) consumers’ desire to receive what they bargain for, and (3) the public interest in maintaining competitive markets by limiting a producer’s control of resale.

The first sale doctrine applies only when the seller is legally selling genuine trademarked goods. In 2003, Taylor Made Golf, a manufacturer of trademarked golf clubs, successfully sued MJT Consulting for selling Taylor Made clubs without authorization. 84  MJT had taken defective club heads that had been rejected and discarded by Taylor Made, affixed alternative shafts and grips, and then sold the “new” clubs under the Taylor Made trademark. MJT’s defense was that it had bought the club heads from a middleman (that represented that it had bought the club heads from another middleman) and that Taylor Made’s infringement claim was therefore invalid under the first sale doctrine. Pointing to factual evidence that Taylor Made had originally manufactured the defective club heads but did not intend to sell them to anyone, the court rejected MJT’s first sale defense.

Fair Use

The defense of fair use is available when a trademark user truthfully uses a competitor’s mark to identify the competitor’s product for the user’s own purposes. To establish fair use, a defendant must show that it used the mark (1) other than as a mark, (2) in a descriptive sense, and (3) in good faith (the user must not have intended to capitalize on the mark’s goodwill or reputation).

Nominative Use

A defendant is not liable for trademark infringement if its use is nominative use—that is, if it uses the mark to reference a competitor’s product, even if the defendant’s ultimate goal is to describe its own product. 85  For example, the manufacturer of a generic form of Tylenol is permitted to label its product with the words “Compare with the active ingredients in Tylenol.” The nominative fair use defense requires the defendant to prove that (1) the use of the plaintiff’s mark was necessary to describe both the plaintiff’s product or service and the defendant’s product or service, (2) the defendant used only as much of the plaintiff’s mark as reasonably necessary to identify the plaintiff’s product or service, and (3) the defendant did nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the holder of the trademark. 86

Genericity

As discussed earlier, genericity can be a defense when a trademark owner brings suit over a trademark that is arguably a generic term. Trademark owners must take appropriate measures to ensure that their marks are not, and do not become, generic.

First Amendment

Defendants may claim a First Amendment defense when their use of another’s trademark is part of their communicative or expressive message and thus is protected as free speech. For example, courts have upheld consumers’ rights to criticize a corporation or service provider through websites that use the corporation’s trademarked name. Courts have protected these so-called gripe sites as protected speech, even though the corporations often allege that the sites confuse other consumers, hurt their business, and dilute their trademarks. 87

11-4h: Remedies for Trademark Infringement

One of the most common remedies for trademark infringement is injunctive relief. Courts may also award damages, measured either by the owner’s lost sales and profits due to the infringement, or by economic injury to the owner’s goodwill and reputation. To the extent that they are not duplicative, courts may award the trademark owner the profits that the infringer earned through its wrongful use of the mark. In cases of flagrant infringement, a court may take the unusual step of awarding attorneys’ fees to the trademark owner. Finally, in the particular case of trafficking in goods or services that knowingly use a  counterfeit mark , the Lanham Act imposes substantial fines and/or imprisonment. 88

11-5: DOMAIN NAMES AND CYBERSQUATTING

The Internet Corporation for Assigned Names and Numbers (ICANN) is the regulatory body that oversees the Internet’s address system. Internet addresses are called  domain names . The top-level domain is the domain name’s suffix, which characterizes the type of organization. For example, “.edu” is used by educational organizations, and “.com” is used by commercial organizations. Country codes, such as “.fr” for France, serve as top-level domain names. The secondary domain identifies the specific organization. For example, in the domain name “ cnn.com ,” the “cnn” identifies Cable News Network. Companies prefer domain names that easily identify their web locations.

Disputes have arisen when entities have registered domain names that are confusingly similar to another business’s trademark. Unlike in the trademark system, where more than one company can register the same mark for noncompetitive products or services, only one entity can own the right to each domain name. Domain names are registered on a first-come, first-served basis. Because the registrar does not check whether use of the name by the person seeking registration would violate someone else’s trademark, the practice of  cybersquatting  developed: An individual would register famous trademarks as domain names and then offer to sell them to the trademark owners for a “ransom.” 89

To combat this practice, ICANN developed a worldwide, fast-track, online domain name dispute resolution policy (UDRP). Under the UDRP, a trademark owner who proves cybersquatting can obtain an order from an arbitration panel canceling the cybersquatter’s domain name or transferring it to the trademark owner. To prove cybersquatting under the UDRP, the complainant must prove that (1) the disputed domain name is identical or misleadingly similar to a trademark to which the complainant has rights, (2) the respondent has no legitimate rights in the domain name, and (3) the domain name is being held and used in bad faith. A successful complainant is not entitled to money damages under the UDRP.

The Anticybersquatting Consumer Protection Act of 1999 (ACPA) 90  created a separate, federal remedy, applicable only to domestic name registrations. Under the ACPA, a complainant must prove that (1) the defendant has a bad faith intent to profit from a mark, including a name of the defendant that is protected as a mark; and (2) registers, traffics in, or uses a domain name that (a) in the case of a mark that is distinctive at the time of registration of the domain name, is identical or confusingly similar to that mark; (b) in the case of a famous mark that is famous at the time of registration of the domain name, is identical or confusingly similar to or dilutive of that mark; or (c) is a trademark, word, or name associated with the Red Cross or the United States Olympic Committee (which are protected under separate statutory sections). The ACPA’s definition of cybersquatting is broader than ICANN’s definition in that it makes bad faith alone actionable, regardless of use. In addition to authorizing a court to order the forfeiture or cancellation of a domain name or the transfer of the domain name to the owner of the mark, the ACPA also authorizes the award of actual or statutory damages of not less than $1,000 and not more than $100,000 per domain name.

11-6: TRADE DRESS

In addition to protecting registered marks, the Lanham Act also protects  trade dress —that is, the packaging or dressing of a product. Trade dress includes all elements making up the total visual image by which a product is presented to customers, as defined by its overall composition and design.

The elements of trade dress infringement parallel those of trademark infringement, with the likelihood of consumer confusion being the core issue. To determine whether there is a likelihood of confusion in a trade dress case, courts apply a ten-factor test: (1) degree of similarity between the plaintiff’s trade dress and the allegedly infringing trade dress; (2) strength of the plaintiff’s trade dress; (3) price of the goods and other factors indicative of the care and attention expected of consumers when making a purchase; (4) length of time the defendant has used the trade dress without evidence of actual confusion arising; (5) intent of the defendant in adopting its trade dress; (6) evidence of actual confusion; (7) whether the goods, although not competing, are marketed through the same channels of trade and advertised through the same media; (8) extent to which the targets of the parties’ sales efforts are the same; (9) relationship of the goods in the minds of consumers because of the similarity of function; and (10) other facts suggesting that the consuming public might expect the plaintiff to manufacture a product in the defendant’s market, or that the plaintiff is likely to expand into that market.

In one case, Best Cellars successfully sued Grape Finds for copying the style and arrangement of its retail wine shops. 91  Best Cellars’ business model was predicated on demystifying wine purchases for unsophisticated shoppers by using a “wall of wine” racking system and other distinctive visual displays. Grape Finds started using the same system. After finding that Best Cellars’ store arrangements were arbitrary and therefore protectable, the court granted a preliminary injunction to prevent Grape Finds from using the same system in its stores.

Trade dress protection may not be claimed for functional product features. 92  In general, a product feature is functional if it is essential to the use or purpose of the article, or if it affects the cost or quality of the article.

11-7: TRADE SECRETS

A  trade secret  is information that gives a business an advantage over its competitors that do not know the information. The classic example of a trade secret is the formula for Coca-Cola. Trade secrets are protected for an indefinite time.

Trade secret law is primarily the province of the states. Until 1996, courts developed the law of trade secrets on a case-by-case basis, applying the relevant state’s common law principles. Today, courts also consider the federal Economic Espionage Act of 1996, 93  which intersects with these traditional approaches.

11-7a: Common Law

The most widely accepted common law definition of trade secret is contained in section 757, comment b, of the Restatement (First) of Torts (1939), which provides:

A trade secret may consist of any formula, pattern, device, or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.

Section 39 of the Restatement (Third) of Unfair Competition (1995) defines trade secret as “any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.”

The courts have developed a number of factors to determine whether specific information qualifies as a trade secret, including (1) the extent to which the information is known outside the business, (2) the extent to which measures are taken to protect the information, (3) the value of the information, (4) the amount of money or time spent to develop the information, and (5) the ease of duplicating the information.

Nevertheless, a certain amount of guesswork is still required to determine whether a particular type of information qualifies as a trade secret under the common law. Faced with only slightly different factual settings, the courts have classified identical types of information differently.

11-7b: The Uniform Trade Secrets Act

In 1979, the National Conference of Commissioners on Uniform State Laws (NCCUSL) promulgated the Uniform Trade Secrets Act (UTSA) in an attempt to provide a coherent framework for trade secret protection. The UTSA expanded the common law definition by adding the terms “method,” “program,” and “technique” to the Restatement of Unfair Competition’s list of types of protected information. The intention was to specifically cover  know-how , which includes technical knowledge, methods, and experience. (In contrast,  show-how  is nonsecret information used to teach someone how to make or do something; it is generally not protectable.) In addition, the UTSA broadened the common law definition by deleting the requirement that the secret be continuously used in a business. Accordingly, section 1 of the UTSA defines a trade secret as:

Information, including a formula, pattern, compilation, program, device, method, technique, or process, that (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Although the common law does not protect information unless it is in use, the UTSA definition is broad enough to include (1) information that has potential value from being secret, (2) information regarding one-time events, and (3) negative information, such as test results showing what will not work for a particular process or product.

The most significant difference between the UTSA and the common law definitions is in the overall approach to determining whether information is protectable as a trade secret. As discussed above, at common law a fairly objective multifactor test was developed. Although many courts adopted a reasonableness standard when interpreting the individual factors of the test, the focus was on objectivity. The UTSA uses a more flexible test, which requires that (1) reasonable steps be taken to preserve information as a trade secret and (2) the owner derive independent economic value from secrecy. Although the “independent economic value” factor is subjective, a number of courts now use it as part of their trade secret test.

Adopted, at least in part, in forty-seven states, the UTSA has only partially fulfilled its goal of standardizing trade secret law. States have tended to enact only those parts of the UTSA that embody the existing common law of the particular state. Consequently, in states that have adopted the UTSA, the courts rely on a combination of the common law and the UTSA. Although the UTSA seems to have fallen short of its goal of establishing consistent protection for trade secrets, it may provide broader protection to owners of trade secrets in states that have adopted it. Its definition of the term trade secret is broader than the common law definition, so the burden of proof on the owner is reduced. In addition, the UTSA provides more effective remedies.

11-7c: Criminal Liability under the Economic Espionage Act

The Federal Economic Espionage Act of 1996 94  imposes criminal liability (including fines and prison sentences) on any person who intentionally or knowingly steals a trade secret or knowingly receives or purchases a wrongfully obtained trade secret. The act’s definition of trade secret is substantially similar to the definition in the Uniform Trade Secrets Act.

Although the Economic Espionage Act was prompted by a desire to remedy perceived problems created by foreign thefts of trade secrets from U.S. businesses, it applies to any trade secret related to or included in products placed in interstate commerce. Individuals who, without authorization, appropriate trade secrets used or intended to be used in interstate or foreign commerce can be fined up to $250,000 and imprisoned for up to ten years; organizations committing this offense can be fined up to $5 million. Individuals who knowingly commit economic espionage, the unauthorized appropriation of trade secrets with the intent to benefit foreign instrumentalities (entities substantially controlled or owned by foreign governments), can be fined up to $5 million and imprisoned up to fifteen years; organizations that commit economic espionage can be fined not more than the greater of $10 million or three times the value of the stolen trade secret to the organization.

The act has extraterritorial application: it applies to any violation outside the United States by a U.S. citizen, a resident alien, or an organization organized in the United States. It also applies to violations outside the United States if any act in furtherance of the offense was committed in the United States.

The government has moved swiftly to add violations of the Economic Espionage Act to its arsenal of potential actions against white-collar criminals. A disgruntled former employee of Replacement Aircraft Parts who offered to sell secret manufacturing details to competitors was sentenced to thirty months in prison after pleading guilty to criminal violation of the Economic Espionage Act. 95

11-7d: Creating Rights in a Trade Secret

In contrast to the formal process required for patent and copyright protection, no lengthy application and filing procedures are needed for trade secret protection. No review or approval by a governmental agency is required. To create and protect a trade secret, one need only develop and maintain a trade secret protection program. When the information being protected has a short shelf life and is not readily discernible from the product or service, trade secret protection may be a more practical solution than copyright or patent protection.

Trade secrets are immediately protectable and continue to be protectable as long as the information remains confidential and is not developed independently by someone else. Material that would not qualify for patent or copyright protection is often protectable as a trade secret. A trade secret need not be as unique as a patentable invention or as original as a copyrightable work. It only needs to provide a competitive advantage. It may be merely an idea that has been kept secret, such as a way to organize common machines in an efficient manner, a marketing plan, or a formula for mixing the ingredients of a product. Trade secrets can also consist of a compilation of information, even though each component part of the compilation is generally known.

In addition, obtaining patent and copyright protection usually requires the disclosure of valuable information. There is always a risk that after the sensitive information has been revealed, the reviewing agency will not grant the protection. To avoid this risk, trade secret protection may be the safest course of action.

There are two main disadvantages to using trade secret protection, however. First, maintaining a full-fledged protection program can be expensive because confidentiality procedures must be continuously and rigidly followed to preserve trade secret status. Second, trade secret protection provides no protection against reverse engineering or independent discovery. As a result, the uncertainty of protection may limit the productive uses of the trade secret.

11-7e: Protecting a Trade Secret

Misappropriation of trade secrets most commonly occurs as a result of inadvertent or employee disclosures. To properly protect trade secret information, the owner must develop a program to preserve its confidentiality. In almost every jurisdiction, the test of a trade secret program’s adequacy may be reduced to the question of whether the owner has taken reasonable precautions to preserve the confidentiality of its trade secrets. A trade secret program should cover four areas: (1) notification, (2) identification, (3) security, and (4) exit interviews.

IN BRIEF: Advantages and Disadvantages of Different Types of Intellectual Property Protection

	Patent	Copyright	Trademark	Trade Secret
Benefits	Very strong protection; provides exclusive right to make, use, and sell an invention	Prevents copying of a wide array of artistic and literary expressions, including soft ware; very inexpensive	Protects corporate image and identity by protecting marks that customers use to identify a business; prevents others from using confusingly similar identifying marks	Very broad protection for sensitive, competitive information; very inexpensive
Duration	20 years from date of filing the utility patent application	Life of author plus 70_years; for works made for hire, 95 years from year of first publication or 120 years from year of creation, whichever is shorter	Indefinitely, as long as the mark is not abandoned and steps are taken to police its use	For as long as the information remains valuable and is kept confidential
Weaknesses	High standards of patentability; often expensive and time-consuming to pursue (especially when overseas patents are needed); must disclose invention to the public	Protects only the particular way an idea is expressed, not the idea itself; hard to detect copying in digital age	Can be lost or weakened if not appropriately used and enforced; can be costly if multiple overseas registrations are needed	No protection from accidental disclosure, independent creation by a competitor, or disclosure by someone without a duty to maintain confidentiality
Required Steps	Detailed filing with U.S. Patent and Trademark Office, which performs a search for prior art and can impose hefty fees	None required, though notice and registration can strengthen rights	Only need to use mark in commerce, though filing with U.S. Patent and Trademark Office is usually desirable to gain stronger protections	Take reasonable steps to protect—generally, a trade secret protection program
U.S. Rights Valid Internationally?	No. Separate patent examinations and filings are required in each country; however, a single international patent application can be filed with the national patent office or the World International Property Organization, and a single filing in the European Patent Office can cover a number of European countries.	Generally, yes	No. Separate filings are required in foreign jurisdictions, and a mark available in the United States may not be available overseas. A single Community Trade Mark filing can cover a number of European countries, however.	No. Trade secret laws vary significantly by country, and some countries have no trade secret laws.

SOURCE: Adapted from CONSTANCE E. BAGLEY & CRAIG E. DAUCHY, THE ENTREPRENEUR’S GUIDE TO BUSINESS LAW 572–73 (4th ed. 2012).

Notification

The first critical element is a written notice, which should be posted, to confirm that all employees have been made aware of the trade secret program. Ideally, the company’s trade secret policy should be explained to each new employee during orientation, and each new employee should sign a confidentiality agreement that specifies how long confidentiality will be required. 96

The company should also provide written notice to any consultant, vendor, joint venturer, or other party to whom a trade secret must be revealed. This notice should take the form of a confidentiality agreement that describes the protected information and limits the receiving party’s rights to use or disclose it. Without such notice, the receiving party may be unaware of the nature of the information and unwittingly use it or release it into the public domain. A nondisclosure agreement (NDA) can serve as the basis for recovery if a court later determines that the party who gained access to trade secrets used or disclosed them in violation of the agreement. 97  Sometimes an NDA may contain a “residuals” provision that excludes from the confidentiality obligation information the receiving party retained in his or her memory after being exposed to the confidential information. This can create a very large loophole in the restrictions on nondisclosure.

Identification

There is some debate about the appropriate method of identifying trade secrets. One view is that everything in the workplace, or pertaining to the business, is a trade secret, but a court will most likely deem this umbrella approach overly restrictive of commerce and therefore against public policy. Such a finding could undermine the company’s trade secret program, exposing all of its trade secrets to unrecoverable misappropriation.

At the other extreme is a program that attempts to specify every one of the company’s trade secrets. This approach may be too narrow because any legitimate trade secrets that are not specified will not be protected. Also, it is often difficult to pinpoint all of a company’s potential trade secrets. For example, although it may be easy to designate all research and development projects as trade secrets, gray areas such as sales data, customer lists, or marketing surveys may cause problems. The best solution may be a program that specifies as much information as possible, while also including a limited number of catchall categories.

Security

Measures must be taken to ensure that trade secret information remains secret, at least from the public. The disclosure of a trade secret, whether intentional (for example, as part of a sale) or by mistake, destroys any legal protection. Access to trade secret information should therefore be limited to those who truly have a need to know. Hard copies of trade secret information should be locked in secure filing cabinets or a secure room. Photocopying machines should be placed as far as possible from trade secret files. Digital confidential information should be encrypted and password protected.

A company should also guard against unintentional disclosure of a trade secret during a public tour of the facility. An offhand remark in the hall overheard by a visitor, or a formula left written on a whiteboard in plain view of a tour group, is all that is needed. The best way to avoid this situation is to keep all trade secrets in areas restricted from public access. If such physical barriers are not possible, visitors’ access should be controlled through a system that logs in all visitors, identifies them with badges, and keeps track of them while they are on the premises.

Employees may inadvertently disclose trade secrets when participating in trade groups, conferences, and conventions, and through publication of articles in trade journals and other periodicals. To avoid this problem, an employer should consistently remind its employees and contractors of when and how to talk about the company’s business activities.

Exit Interviews

When an employee who has had access to trade secrets leaves the company, the employer should conduct an exit interview. The exit interview provides an opportunity to reinforce the confidentiality agreement the employee signed on joining the company. If no confidentiality agreement exists, the exit interview is even more important because it provides the notice and possibly the identification necessary to legally protect the employer’s trade secrets. The exit interview also lets the departing employee know that the company is serious about protecting its trade secrets and that any breach of confidentiality could result in legal proceedings. After such a warning, any misappropriation would be deliberate and could therefore result in punitive damages.

11-7f: Misappropriation of Trade Secrets

An individual misappropriates a trade secret when he or she (1) uses or discloses the trade secret of another or (2) learns of a trade secret through improper means. Section 1 of the UTSA defines “improper means” as theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, and espionage through electronic or other means. The list is not exhaustive, however, and other actions that strike a court as improper would probably qualify as an improper means.

In one misappropriation case, Wyeth, a large pharmaceutical company, sued Natural Biologics for misappropriating its secret manufacturing process for Premarin, a highly profitable hormone replacement therapy drug. 98  Pretrial discovery uncovered a series of phone calls between Natural Biologics and a retired Wyeth scientist who had been instrumental in developing the Premarin manufacturing process. The court determined that these calls gave the fledgling company all the knowledge it needed to copy the process. Because Natural Biologics had improperly obtained this information, the court issued a permanent injunction forbidding it from using the information or in any way engaging in drug development processes.

Inevitable Disclosure Doctrine

Some courts have recognized a form of employee misappropriation under the  inevitable disclosure doctrine , which recognizes that former employees who go to work for a competitor in a similar capacity will inevitably rely on and disclose the trade secrets gained in their former employment.

The inevitable disclosure doctrine was first recognized by a federal appeals court in PepsiCo, Inc. v. Redmond. 99  William Redmond, Jr., worked as a senior marketing manager for PepsiCo in its Pepsi-Cola North America division. Redmond had just completed work on the strategic marketing plans for All Sport (a sports drink that competed against Gatorade) and PepsiCo’s powdered teas (which competed against Snapple, among others). In November 1994, Redmond accepted an offer from Quaker Oats to work as the vice president of field operations in Quaker’s combined Gatorade and Snapple drinks subsidiary. PepsiCo sued to enjoin Redmond from working at Quaker Oats on grounds of threatened misappropriation.

The U.S. Court of Appeals for the Seventh Circuit held that a company may prove trade secret misappropriation by demonstrating that the employee’s new position will inevitably lead him to rely on his ex-employer’s trade secrets. Because of the competition between All Sport and Gatorade, the court concluded that Redmond could not help but rely on PepsiCo’s trade secrets as he planned Gatorade’s future course. Specifically, Quaker Oats would have a substantial advantage by knowing how PepsiCo would price, distribute, and market its sports drinks. The court likened the situation to that faced by a football team whose key player leaves to play for another team and takes the playbook with him.

By recognizing the notion of inevitable disclosure as being within the UTSA’s provision of “threatened disclosure,” the PepsiCo case gives employers greater leverage over departing employees and a powerful weapon against competitors who lure away valuable employees. For example, after initiating a lawsuit, Campbell Soup Company entered into a settlement agreement with H.J. Heinz that allowed the former head of Campbell’s U.S. soup business to join the Heinz tuna and pet-food businesses, but only on the condition that he stay out of the soup business for one year.

Although a number of courts have accepted the inevitable disclosure doctrine in some form, other courts have been reluctant to apply the doctrine. For example, the U.S. District Court for the Southern District of New York refused to apply the inevitable disclosure doctrine in circumstances where a noncompete agreement was considered overbroad and thus unenforceable. 100  The court reasoned that “the inevitable disclosure doctrine treads an exceedingly narrow path through judicially disfavored territory. Absent evidence of actual misappropriation by an employee, the doctrine should be applied in only the rarest of cases.” In FLIR Systems Inc. v. William Parrish, 101  the California Court of Appeal went further, declaring: “The doctrine of inevitable disclosure is not the law in California.”

11-7g: Remedies for Trade Secret Misappropriation

Once a trade secret has been misappropriated, the law provides a choice of remedies, which are not mutually exclusive.

Injunctions

A court may issue an injunction ordering the misappropriator to refrain from disclosing or using the stolen trade secret. An injunction is available only to prevent irreparable harm, however. If the trade secret has already been disclosed, an injunction may no longer be appropriate. The court may, however, still enjoin the misappropriator from using the information so that the misappropriator will not benefit from his or her wrongful act. In this situation, the injunction is often combined with an award of damages.

The owner may also be able to seek an injunction or damages from anyone receiving the misappropriated trade secret or anyone hiring the individual who misappropriated it. For example, as mentioned earlier, the court issued a permanent injunction against Natural Biologics forbidding it from any drug development, because its entire drug-manufacturing business was based on information stolen from Wyeth.

Finally, an injunction may also be appropriate when an individual threatens to use or disclose a trade secret, although the real damage has not yet occurred. In the PepsiCo case, the former PepsiCo employee was not permitted to work for Quaker Oats until the information he had in his head about PepsiCo’s marketing strategy became stale and lacked competitive value.

Damages

When the owner of the trade secret has suffered financial harm, courts often award money damages, based on either a contract or a tort theory. Under the tort theory of trade secrets, the purpose of the damages is not only to make the owner whole, but also to disgorge any profits the misappropriator may have made due to his or her wrongful act. The key to the tort measure of damages is that there was either a harm or an unjust gain, or both. The contract theory of trade secrets measures damages by the loss of value of the trade secret to the owner as a result of a breach of contract. Courts determine the loss of value by adding the general loss to any special losses resulting from the breach and subtracting any costs avoided by the owner as a result of the breach. The technical differences between the two measures of damages make little practical difference. Most courts will attempt to fairly compensate the owner of a misappropriated trade secret regardless of how the case is characterized.

Punitive Damages

Punitive damages are available when the misappropriation was willful and wanton. Under Section 3 of the UTSA, the court may award double the ordinary damages if it finds willful and malicious misappropriation; in some states, courts may award attor neys’ fees as well.

Criminal Liability

As described earlier, the Economic Espionage Act criminalizes the theft of trade secrets and imposes fines and imprisonment on those convicted under it. In addition, many state statutes also impose criminal liability for theft of trade secrets. Although criminal charges are less common than civil charges, in part due to the higher standard of proof for a criminal conviction, they still occur.

GLOBAL VIEW: The Move Toward Harmonization of Intellectual Property Regimes

Several multinational treaties are designed to harmonize the application of intellectual property laws across jurisdictions. Although they do not alter the substantive criteria that each jurisdiction applies to determine whether patent, trademark, or copyright protection is available, the treaties seek to coordinate the registration and recognition process among signatory countries. 102

In most countries, if two entities file for protection of the same invention or trademark, the entity that filed first receives protection. This can be a problem for an inventor or trademark owner who files for protection in one country and later discovers that someone else has subsequently filed for protection of the same invention or trademark in another country. The International Convention for the Protection of Industrial Property Rights (known as the Paris Convention) addresses this problem by encouraging reciprocal recognition of patents, trademarks, service marks, and similar forms of intellectual property rights among its eighty-plus signatory nations. Each signatory nation grants nationals of other signatory nations a grace period after filing in their home country within which to file corresponding applications for patents (one year) or trademarks (six months).

The Paris Convention does not alter the substantive requirements of the laws of each nation, so patent or trademark protection in one country does not necessarily translate into protection in another country. Differing rules governing eligibility may mean that actions in one’s home country that do not compromise protection there may forfeit protection abroad.

Patents

The Patent Cooperation Treaty (PCT), which as of 2013 had 141 contracting parties, allows an inventor to file a single international patent application to preserve the right to seek patent protection in each contracting country, rather than having to initially apply for separate patents in many different countries. The inventor may file this application either with the national patent office (e.g., the PTO for U.S. inventors) or the International Bureau of the World Intellectual Property Organization (WIPO).

Every international patent application is subject to an “international search” by an International Searching Authority. The search results include a list of citations of prior art relevant to the international patent application claims and information regarding possible relevance of the citations to questions of novelty and inventiveness (nonobviousness). This information enables the applicant to evaluate its chances of obtaining patents in the countries designated. An applicant may also have an international preliminary examination of the patent, which provides even more information about the invention’s patentability. This information helps an applicant decide whether to file applications in individually designated countries.

The patent practices of other countries are often different from those in the United States. For example, foreign laws regarding statutory bars are radically different from U.S. patent law. A rule of thumb is that any public disclosure of an invention prior to filing the patent application will prevent an inventor from obtaining foreign patent protection. Also, some jurisdictions are more receptive to certain types of patents than others. In Europe, there are significant obstacles to obtaining patents on certain types of software innovations, including business methods. Given these differences, managers should discuss the rules that apply in foreign jurisdictions with an attorney prior to disclosure or sale of any patentable invention.

Copyrights

International copyright protection has also begun to harmonize. Under the Berne Convention and the Universal Copyright Convention, American works receive the same protection that is afforded to the works of a national in foreign countries that are signatories of the same treaty.

In 2001, the European Union (EU) approved a copyright directive to update and harmonize member state copyright laws to bring them into conformity with the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty. The directive outlaws the manufacture of devices that facili tate the circumvention of technology used for copyright protection. The directive also provides authors with the exclusive right to authorize or prohibit communication of their work to the public by wire or wireless means, including interactive Internet sites that offer such works without the author’s permission. In contrast to the DMCA in the United States, however, the directive contains several different, yet still compliant, implementation methods regarding exceptions, penalties, and remedies that allow each country to modify the rules as needed. All of the member states have enacted the legislation required for compliance with the directive. The EU has issued additional directives dealing with EU copyright issues. For example, a directive issued in 2011 extended copyright protection from fifty to seventy years for performers and sound recordings, to more closely mirror the protection given to authors. 103

Trademarks

Every country has its own methods for determining what constitutes a protectable trademark, how to obtain and maintain trademarks, and the scope of protection available for trademarks. In contrast to the United States, in most countries use of a mark confers no rights; the first person to register the mark owns the rights to use it. In addition, registration of a trademark in the United States confers no rights in foreign countries, although a U.S. registration can provide an easy basis for registration of corresponding trademarks in countries that participate in multilateral trademark conventions with the United States.

Currently, several overlapping international regimes govern trademark applications, reflecting the trend toward increased global harmonization. As noted earlier, under the Paris Convention, an owner has a six-month grace period from the date a trademark registration application is filed in his or her home country to file in other signatory countries. As long as the foreign filing is made within that grace period, it is treated as if it had been filed in the foreign jurisdiction on the date the home country filing occurred.

The Madrid Protocol allows for centralized international registration of trademarks. The United States joined the Madrid Protocol in 2003, and there were ninety signatory countries as of April 2013. 104  A U.S. trademark owner can register the trademark in all signatory countries by filing a single application at WIPO’s International Bureau in Geneva or at the U.S. PTO. Many lawyers see this process as beneficial and believe it will substantially reduce the time and expense associated with trademark application filings. Others, however, point to differences in protection between national trademark regimes that may prove disadvantageous to U.S. trademark holders who use the WIPO registration process. For example, the PTO application requires narrower descriptions of goods and services than are required in many countries. As a result, a U.S. trademark holder may be better off filing separate, broader applications in each relevant foreign country.

The Pan American Convention recognizes the right of a trademark owner in one signatory country to successfully challenge the registration or use of that same trademark in another country. The key issue is whether persons using or applying to register the mark had knowledge of the existence and continuous use of the mark in any of the member states on goods of the same category.

For EU members, the Community Trade Mark (CTM) can confer protection in the entire EU. The CTM does not replace national rights or Madrid Protocol rights but coexists with them. A CTM can only be registered, assigned, or canceled with respect to the entire EU.

Trade Secrets

International trade secret protection is perhaps the least codified and harmonized aspect of intellectual property; thus, this area is the riskiest for U.S. companies doing business abroad. A primary concern is that countries differ in their interpretation of what constitutes a trade secret.

In 2011, the EU commissioned Hogan Lovells International LLP, a global law firm, to perform a study of trade secret law and practices in the member states. 105  The study found that each member state offered some form of trade secret protection, but the scope and enforcement of such protections varied widely and resulted in a “patchwork” system. For example, certain countries protect secret information regardless of whether it is commercial or industrial, while other countries provide different levels of protection depending on the specific type of information. Further, Sweden is the only EU country that has a law specifically protecting trade secrets—The Act on the Protection of Trade Secrets. This act defines a trade secret as information about business or industrial relations that is intended to be kept secret and that, if revealed, would harm the owner competitively. Protected information includes “documented” information (drawing, models, and prototypes), as well as “the knowledge of individual persons about specific circumstances even where it has not been documented in some form.”

Japan does not recognize trade secrets as protectable property in and of themselves; instead, Japanese law forbids unfair acts of acquiring, disclosing, or using information in a manner that harms the trade secret owner. Certain countries, including Canada and Australia, rely on common law. Other countries, such as Argentina and Israel, have adopted specific trade secret legislation; Thailand has implemented a registration system. The Philippines provides no specific statutory legal protection for trade secrets, but it maintains that trade secret protection is encompassed within other intellectual property regimes. In China, government approval is required for any licensing agreement involving trade secrets; if the parties fail to comply, the trade secret owner forfeits the trade secret after ten years.

Most foreign countries will enforce reasonable nondisclosure restrictions in contracts, at least against parties to the contracts; however, most countries do not recognize the tort law aspect of trade secrets recognized in the United States. In some countries, the judicial process itself may destroy the confidential character of the misappropriated information.

 THE RESPONSIBLE MANAGER: PROTECTING INTELLECTUAL PROPERTY RIGHTS

Some of a company’s most important assets may be intangible forms of intellectual property. Consider the value of the Apple trademark. In addition to protecting his or her company’s own intellectual property, a manager should also ensure that the company does not infringe the intellectual property rights of others, whether they be trade secrets, patents, copyrights, or trademarks.

Problems frequently arise when a manager leaves the employment of one company to assume a position at another. During the exit interview, supervisors should remind employees of their obligations and inspect any materials and computers being removed from the employer’s premises. It is critical that the manager and the new employer ensure that no confidential information, including trade secrets, is conveyed to the new employer, either in the form of documents or as information in the manager’s head. At the time of hire, the employer should determine whether the potential employee is bound by a restrictive covenant. Moreover, a company should provide written notice to all employees that it has a policy against receiving, using, or purchasing any trade secrets belonging to third parties. Misappropriation of trade secrets is a civil and criminal offense.

If the manager cannot fulfill all the duties of his or her new job without using the prior employer’s trade secrets, the new employer should scale back the manager’s activities and responsibilities. This can be accomplished by having the former employer and the new employer agree that the manager will not assume responsibility for certain product lines that compete with his or her former employer’s until a date when the strategic and other confidential information known by the manager is stale. If possible, the departing manager should negotiate this issue as part of his or her severance arrangement, rather than wait for a costly lawsuit to be brought by the former employer.

Because international trade secret protection is the least codified and least harmonized aspect of intellectual property, a manager should consult with local counsel before making trade secrets available, by license or otherwise, in a foreign country. Patents, copyrights, and trademarks also provide legal protection for different aspects of a company’s intellectual property. Patents are extremely important to high-tech companies and some e-commerce firms. Royalties from patents can add tens or even hundreds of millions of dollars to a company’s revenues. A manager should develop a global patent strategy as each jurisdiction gives the holder exclusive rights only in the granting jurisdiction.

Patents also have an important strategic use as a defensive measure in the event that another company claims patent infringement. In such a case, it is very helpful for a manager to have patents that can be used as bargaining chips to negotiate a settlement, which often takes the form of a cross-license.

Copyrights prevent others from copying literary works, musical works, sound recordings, computer software, and other forms of expression fixed in a tangible medium. A manager should consult with an experienced copyright attorney to ensure that his or her company obtains copyright ownership when it commissions, or contracts with, a third party to prepare a copyrighted work. A manager should also discuss with an attorney what, if any, copyright protection is available for a work in any foreign jurisdiction in which the company wants to distribute the work and what steps are necessary to obtain such protection. A manager should be aware that copyright registration with the U.S. Copyright Office is a prerequisite for filing an infringement suit for a work of U.S. origin. Statutory damages and attorneys’ fees are available only to owners who have registered the work within ninety days of first publication or prior to the infringement that forms the basis of the suit. Because the timing of the registration is critical, a manager should consult with a copyright attorney before publication of an important copyrighted work.

Trademarks that identify brands of goods or services are protected for an indefinite time. Managers must work to preserve trademarks, however. Once the buying public starts using the trademark as a synonym for the product, rather than as a means of distinguishing its source, loss of the trademark is imminent. The trademark registration process can be complex and confusing. It can also take up to eighteen months after an application is filed for a federal registration to be issued. Early consultation with legal counsel is therefore strongly advised.

A company may benefit from technology licensing. The volume of such arrangements, which offer advantages and disadvantages for both the licensor and the licensee, continues to accelerate.

Finally, managers should evaluate the adequacy of the company’s insurance coverage for losses and claims related to electronic commerce and intellectual property. In light of the importance of computers, it is crucial to ensure that policies for property damage and business interruption cover damage to hardware and software, loss of data, and business disruptions caused by a virus, hacker attack, or other electronic assault. Commercial general liability policies, which provide coverage for liability a company may face for harm to third parties, usually cover bodily injury, property damage, personal injury, and advertising injury. Emerging issues include whether data are tangible property, whether the insertion of a defective computer part or software into a larger system causes property damage, and whether any company with a website is in the business of advertising and is therefore not covered by the usual advertising injury provisions, which can cover intellectual property infringement and defamation claims.

 A MANAGER’S DILEMMA: PUTTING IT INTO PRACTICE: A PATENT FOR YOUR THOUGHTS

Prometheus Laboratories, Inc. is the sole licensee of two patents that correlate the concentrations of certain metabolites in a patient’s blood with the probability that a particular dosage of thiopurine drugs, used to treat autoimmune diseases, will be effective. Simply stated, if the metabolites of a patient who has taken a dose of the thiopurine drug exceed the amount specified by Prometheus, then that dose will probably result in harmful side effects, whereas if the metabolites measure below the amount specified by Prometheus, the drug will probably not be effective. Based on the results, a physician can modify a patient’s treatment plan.

Scientists knew there was a relationship between metabolite levels and the dosage of thiopurine when the patents were issued, but they did not know the exact numeric correlation of the metabolite levels with the likely harm or ineffectiveness of the drugs. The patent claims set forth “processes embodying researchers’ findings” that identified the correlations “with some precision.” The “process,” described as a “method of optimizing therapeutic efficacy” for treating the autoimmune disease, consisted of the following: (1) administering the thiopurine and (2) determining the level of the metabolite “wherein” a metabolite level less than a specified level correlated with a need to increase the dosage and “wherein” a metabolite level exceeding the specified level correlated with a need to decrease the dosage.

Prometheus sold diagnostic tests that embodied this process. Mayo Clinic Rochester had purchased and used the tests, but later announced it would start using and selling its own test (the metabolite levels in its test differed from those used by Prometheus). Prometheus sued for patent infringement.

Did Prometheus merely turn a “law of nature” into a patent by formalizing the steps in the process? 106  In other words, are the steps “routine, conventional activity” that scientists in this field had engaged in before the patents were issued? If so, is it ethical to apply for a patent? Was it ethical for Mayo Clinic to purchase and use Prometheus’s product and then develop and market its own product?

 INSIDE STORY: Battle of the Titans: Apple v. Samsung

Samsung and Apple are fierce competitors in the world of smartphones and other electronics. In 2012 and 2013, each company filed multiple patent infringement lawsuits against the other, resulting in large damages awards and the imposition of import bans. In addition, the companies filed certain disputes with the U.S. International Trade Commission (ITC), a federal agency that can resolve these issues more quickly than the courts. Although the ITC does not have the power to award monetary damages, it can ban infringing sales. The president of the United States can, however, veto ITC decisions.

The electronics industry is dependent on “standard-essential patents” (SEPs), which form part of industry standards for various products. Companies typically “cross-license” such patents to each other, but Samsung and Apple were unable to agree on the licensing terms of one cellular SEP owned by Samsung. 107  After Apple continued using the patent, Samsung brought the matter to the ITC.

In 2013, the ITC found that Apple had infringed the Samsung patent covering the transmission of data over cellular networks. Consequently, the ITC banned the sale of certain older Apple devices that work on the AT&T network, including the iPhone 4, the iPhone 3GS, and the iPad 2 3G. Within the sixty-day period for presidential review, President Obama vetoed the ban. U.S. trade representative Michael Froman indicated that the veto was based “in part on the ‘effect on competitive conditions in the U.S. economy and the effect on U.S. consumers.’” 108  One news source praised the veto, writing that it sent a “strong message that a routine dispute over standards-essential patents should not be the basis of an import ban.” 109  In a separate 2013 case, the ITC issued an injunction banning sales of Samsung mobile devices found to have violated two non-standards-essential Apple patents involving graphical and hardware interface designs.

Because patents are granted country by country, there can be inconsistent verdicts in different courts. In 2012, a California district court jury awarded Apple more than $1 billion in damages after finding Samsung had violated six Apple smartphone patents. The judge reduced the damages by $410 million, pending a new trial on damages, 110  but the jury subsequently granted Apple an additional $290 million in damages. 111  In contrast, a German court ruled in favor of Samsung in 2013, dismissing Apple’s utility patent claim on a smartphone multi-language function. 112

In 2013, Apple appealed a U.S. district court’s decision not to impose a ban on the sale of twenty-six Samsung mobile products embodying Apple’s patents. 113  The district court judge found that Apple had not shown that the infringement caused “irreparable harm,” a necessary factor for injunctive relief.

Apple and Samsung were back in court in 2014, with Apple seeking $2 billion from Samsung in what Time describes as “a proxy war against Google’s Android operating system, which powers the most popular Samsung devices.” 114  Apple co-founder Steve Jobs had threatened “thermonuclear war” over what he perceived as Google’s theft of Apple’s iPhone technology. 115  For its part, Samsung denied Apple’s charges and counterclaimed that Apple had infringed on Samsung’s mobile device technology.

In South Korea, Samsung’s home country, results have also been mixed. Samsung prevailed in a 2012 South Korean lawsuit in which it claimed Apple had violated two of its wireless technology patents. 116  The following year, however, a South Korean court dismissed a Samsung lawsuit against Apple in which Samsung claimed Apple had infringed three of its mobile patents. 117

Given the interrelated and complex nature of smartphone and tablet technology, only one thing appears clear. Apple and Samsung are likely to continue to compete not only in the marketplace but also in courthouses around the world.