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600 UNIT FIVE | Regulatory Environment of Business

Intellectual Property

learning outcomes checklist After studying this chapter, students who have mastered the material will be able to:

24-1 Define a trade secret and other protectable business information and articulate the various legal implications for misappropriation of that information.

24-2 Classify trademarks marks based on their level of distinctiveness and give examples of trademarks, trade dress, and service marks.

24-3 Express how federal laws aimed at regulating trademarks in cyberspace apply to domain names.

24-4 Identify and understand the impact of trademark infringement and dilution.

24-5 Articulate the fundamental requirements for copyright protection, the legal ramifications of copyright infringement, and the impact of technology on copyright law.

24-6 Apply the fair use defense and give examples from case law. 24-7 Explain the process for obtaining and maintaining a

patent and articulate the basic requirements for an invention to have patent protection.

24-8 Identify and understand the remedies for acts of patent infringement.

24 CHAPTER

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CHAPTER TWENTY FOUR | Intellectual Property 601

T he formal protection of intellectual property has been a foundation of U.S. law since the ratification of the Constitution. In Article I,

Section 8 of the U.S. Constitution, Congress is specifically authorized to protect intellectual prop- erty “by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” A study published in the Harvard Business Review found that intellec- tual property represents approximately 70 percent of an average firm’s value, and that number has nearly doubled in one decade. 1 This chapter dis- cusses the increasingly important legal concepts of intellectual property protection that will help business owners and managers to make informed decisions on how best to protect their own intel- lectual property and prevent infringing upon the

intellectual property rights of others. In this chap- ter, students will learn:

■ Legal protections for trade secrets and other business information.

■ Statutory and common law requirements for protection of trademarks, service marks, and trade dress.

■ Requirements for protection under federal copyright laws, consequences of infringement, and application of the fair use test.

■ Overview of protections for inventors through patent law and statutory requirements for obtaining a patent.

■ International treaties and risks concerning intellectual property protection.

1K. Rivet and D. Kline, “Discovering New Value in Intellectual Property,” Harvard Business Review, January 2000, p. 58.

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TRADE SECRETS AND PROTECTION OF BUSINESS INFORMATION One of the most valuable assets of any firm is their secret processes, formulas, methods, procedures, and lists that allow them a competitive advantage in their trade. It is important to understand that many of these types of trade secrets, business information, and business methods may not be protectable by patent or copyright laws. In fact, patent applicants generally rely on trade secret law to protect their inventions while patent applications are in progress. Businesses from across the spectrum of sectors turn to trade secret protection laws to protect some or all of their valuable creative ideas. Examples of technical and business information material that can be protected by trade secret law include customer lists, designs, instructional methods, manufacturing processes and product formulas, and document-tracking processes.

Courts use several factors under the common law of the majority of states to determine whether certain material constitutes a trade secret:

■ The extent to which the information is known outside the claimant’s (i.e., the firm claiming the information to be a trade secret) business.

■ Measures taken by the claimant to guard the confidentiality of the information.

■ The value of the information to competitors.

■ The amount invested (in terms of time and money) in developing the information.

■ The efforts to maintain trade secret confidentiality among the claimant’s employees and third-party vendors (such as auditing firms).

TRADE SECRET PROTECTIONS Trade secret protections are provided by state statutes and/or state common law. The Uni- form Trade Secrets Act (UTSA) 2 defines trade secrets as information or articles that are to be kept secret because of its particular value. More formally, a trade secret is described as formula, pattern, compilation, program, device, method, technique, or process that meets the following criteria:

■ Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use.

■ Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Economic value must be identified by the owner and secrecy must be kept.

Misappropriation While the definition of misappropriation may cover a wide spectrum of illegal acts, most states use the fundamental definitions contained in the UTSA: acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means, or any disclosure or use of a trade secret of another without express or implied consent.

Criminal Sanctions While the UTSA does not contain any criminal sanctions, many states have added a sep- arate set of statutes that make certain trade secret misappropriation a criminal offense. For example, in 1997, a district attorney in California prosecuted several executives and

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2The UTSA is a model law drafted by the American Law Institute for use by state legislatures. For more infor- mation on the ALI and Model Laws, see Chapter 1, “Legal Foundations.”

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CHAPTER TWENTY FOUR | Intellectual Property 603

employees of Avant! Corporation, a firm that designed software related to semiconductor chips. The prosecutor was alerted to the case after a competitor of Avant! sued them in an action brought under California’s Trade Secret Act, alleging that Avant! employees stole computer code from one of Avant!’s primary competitors. 3 Ultimately, Avant! accepted a plea bargain from the prosecutor that forced the company and seven individuals to pay $35 million in fines and resulted in incarceration for five of the defendants. The Economic Espionage Act is a federal statute passed in 1996 providing criminal penalties for domes- tic and foreign theft of trade secrets.

Exclusive Rights for Unlimited Duration Perhaps the most significant advantage of trade secret protection over other forms of intel- lectual property (such as patents) is protection for trade secrets does not expire after a fixed period of time. A trade secret owner has the right to keep others from misappropriating and using the trade secret for the duration of the firm’s existence. Although sometimes the misappropriation is a result of industrial espionage, most trade secret cases involve people who have taken their former employer’s trade secrets for use in a new start-up business or for a new employer.

Trade secret protection endures so long as the requirements for protection continue to be met. The protection is lost if the owner fails to take reasonable steps to keep the information secret. For example, Sam discovers a new method for manipulating images in multimedia works. He demonstrates his new method to a number of other developers at a multimedia conference. Sam may have lost his trade secret protection for the image manipulation method because he failed to take appropriate steps to keep his method secret.

Trade secret owners have recourse only against misappropriation. Discovery of pro- tected information through independent research or reverse engineering (taking a product apart to see how it works) is not misappropriation.

SELF-CHECK Trade Secrets Which of the following may be protectable as a trade secret? 1. A list of customers compiled by a firm that included buying patterns, purchaser contact informa-

tion, and preferred products of each customer. 2. A system used by a medical practice for scheduling patients for doctor’s office visits. 3. The formula for a new brand of fruit drink for a beverage supply company. 4. The process used by an accounting firm to draft financial statements in accordance with Gener-

ally Accepted Accounting Procedures (GAAP). 5. New software that helps a manufacturer speed up the design process for new products.

Answers to this Self-Check are provided at the end of the chapter.

TRADEMARKS, SERVICE MARKS, AND TRADE DRESS A trademark is a word, symbol, or phrase used to identify a particular seller’s prod- ucts and distinguish them from other products. For example, the word Nike and the Nike “swoosh” symbol identify shoes made by Nike and distinguish them from shoes made by another company. Similarly, the Coca-Cola name and logo design distinguishes the brown- colored soda of one particular company from competing brown-colored sodas made by

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3Cadence Design Systems, Inc. v. Avant!, 253 F.3d 1147 (9th Cir. 2002). The parties settled the civil suit for $265 million.

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604 UNIT FIVE | Regulatory Environment of Business

other companies. When such marks are used to identify services rather than products, they are known as service marks . Visa, for example, is a service mark related to the credit card services offered by Visa International Services Associated.

Trade Dress Trademark protection also extends beyond words, symbols, and phrases to include other aspects of the product such as shape or the color scheme of its packaging. These features are known as trade dress. Increasingly, the U.S. Patent and Trademark Office (USPTO) and courts have granted trademark protection for such trade dress-related characteristics as product shapes, colors, and scents so long as a company can prove an exclusive link to the source product in the consumer’s mind. For example, beginning in 2005, after having secured trademark registra- tion for the two-dimensional iPod symbol and the cobranded “Made for iPod” symbol, Apple applied for trademark protection of the actual three-dimensional shape of their product. Apple provided the USPTO with evidence that (1) they had spent hundreds of millions of dollars in advertising targeted to building an association between iPod’s shape and Apple, (2) there was a widespread consumer familiarity with the iPod’s design, and (3) many consumers automati- cally linked the iPod’s shape with Apple. In 2008, the USPTO granted Apple’s application for trademark registration. Figure 24.1 shows the sketches submitted by Apple to the USPTO.

Trademarks as a Business Asset Business owners often invest significant resources into their trademark design, advertise- ment, and protection because it is a valuable asset. Trademarks make it easier for consum- ers to quickly identify the sources of a given good. Trademark owners design and advertise their trademarks in hopes of helping to build brand loyalty, knowing that instead of reading the fine print on a product, consumers have instant recognition of their mark. Rather than having to ask a store clerk where to find a particular brand of sneaker, consumers are more likely to recognize a unique pattern of stripes or a “swoosh” symbol. Trademark protec- tions are designed to ensure that competitors cannot have a free ride on a popular brand name. If a low-quality clothing manufacturer could freely use the name Aéropostale or the widely known trade dress associated with that mark, consumers might assume that they are buying authentic Aéropostale clothing. Sales and reputation may suffer as consumers now began to infer that the Aéropostale company had reduced its quality assurance standards.

F I G U R E 24 .1 Apple iPod Trademark Registration

Apple secured trademark protection for the iPod symbol (top left), its co-branded products symbol (bottom left), and for the shape of the iPod (right).

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CHAPTER TWENTY FOUR | Intellectual Property 605

Trademarks also serve as an incentive for business owners to invest in the quality of their goods or services. If a consumer tries a brand of laundry detergent and finds the qual- ity to be lacking, it will be easy for a consumer to avoid that brand in the future. Trademark law provides consumer protection by regulating the use of trademarks and prohibiting the use of a mark where consumer confusion may result.

SOURCE OF LAW Trademark protections are a patchwork of federal and state law, but the major provisions and protections are found in a federal statute known as the Lanham Act. The statute pro- hibits the use in commerce, without the mark holder’s consent, of any protected trademark in a way likely to cause consumer confusion. The act also prohibits the use of an unregis- tered common law trademark. 4

Classifications of Trademarks To qualify for protection as a trademark, the mark must be distinctive. That is, it must be capable of identifying the source of a particular good. In determining whether a mark is distinctive, marks can be grouped into three categories that are based on the mark’s rela- tionship to the underlying product. Because marks vary with respect to their distinctive- ness, the requirements for, and degree of, legal protection afforded a particular trademark will depend upon which category it falls within.

Arbitrary or Fanciful A mark categorized as arbitrary or fanciful bears no logical rela- tionship to the underlying product. For example, “ Amazon.com ” or “Kodak” bears no inherent relationship to their underlying products or services. Similarly, the Google name and symbol has no obvious connection to an Internet search engine. Arbitrary/fanciful marks are highly distinctive and are thus afforded a relatively high level of protection.

Suggestive A trademark is classified as suggestive if the mark itself evokes images of characteristics of the underlying product. Some exercise of imagination or knowledge of a particular field may be necessary to make this connection, but the mark itself suggests the underlying product. For example, Under Armour Clothing suggests some type of product to be used “under” something, but one needs a leap of imagination to understand the tied

415 U.S.C. § 1114(1)(a).

Google is one of the strongest and most distinctive trademarks in the world.

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product. Suggestive marks are similar to arbitrary marks in that they tend to be highly dis- tinctive and are given a high level of protection.

Descriptive A descriptive trademark is one in which the mark directly describes, rather than suggests, a characteristic of the underlying product or service in terms of color, func- tion, and so forth. For example, “Pizza Hut” tells us something about the product they sell. Marks that indicate geographic ties, such as Vermont Maple Syrup, or marks that use a proper surname, such Ford Motor Company, are considered descriptive. However, unlike arbitrary marks, descriptive marks are not inherently distinct and may only gain trademark protection if they have acquired a secondary meaning. Descriptive marks must clear this additional hurdle precisely because these are frequently common terms that are connected to the product, but may also have alternate meanings in a different context.

Standards for Secondary Meaning A secondary meaning is created when the consum- ing public primarily associates a mark with a particular product rather than any alternate meaning. For example, Microsoft attempted to protect the term Windows as a mark for its revolutionary operating system for many years. In order to attain that right, Microsoft was required to show that much of the consuming public more often associated that term with their operating system rather than panes of glass.

In Case 24.1, a federal court of appeals analyzes the requirements for a secondary meaning.

CASE 24.1 Custom Vehicles v. Forest River, 476 F.3d 481 (7th Cir. 2007)

FACT SUMMARY Custom Vehicles registered the trademark “Work-N-Play” for one of their products. Work-N-Play vehicles were vans designed to be both a mobile office and, upon conversion that took the owner approximately one hour, a camper. Later, Forest River manufactured a van with a ramp door from the rear cargo section that had space fitted for a snowmobile, motorcycle, or ATV. They named the van Work and Play (without registering it as a trademark). Custom filed suit for trademark infringement, but the district court held that no infringement had taken place.

SYNOPSIS OF DECISION AND OPINION The Sev- enth Circuit Court of Appeals affirmed the trial court’s decision in favor of Forest, ruling that Custom’s mark was descriptive but had not acquired a secondary mean- ing. Sales of Custom’s product were relatively small, and there was no evidence that the mark would have any brand recognition. Thus, the mark was not sufficiently “famous” so as to be afforded trademark protection.

WORDS OF THE COURT: Secondary Meaning “A trademark, like a patent, carries a presumption of valid- ity. However, in the case of a registered descriptive mark,

the presumption is that it has acquired secondary mean- ing. But the act of registration merely begins the pro- cess that leads to the presumption. Bare registration is not enough. Trademarks cannot be ‘banked’ or ‘ware- housed’—that is, an individual or entity cannot register thousands of names, unrelated to any product or service that it sells, in the hope of extracting a license fee from sellers of products or services for which one of the names might be apt. The register of a name must certify that the product is in use in commerce—defined as the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark—within six months after the trademark is registered. Within those six months, the use of the trademark in one commercial sale is not enough to place the trademark in the ordinary course of trade, unless the sale is large enough to seize the attention of the relevant market.”

Case Questions 1. Should Custom have waited until they sold more of

this product before they registered Work-N-Play as a trademark?

2. Why must a descriptive mark acquire a secondary meaning in order to have protection?

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Legal Implications in Cyberspace LO24-3

Domain Names, Trademarks, and Cybersquatting

The explosive growth of consumer Internet use caused concern among trademark holders on a number of fronts. Chief among them was the practice of individuals who legally registered domain names that were also words associated with a famous trademark. Once the domain name was secured, the individual would offer the domain name at an extraordinarily inflated rate to the trademark owner. This practice became known as cybersquatting and was the subject of considerable media attention in the 1990s and early 2000s. Congress responded to this

practice by passing a federal statute designed to curb some of the more unscrupulous cybersquatters. That law, the Anticybersquatting Consumer Protection Act (ACPA), gave specific statutory remedies to trademark owners to recover trademark-related domain names from users that acted in bad faith. Bad faith is a dishonesty of belief or purpose. In this context, the bad faith requirement may be met in a number of ways, but is typically satisfied when the registrant has no legitimate reason for the use of a domain name or the registrant is using the domain name to profit or confuse consumers. In Case 24.2, a federal court outlines nine examples of bad faith under the ACPA.

ACQUIRING RIGHTS FOR TRADEMARK PROTECTION Assuming that a trademark qualifies for protection, rights to a trademark can be acquired in one of two ways: (1) by being the first to use the mark in commerce, or (2) by being the first to register the mark with the U.S. Patent and Trademark Office (USPTO or simply PTO). In the case of registration, one typically needs to put the product into use to obtain full protection. Remember, however, that descriptive marks qualify for protection (and can be registered) only after they have acquired secondary meaning. Thus, for descrip- tive marks, there is typically a period after the initial use of the mark in commerce before it acquires a secondary meaning, during which it is not entitled to trademark protection. Once it has achieved a secondary meaning, trademark protection attaches. The use of a mark in commerce generally means the actual sale of a product to the public with the mark attached or displayed.

The other way to acquire priority is to register the mark with the PTO with a bona fide intention to use the mark in commerce. Unlike use of a mark in commerce, registra- tion of a mark with the PTO gives a party the right to use the mark nationwide, even if actual sales are only to a limited area. This right is limited, however, to the extent that others are already using the mark within a specific geographic area. If that is the case,

a Name for a King’s Ransom 1. Do you think that registering a domain name with the sole intent to sell the domain name

is ethical? Isn’t this just the market economy at work? 2. If one individual buys a domain name from another, with the intent to resell to another

party, is that a different ethical decision than in question one? 3. Are there any circumstances in which a party could ethically obtain the domain name of

a famous trademark?

BUSINESS ETHICS perspective

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CA S E 24 . 2 People for the Ethical Treatment of Animals v. Doughney, 113 F. Supp. 2d 915 (E.D. Va. 2000)

FACT SUMMARY People for the Ethical Treatment of Animals (PETA) is the high-profile nonprofit orga- nization devoted to educating the public at large and attempting to prevent the abuse of animals for corpo- rate gain. Doughney registered PETA.org, claiming he was head of an organization called People Eating Tasty Animals and, thus, was entitled to use the name. Doughney’s Web site contained links to furriers and others that would be in direct conflict with PETA’s mis- sion. PETA filed suit against Doughney alleging, among other things, his use of PETA.org violated the ACPA.

SYNOPSIS OF DECISION AND OPINION The court ruled in favor of PETA, granted them summary judgment, and ordered Doughney to cease use of the PETA.org domain name. The court pointed out nine examples of bad faith action taken by Doughney and held that his actions violated the ACPA. The court rejected Doughney’s claim that the Web site was merely a parody of the PETA organization because of the likelihood of confusion. In fact, Doughney admit- ted that “many people” would initially assume that they were accessing an authentic site sponsored by PETA.

WORDS OF THE COURT: Bad Faith “[Under the ACPA], there are nine factors a court must consider in making a determination of whether the Defendant had a bad faith intent. Applying these factors, it appears that Doughney had the requisite bad faith intent.

First, Defendant possessed no intellectual property rights in ‘PETA.ORG’ when he registered the domain name in 1995. Second, the ‘PETA.ORG’ domain name

is not the Defendant, Michael T. Doughney’s legal name or any name that is otherwise used to identify the Defendant. Third, Defendant had not engaged in prior use of the ‘PETA.ORG’ domain name in connection with the bona fide offering of any goods or services prior to registering ‘PETA.ORG.’ Fourth, Defendant used the PETA mark in a commercial manner. Fifth, Defendant clearly intended to confuse, mislead and divert Internet users into accessing his website, which contained information antithetical, and therefore harm- ful to the goodwill represented by the PETA mark. Sixth, on Doughney’s ‘PETA.ORG’ website, Dough- ney made reference to seeing what PETA would offer him if PETA did not like his website. Seventh, Defen- dant, when registering the domain name ‘PETA.ORG,’ falsely stated that ‘People Eating Tasty Animals’ was a non-profit educational organization and that this web- site did not infringe any trademark. Eighth, Defendant has registered other Internet domain names which are identical or similar to either marks or names of famous people or organizations he opposes. Ninth, the PETA mark used in the ‘PETA.ORG’ domain name is distinc- tive and famous and was so at the time Defendant reg- istered this site in September 1995.”

Case Questions 1. Was there any indication that Doughney was

“cybersquatting”?

2. Could Doughney have avoided liability by making changes to his Web site or business model? What changes may help shield him from liability?

webcheck uspto.gov/trademarks Have an idea for a trademark? Try a trademark

registration search at the Web site above or link to it through this textbook’s companion Web site at

www.mhhe.com/melvin.

then the prior user of the mark retains the right to use that mark within that geographic area; the party registering the mark gets the right to use it every- where else. In essence, different parties can have trademark protection simultaneously. For example, if Robert begins to use a trademark for a specialty coffee in his coffee shop in Boston, but does not use it in any other market, he has acquired the right to use it in Boston only because he was the first to put it into commerce. However, if National Brand Cof- fee (NBC) wants to use the very same trademark, they may register it with the PTO and be entitled to nationwide rights (except the right to use it in the

KEY POINT In order for a plaintiff to recover under the ACPA, the defendant must have acted in bad faith.

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same Boston geographic market). So both Robert and NBC have rights to the same trade- mark, but the rights only extend to the appropriate geographic area.

Applications and the PTO Applications for registration are subject to approval by the PTO. The PTO may reject a registration on any number of grounds. For example, the PTO will refuse to register (1) any mark that is not inherently descriptive, (2) generic marks or descriptive marks that have not attained secondary meaning, (3) immoral or scandalous marks, (4) certain geographic marks, (5) marks that are primarily surnames, and (6) marks that are likely to

Advantages of Trademark Registration

SOLUTIONS FOR MANAGERS

PROBLEM The common law and statutory law protections in the area of trademark protection result in too much uncertainty regarding a business’s ability to use the mark.

SO LU T I O N Register your trademark as soon as possible with the USPTO.

Although this may require attorneys’ fees, the return on investment may well be worth it. The major advantages to registration are:

• Registration gives a party the right to use the mark nationwide, subject to any geographic exceptions.

• Registration constitutes nationwide constructive notice to the public of trademark ownership. • Registration enables a party to bring an infringe- ment suit in federal court. • Registration allows a party to potentially recover treble (triple) damages, attorneys’ fees, and other remedies. • Registered trademarks may, after five years, become “incontestable,” at which point the exclusive right to use the mark is conclusively established.

Registering a trademark with the USPTO provides maximum nationwide protection and gives the mark holder the right to enforce its rights in federal court.

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cause confusion with existing marks. As noted above, rejection of the mark does not neces- sarily mean that it is not entitled to trademark protection. It means simply that the mark is not entitled to the statutory benefits provided by law (such as those listed in the preceding Solutions for Managers). Some famous rejections include:

■ Twitter’s 2009 application to trademark the term tweet because of insufficient evidence of secondary meaning.

■ Chippendales’ application to trademark their famous “cuffs-and-collar only” configura- tion worn by their waiters was rejected as not inherently distinctive. The USPTO was not sufficiently persuaded by the affidavit of an expert on American burlesque theatre that the Chippendales costumes are associated with “iconic characters” that makes the costume distinctive.

Preserving Trademark Protection The rights to a trademark can be lost through abandonment, improper licensing or assign- ment, or genericity. A trademark is abandoned when its use is discontinued with intent not to resume its use. Nonuse for three consecutive years is prima facie evidence of abandon- ment. The basic idea is that trademark law only protects marks that are being used, and parties are not entitled to warehouse potentially useful marks.

Trademark rights can also be lost through genericity (also known as genericide ). Some- times, a trademark that is originally distinctive can become generic over time, thereby losing its trademark protection. A word will be considered generic when, in the minds of a substantial majority of the public, the word denotes a broad genus or type of product and not a specific source or manufacturer. In a landmark genericity case, Bayer v. United Drug Company, decided in 1921, aspirin was held to be generic. Other examples include zipper and elevator, which were both formerly brand names. In deciding whether a term is generic, courts will often look to dictionary definitions, the use of the term in newspapers and magazines, and any evidence of attempts by the trademark owner to “police” its mark. Xerox Corporation, for example, runs full-page advertisements in national newspapers pointing out that it is incorrect to refer to the photocopying of a document as “Xeroxing” the document. Other companies working to police their mark to prevent genericity include Jeep, Google, and the makers of the Band-Aid brand of adhesive strip.

Trademark Infringement If a party owns the rights to a particular trademark, that party can sue subsequent parties for trademark infringement. The standard is “likelihood of confusion.” To be more spe- cific, the use of a trademark in connection with the sale of a good constitutes infringement if it is likely to cause consumer confusion as to the source of that good or as to the sponsor- ship or approval of that good. In deciding whether consumers are likely to be confused, the courts will typically look to a number of factors. These factors, known as the Polaroid test, based on a landmark infringement case in Polaroid Corp. v. Polarad Elecs. Corp., 5 include (1) the strength of the mark, (2) the proximity of the goods, (3) the similarity of the marks, (4) evidence of actual confusion, (5) the similarity of marketing channels used, (6) the degree of caution exercised by the typical purchaser, (7) the defendant’s intent, and (8) the sophistication of the consumer.

The use of an identical mark on the same product would clearly constitute infringe- ment. For example, suppose that Richard manufactures and sells personal computers from his home office that overlooks a dell meadow. He likes the dell meadow so much that he

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Legal Speak >)) Prima Facie Literally “at first sight,” prima facie cases are made when certain clear evidence exists as to a conclusion of law, but it is subject to further evidence or defense to rebut the original evidence.

5287 F.2d 492 (2d Cir. 1961).

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uses the mark “Dell” on all of his computers. His use of that mark will likely cause confusion among consumers, because they may be misled into think- ing that the computers are made by the more famous Dell, Inc. Using a very similar mark on the same product may also give rise to a claim of infringe- ment if the marks are close enough in sound, appearance, or meaning so as to cause confusion to the consumer. Thus, while “Dell” may be off-limits for Richard’s personal computer products (and per- haps also “Dell’s Design”), use of Dell with an unrelated product will not give rise to an infringement claim. The famous Dell, Inc., and the local Dell’s Deli can peacefully coex- ist, because consumers are not likely to think that the computers are being made by the deli, or vice versa. In an actual trademark case, Apple successfully blocked the importa- tion of “Pineapple” computers from Taiwan because the marks were too similar and could cause consumer confusion.

Trademark Dilution In addition to bringing an action for infringement, owners of trademarks may also bring an action for trademark dilution. In 1995, Congress passed the Federal Trademark Dilution Act that permits mark holders to recover damages and prevent another from “dilution” of distinctive trademarks. This is protection for the trademark owner who is unable to establish consumer confusion. Once the prerequisites for a dilution claim are satisfied, the owner of a mark can bring an action against any use of that mark that dilutes the distinctive quality of that mark, either through “blurring” or “tarnishment” of that mark; unlike an infringement claim, likelihood of confusion is not necessary. Blurring occurs when the power of the mark is weakened through its identification with dissimilar goods, for example, IBM brand bicycles or Xerox brand paint brushes Although neither example is likely to cause confusion among consumers, each dilutes the distinctive quality of the mark. Tarnishment occurs when the mark is cast in an unflattering light, typically through its association with inferior or unseemly products or services.

CONCEPT SUMMARY Trademarks

■ A trademark is a word, symbol, or phrase used to identify a seller’s product and distin- guish it from other products.

■ Businesses invest significant resources in trademark design; these marks are among a company’s most valuable assets.

■ Trademark protection is a combination of state law and a federal statute known as the Lanham Act.

■ Trademark protection is obtained either through initial use in commerce or registration with the USPTO.

■ Managers should focus special attention to policing their firm’s mark, that is, having a policy in place and taking steps to prevent others from using the mark. Otherwise, the mark may be lost through abandonment or genericity

■ In order to prove infringement, the mark owner must prove that use of the mark by another could cause consumer confusion or that the use of the mark dilutes or tarnishes the mark.

KEY POINT Likelihood of confusion: In order for a trademark holder to prevent another from using the holder’s mark, the holder must prove that the use of the mark by another will be likely to cause consumer confusion as to the source of the goods. Courts use the eight-factor Polaroid test to assess likelihood of confusion.

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COPYRIGHT LAW: PROTECTIONS OF ORIGINAL EXPRESSIONS Black’s Law Dictionary defines a copyright as “the right of literary property as recognized and sanctioned by positive law.” More precisely, copyright protection is an intangible right granted by the Copyright Act of 1976 6 (a federal statute) to the author or originator of an original literary or artistic production, where the artist is invested, for a specified period (see Table 24.1 ), with the sole and exclusive privilege of multiplying copies of the work along with the right to profit by publication and sale.

The Copyright Act allows creators to obtain a copyright by having an “original work of authorship fixed in any tangible medium of expression, not known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” 7

Protected works include literary works, musical works, dramatic works, choreo- graphic works, motion pictures, sound recordings, and pictorial or graphical works. Works that cannot be protected include ideas, procedures, processes, systems, methods of operation, concepts, principles, or discoveries, no matter how it is explained, illus- trated, or described. 8

Fundamentally, in order to gain copyright protection, a work must meet a three-part test: (1) originality, (2) some degree of creativity, and (3) fixed in a durable medium.

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Publisher or other party (works for hire)

First of (1) 120 years from the date of creation, or (2) 95 years from the date of publication.

More than one author or originator

70 years from the death of the last surviving author or originator.

TA B L E 24 .1 Copyright Protection Periods

617 U.S.C. § 101, et seq. 717 U.S.C. § 102(a). 8Note that ideas, procedures, systems, and the like may be covered by intellectual property protections other than copyright law. 9499 U.S. 340 (1991). This case was the beginning of the phone book battles. Once Feist was decided, several different publication companies began to compete with telephone companies for Yellow Pages advertising. This one decision spurred a new niche in the publishing industry.

Originality and Creativity Requirements The meaning of the word original has brought about the most controversy in interpreting the requirements of the Copyright Act. What is to be considered original, and what guide- lines should be used to determine originality? The courts have ruled that an original work of authorship is a work that is original to the author; meaning, the author must use her own creative capabilities to create the work or medium. Does this mean that a compilation of noncopyrightable facts (such as names and telephone numbers) can be copyrighted as long as one author put the collaboration together first or in a creative way? In Feist Publications, Inc. v. Rural Telephone Service, 9 the landmark case on copyright originality and creativity,

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the U.S. Supreme Court gave some guidance as to what level of creativity was necessary to meet the originality requirements. The Court ruled that, although compilations of facts could be copyrightable, there had to be some creative element used that made the compila- tion an original work. For example, the White Pages of a telephone directory do not meet the creativity requirement because they are simply arranged alphabetically. One federal appellate court has even held that the Yellow Pages listings of a telephone directory do not meet the originality requirement. 10

Durable Medium To be protected, a work must be fixed in a durable medium. This underscores the copyright law’s requirement that the work must be more than just an idea or thought process. In fact, the work must be in a tangible form such as in writing, digital, video, and so forth. Copy- right protections extend automatically to a work once created. Although there is no need to register the work with the United States Copyright Office to obtain protection, registration is a prerequisite to actually enforcing the holder’s rights in court.

COPYRIGHT INFRINGEMENT When a copyright holder pursues a party that it believes has infringed on its copyright, the aggrieved party will generally pursue one of three theories of infringement. These theories have been developed by the federal courts to sort out the various ways by which one could infringe upon a copyright. These theories are direct, indirect (also known as contributory ), or vicarious infringement.

Direct Infringement Direct infringement occurs when the copyright owner can prove legal ownership of the work in question and that the infringer copied the work without permission. While the first element is straightforward, the second element is more complex than appears at first glance. In the context of the copyright protections afforded by law, it is clear that the word copied must have an expansive definition rather than a narrow one (i.e., copy means more than an exact replica). At the same time, of course, the definition cannot be so expansive as to foreclose any works of the same category.

Courts have developed the substantial similarity standard to guide the definition of copy under copyright laws. Thus, a copyright holder need only prove that the infringer copied plots, structures, and/or organizations that made the infringing work substantially similar to the copyrighted work.

Indirect Infringement Indirect infringement (also known as contributory infringement ) involves three par- ties: the copyright owner, the direct infringer, and the facilitator of the infringement. The theory of indirect infringement is one that holds the facilitator liable for damages. Therefore, before pursuing a theory of indirect infringement, the copyright owner must identify the direct infringer. Normally, in order for the facilitator to be liable, the party must have knowledge (direct or imputed) of the infringement and/or contribute to the infringement in some material way. In the famous case of A&M Records, Inc. v. Napster, Inc., 11 a federal appeals court held that Napster’s business model of facilitating a peer- to-peer community for sharing of digital music files constituted contributory infringe- ment because Napster had the ability to locate infringing material listed on its search

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10BellSouth Advertising v. Donnelley Information Publishing, 999 F.2d 1436 (11th Cir. 1993). 11239 F.3d 1004 (2001).

Legal Speak >)) Direct and Imputed Knowledge Direct knowledge implies a party has firsthand, actual knowledge of a fact. Imputed knowledge is gained from circumstances or a relationship with a third party where a diligent party “should have known” about the fact at issue.

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engines and the right to terminate users’ access to the system. Digital file sharing is discussed more extensively later in this section (see Legal Implications in Cyberspace: Copyrights in the Digital Age).

Vicarious Infringement The final copyright infringement theory, vicarious infringement, is similar to the indirect infringement theory in that they both involve third parties not involved in actual direct infringement. Vicarious liability is based on agency law (see Chapter 10, “Agency and Employment Relationships”) and can be used as a theory of liability when the infringing party (the agent) is acting on behalf of or to the benefit of another party (the principal). In that case, the principal party is said to be vicariously liable. The copyright owner will be entitled to remedies against the principal to the same extent as the direct infringer. Vicarious liability most often occurs in an employer–employee circumstance where the employee is acting with authority from the employer and commits an act of infringement that benefits the employer.

The No Electronic Theft Act 12 (NET Act ) of 1997 gave sharper teeth to the Copy- right Act’s previous criminal sanctions. The NET Act provides for criminal liability for anyone infringing on a copyright by making a reproduction or distribution, includ- ing by electronic means, of one or more copies of a copyrighted work with a total retail value of more $1,000. Penalties include maximum fines of $250,000 and potential incarceration. 13

Defense to Infringement Claims: Fair Use Copyright owners do not enjoy unlimited rights to their work. Rather, the law balances public interests with the property rights of copyright owners. The most common and pow- erful defense is fair use. A landmark case on the fair use defense is the U.S. Supreme Court’s decision in Universal Studios v. Sony, 14 where the Court ruled that Sony’s manu- facturing and selling of Betamax (the first videocassette tape recording format used in a home videocassette recorder, or VCR, which was the precursor to digital video record- ing technology) was not per se infringement. The Court made clear that Congress did not give absolute control over all uses of copyrighted materials. Some uses were permit- ted and because the device could still be used for “substantial non-infringing uses” the Court held that Sony was not liable for contributory infringement. This fair use exception, known as the Sony defense or the Betamax doctrine, was used, unsuccessfully, as the basis for the defense in the A&M Records v. Napster case (discussed previously in this chapter) and was reexamined by the U.S. Supreme Court in the MGM v. Grokster case (discussed later in the chapter). 15 Fair use has also been extended to the use of a work for parody or satirical purposes. 16

1217 U.S.C. § 506. 13A catalyst for this law was a criminal case brought against an MIT student that posted copyrighted software on the Web free of charge for anyone to download. The government could not obtain a conviction in the case because the existing law (prior to the NET Act) only imposed criminal liability when the infringement was undertaken for private financial gain. The NET Act eliminated the financial gain requirement for a criminal con- viction. See U.S. v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994). 14464 U.S. 417. After Sony had started producing videotape recorders (sold under the brand name Betamax) in a price range that many consumers could afford, Universal saw the mass distribution of this product as a threat to its business and market share. They sued Sony on an infringement theory, claiming that consumers were using the Sony product to copy their copyrighted movies. 15See Legal Implications in Cyberspace: Copyrights in the Digital Age. 16Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994).

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The term fair use has now been codified in the Copyright Act with four specific (though nonexclusive) guideposts: the purpose and nature of the use, the nature of the work itself, the amount and substantiality of the material used, and the effect of the use on the market.

Purpose and Nature of the Use If the use of the work is to further education or schol- arship, courts are more likely to be sympathetic to an assertion of fair use. This does not mean, however, that whole sections of textbooks or copied videotapes may be used with impunity. Also, if the use is for some commercially profitable purpose, this will weigh heavily against the infringer. This is not to say that commercial use is a complete bar to assertion of fair use.

Nature of the Work If the copyrighted material has not yet been put into the public domain, fair use is a difficult defense. This is not to say that a complete bar to nonpublic works exists; newsworthy and factual information are still subject to fair use.

Amount and Substantiality Used Courts essentially analyze the totality of the cir- cumstances regarding the amount of copyrighted material used compared to the entire work at issue. Short phrases and limited use of the copyrighted work are often protected by the fair use defense.

Market Effect Courts are reluctant to allow fair use as a defense (even if the use fits the other three categories) if a copyright holder demonstrates that the value of a copyrighted work will be diminished by allowing its use. Fair use cannot impair the marketability or economic success of the copyrighted work.

Self-Check Fair Use Which of these situations would constitute fair use? 1. A manager photocopies an article of interest from The Wall Street Journal and distributes it to

three co-workers who also may be interested. 2. A company buys one copy of a training manual from a publisher, and then distributes photocop-

ies of entire chapters to its workforce. 3. An executive rents out a DVD on motivation from her local video/DVD store. The next day, she

shows the DVD during work hours to her management team in order to inspire them to adopt certain leadership practices.

4. A firm that arranges corporate training sessions buys a DVD that features former General Elec- tric CEO Jack Welch on problem-solving skills for executives. The firm shows 30 minutes of this DVD at the beginning of each of its eight-hour training sessions called “Solutions for Solving,” for which they charge $500 per person for the entire session.

Answers to this Self-Check are provided at the end of the chapter.

RIAA Lawsuits In addition to aggressively pursuing file-sharing services such as Napster and Grokster, the motion picture and music recording industry has filed thousands of infringement lawsuits against individuals engaged in file sharing. The Recording Industry Association of Ameri- can (RIAA) has invested substantial resources in tracking down and recovering damages from individual infringers. In a 2009 case that garnered substantial media attention, a jury imposed damages of $1.92 million against Jammie Thomas-Rasset in a federal court in Minnesota. The award was the result of a lawsuit filed by RIAA against Thomas-Rasset that alleged she downloaded more than 1,700 copyrighted songs.

Legal Speak >)) Infringement The unlawful use of another’s intellectual property.

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Legal Implications in Cyberspace

Copyrights in the Digital Age Technology has created new challenges for legislatures and courts struggling with applying copyright law in the digital age.

Computer Software In order to settle uncertainty in the computer science field about the ability to copy- right computer software, Congress amended the Copy- right Act with the Computer Software Copyright Act.* This law, passed in 1980, specifically defined computer software programs as a literary work and, thus, entitled to protection. However, the nature of computer software brings with it a good deal of uncertainty in terms of copy- right protection. In 1986, the landmark case of Whelan v. Jaslow† gave the first guidance by an appellate court on the issue of copyright protection for software and indi- cated that courts were willing to extend broad protection to computer programs, including both the “look and feel” of a program’s displays and also the program’s structure, sequence, and organization. More recently, courts have been carving back this broad protection and adopting a more sophisticated test. One appellate court also made clear that patents, not copyrights, would be the most suitable form of intellectual property protection to pro- tect the dynamic aspects of writing computer software programs.‡

Evolution of Copyright Law and Technology The revolutionary technological gains and the increasing popularity of the information superhighway has led to sig- nificant threats to copyright holders such as record labels and movie studios. In the past, copyright infringement of movies and music was limited because the technology that existed to copy these media was not capable of pro- ducing mass copies, except through a sophisticated crim- inal network. In short, the average consumer was limited in what he could copy and distribute and, thus, copyright holders had little fear that day-to-day consumer infringe- ment would impact their revenue stream from sales of the original. However, when the digital age truly arrived, copyright holders responded by lobbying Congress for additional protections in the area of copyright laws.

Audio Home Recording Act The Audio Home Recording Act (AHRM), a 1992 amendment to the Copyright Act, was a response to the rapidly advanc- ing technology of digital audio that emerged in the early 1990s. This new digital technology industry threatened the major record labels because it caused enforceability problems for the copyright protection of musical record- ings. In the early 1990s, these digitally copied recordings became increasingly common because the recording device, a CD-Writer, became standard equipment with many computer packages. The AHRA forced manufac- turers of CD-Writers to pay royalties (2 percent of their sales) to a fund administered by the Copyright Office, and eventually paid to copyright owners. It also required the producers of a digital audio recording device to include a Serial Copy Management System (SCMS) that, through computer software, prevents copies from copies to be made, but does not prevent copies from originals to be created.

Digital Millennium Copyright Act Congress passed the Digital Millennium Copyright Act (DMCA) in 1998 in an attempt to modernize copyright law to deal with the new challenges that had emerged in the digital age. The DMCA was controversial because it added substantial protections to copyright holders of digital products and gave immunity to internet service pro- viders (ISPs) for certain copyright liability. Some of the major provisions of the DMCA are: ■ Civil and criminal penalties established for anyone

who produces, sells, or distributes any product or service that circumvents antipiracy software or other antipiracy technology.

■ Restriction of import or distribution of analog video recorders and camcorders that lack antipiracy features.

■ ISPs have no liability for copyright infringement by their users (such as posting copyrighted software on an ISP’s electronic bulletin board) so long as the ISP does not have actual knowledge of the infringing material.

File Sharing Technology changed the status quo rapidly. The late 1990s saw the introduction of two very important technological advances: (1) the popular music file format known as MP3 (essentially compressed digi- tal files), and (2) the increasing speed advancements

*17 U.S.C.A. § 117. †797 F.2d 1222 (3rd Cir. 1986). ‡Computer Associates International v. Latai, Inc., 982 F.2d 693 (2nd Cir. 1992).

(continued )

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Legal Implications in Cyberspace

of the Internet. These two additions changed the once hours-long process of transferring music and movies over the Internet to a process that took just a few min- utes or less. The MP3 file popularity grew very quickly. This, in turn, brought about the ability to upload and download music and video files from one private per- sonal computer to another. The ability to upload and download hundreds of files a day led to the establish- ment of peer-to-peer (P2P) networking and, of course, entrepreneurs who have leveraged this technology into profit. The pioneer of P2P file-sharing communities was Napster. As discussed, the Ninth Circuit Court of Appeals effectively shut down Napster after they ruled

that Napster’s business model was inherently illegal because Napster had imputed knowledge of copyright infringement. However, other Napster-like services were thriving under a business model whereby the P2P provider could not have any actual knowledge of copy- right infringement. The motion picture and recording industries doggedly pursued each of these companies by suing them under a contributory infringement the- ory. Of course, Napster eventually reemerged as a pay for subscription service. Ultimately, the issue of what level of intent was necessary to constitute infringement was decided by the U.S. Supreme Court in Landmark Case 24.1.

CONCEPT SUMMARY Copyrights ■ Copyright protection is an intangible right granted by the Copyright Act to the author or

originator of an original literary or artistic production . ■ In order to obtain copyright protection, the work must be a result of some creative

capability by the author/originator and it must be fixed in a durable medium (such as in writing).

■ There are three theories of infringement: direct, indirect (also known as contributory), and vicarious.

■ A powerful defense is “fair use” of copyrighted material where a court will examine the purpose and nature of the use, the nature of the work, the amount used, and the market effect of the use.

PATENTS: LEGAL PROTECTION OF INVENTIONS AND PROCESSES A patent is a government-sanctioned monopoly right that allows an inventor the exclusive entitlement to make, use, license, and sell her invention for a limited period of time. Pat- ent rights are important in the entire businesses community, but are particularly vital to the manufacturing, technology, and pharmaceutical sectors. Patents are often an impor- tant part of the planning for these firms because their business model depends on the benefits of obtaining a patent; that is, the full legal protection of their ideas, methods, and inventions. Once a patent is obtained, a competitor is barred from profiting off the patented device or process during the life of the patent. Thus, a patent can be a firm’s most important and valuable asset.

Understanding the fundamentals and discarding the myths of patent laws are impor- tant for managers. The most common myth is an assumption that nearly any new idea or invention is “patentable” (able to obtain patent law protection). This assumption is not true

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618 UNIT FIVE | Regulatory Environment of Business

L A N D M A R K C A S E 24 .1 Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 545 U.S. 913 (2005)

FACT SUMMARY After the Napster decision, a number of other P2P file-sharing communities emerged with a slightly different business model. One famous firm, Grokster, used a business model whereby it would be impossible for Grokster to know if the files being shared were an infringing use. Thus, Grokster argued, no Napster-like imputed liability could attach and no contributor infringement existed. According to Grokster (and many other such firms that were emerging), this is precisely the same business that Sony was in when selling the Betamax and they were entitled to the same type of fair use exception of “capable of substantial non-infringing uses” as the Supreme Court articulated in the Sony case. When MGM studios sued Grokster (and others including StreamCast, the distributor of Morpheus software) both the federal trial court and the federal court of appeals agreed with Grokster and allowed Grokster to use the Sony exception in their ruling against MGM.*

SYNOPSIS OF DECISION AND OPINION The Supreme Court unanimously held that Grokster could be liable for inducing copyright infringement and reversed the court of appeals ruling. The Court specifically ruled that anyone who distributes a device with the intent to promote its use to infringe copyright is liable for the resulting acts of infringement (contributory) by third parties. Although there was some disagreement among the Justices about the Sony defense, ultimately the Court held that the lower courts had misapplied the Sony exception because there was ample evidence that Grokster had acted with intent to cause copyright infringement via the use of their software.

WORDS OF THE COURT: Evidence of Intent “Three features of this evidence of intent are particularly notable. First, each company showed itself to be aim- ing to satisfy a known source of demand for copyright infringement, the market comprising former Napster users. StreamCast’s internal documents made con- stant reference to Napster, it initially distributed its Morpheus software through an OpenNap program compatible with Napster, it advertised its OpenNap program to Napster users, and its Morpheus software functions as Napster did except that it could be used to distribute more kinds of files, including copy- righted movies and software programs. Grokster’s name is apparently derived from Napster, it too ini- tially offered an OpenNap program, its software’s function is likewise comparable to Napster’s, and it attempted to divert queries for Napster onto its own Web site. Grokster and StreamCast’s efforts to sup- ply services to former Napster users, deprived of a mechanism to copy and distribute what were over- whelmingly infringing files, indicate a principal, if not exclusive, intent on the part of each to bring about infringement.”

Case Questions

1. Why was the Court so concerned about the Open Nap program offered by StreamCast and Grokster?

2. Why do your think the Court refused to apply the Sony exception in this case?

*Metro-Goldwyn-Mayer Studios v. Grokster, Ltd., 380 F.3d 1154 (9th Cir. 2004).

and may be an expensive lesson to learn. In fact, in order to obtain a patent, the idea or invention must meet stringent criteria set down in federal statutes. The patent application procedure is often very expensive because one must almost always obtain counsel that specializes in patent law. These law firms, known colloquially as intellectual property (or simply “IP”) firms, are often more expensive than expert counsel in other areas of the law given the specialized nature of their services.

Even if one is successful in obtaining a patent, enforcing the patent via an infringement suit is an even more expensive undertaking. According to a study in The New York Times, the median cost for enforcing a patent (assuming an infringement suit is necessary) is around $1.2 million. This significant cost factor must be considered in a company’s patent management strategy.

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CHAPTER TWENTY FOUR | Intellectual Property 619

Avoiding Intellectual Property Liability: Landmines on the Web

SOLUTIONS FOR MANAGERS

P RO B L E M Managers that oversee an Internet-based marketing model are often barraged with conflicting infor- mation and advice about trademark and copyright law.

By taking simple and inexpensive precautions, manag- ers can help protect their company from infringement liability.

SO LU T I O N # 1 Limit your linking.

Courts have allowed the use of a typical hypertext link so long as the use is reasonable under the cir- cumstances. Inline imaging, framing, and even deep linking have all been given legal protection so long as the essence of the copyright and trademark laws are protected. However, an attempt to use a link to create confusion by the consumer that ultimately could result in the consumer being directed to a competing business would constitute infringement.

For example, let’s suppose that MuseumTicketsRUs is a registered trademark of a company that sells tick- ets to museum exhibits in major cities and that it hosts a Web site, MuseumTicketsRUs.com. A second firm, Artists.com, hosts a Web site that provides links to all museum Web sites, all museum online stores, art supply stores, and the like. If Artists.com simply provides a link to MuseumTicketsRUs, then no copyright or trademark infringement has taken place. However, if Artists.com uses MusuemTicketsRUs’s logo, similar name, or other

similar identifying characteristic, and uses the link to direct a consumer-user to a competing site with which Artists.com has a commissioned-based agreement, this would clearly constitute infringement and expose Art- ists.com to significant legal liability. Thus, it is a good idea to take steps to avoid any consumer confusion such as displaying a disclaimer that the originating site with the link is not related to or a part of the linked site.

Deep linking (i.e., linking to an embedded site) may be cause for additional concerns if the embedded site skips through advertising that the Web page host has placed in the original site. It is a good practice to use links only to originating Web pages (home pages) or at the very least to offer links to both the originating home page and the deep-linked page in close proximity with labels for the user that describe the content of the page. Moreover, if the linked site has taken technical steps to prevent linking or given notice that they do not sanction deep linking, this should give a manager pause because they may be crossing the line of reasonableness into infringement.

The ultimate protection against infringement, of course, is obtaining express permission to deep link or image. The owner of the site will often give you permis- sion so long as your site is not a competitor or a site that may tend to tarnish their image (such as adult-content sites). A simple form for this permission is shown.

Agreement and Permission to Use

This Agreement, made this day of October, 2010, between Museum TicketsRUs (Owner) and Artists.com (User), acknowledging sufficient consideration, the parties agree as follows:

1. Owner permits User to link, deep link, inline image, or frame Owner’s Web site (www.MuseumTicketsRUs.com) from User’s Web site (www.Artists.com).

2. User shall be entitled to use this permission until such time as Owner gives User 48 hours’ notice via e-mail to cease the use of the link. Owner has the absolute and unconditional power to revoke this per- mission at anytime and for any reason.

3. Upon such notice, User agrees to cease the use of any and all links to Owner’s Web site as soon as possible.

4. Owner shall not be entitled to any compensation under this Agreement. Signed: (Owner) Date: (User) Date:

continued

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The patent issued to the Wright brothers in 1906 for their flying machine began a new era in global commerce.

620 UNIT FIVE | Regulatory Environment of Business

FUNDAMENTALS OF PATENT LAW Patent law in the United States dates back to 1790 and is gov- erned by the Patent Act established by the very same Congress that ratified the U.S. Constitution. Of course, the law has been amended since then, but the basic standards have not changed much. A patent for inventions or processes (also known as “utility” and “business method patents,” respectively) lasts for a period of 20 years from the date of filing the application with the USPTO. A “design” patent (discussed later) lasts for 14 years.

In order to obtain a patent, an invention must be novel, non- obvious, and a proper subject matter for protection under the patent law.

Novelty Standard An invention or process must be unique and original, and a patent applicant must show that no other identical invention or process exists. The statute delineates the guidelines for this novelty standard based on a three-prong test. The first prong is the “public use” test, and requires that the invention or pro- cess not already be in public use. The second prong governs priority for inventors of the same invention or process. The American standard is known as the “first-to-invent” rule, which provides that the inventor who has been determined to invent first (not the inventor who has filed first) has prior- ity over other inventors of the same product. The final prong requires a determination by the USPTO that the applicant

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SOLUTIONS FOR MANAGERS

SO LU T I O N # 2 Make copyrighted images thumbnail size.

A significant amount of litigation has ensued over the use of copyrighted photos in thumbnail size as a means to preview the content for a consumer using an Inter- net search engine or consumers who link to another page via the thumbnail image. The idea, of course, is to allow the consumer-user attempting to find a particu- lar photo graph or image to scan multiple images and choose, rather than having to actually link to the actual page to view, the photos, thus saving the consumer user time.

Copying the image of another is clearly infringe- ment. For example, if Best Furniture, a large retailer of patio furniture, takes photographs of its products and

displays them on their Web site, the use of those photos by a competing retailer on their own Web site (or in a catalog for that matter) is clearly illegal. However, let’s suppose that a Web site that is hosted by Patio and Deck Contractors Inc. provides thumbnail images of Best Furniture’s patio furniture photos on its Web site with a link to Best Furniture’s site as a service to Patio and Deck Contractors’ customers. In this instance, the uses of the images are legal under the fair use exception to the Copyright Act.

An overwhelming majority of courts have ruled that use of thumbnail photograph images by Internet Web sites has “transformed” the original photograph in such a way as to make the use of the images legal.

Avoiding Intellectual Property Liability: Landmines on the Web

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CHAPTER TWENTY FOUR | Intellectual Property 621

L A N D M A R K C A S E 24 . 2 Dunlop Holdings Ltd. v. R AM Golf Corporation, 524 F.2d 33 (7th Cir. 1975)

FACT SUMMARY DuPont chemical company produced a chemical known as Surlyn in 1964. Before DuPont found a commercial use for it, Butch Wagner, who was in the business of selling re-covered golf balls, began to experiment with Surlyn as a golf ball cover. In November 1964 he had developed the formula so that it was suitable to give unprecedented durability to a golf ball and began to sell the Surlyn covered balls that same year. Wagner never applied for a patent. Subsequently, Dunlop obtained a patent for Surlyn covered golf balls and when RAM began to produce the same type of golf balls, Dunlop sued RAM for infringement. RAM defended their use by challenging Dunlop’s patent as invalid because Wagner made the invention public 10 years earlier via his sale of many Surlyn covered balls to a group of regular customers. Dunlop countered that Wagner had concealed an important ingredient and, thus, had concealed the actual invention from the public. The trial court agreed with RAM holding that Wagner’s public use barred Dunlop from obtaining a patent.

SYNOPSIS OF DECISION AND OPINION The appellate court affirmed the ruling of the trial court against Dunlop. The court held Wagner’s golf balls that were coated with the Surlyn-based invention were in public use because Wagner had marketed and sold the

items as best he could as a sole proprietor. The court also ruled that the fact that Wagner did not reveal a key ingredient of the invention to the public was not relevant. Thus, Dunlop could not pass the first prong of the novelty standard (public use test) and is not entitled to a patent.

WORDS OF THE COURT: Public Use Test “The patent claims are broad enough to encompass any golf ball cover made principally of Surlyn, and there is no doubt that Wagner had made a large number of such golf balls and successfully placed them in public use. The only novel feature of this case arises from the fact that Wagner was careful not to disclose to the public the ingredient that made his golf ball so tough. [ . . . ] But in this case, although Wagner may have failed to act diligently to establish his own right to a patent, there was no lack of diligence in his attempt to make the benefits of his discovery available to the public. [ . . . ] [T]he evidence clearly demonstrates that Wagner endeavored to market his golf balls as promptly and effectively as possible. The balls themselves were in wide public use.”

Case Questions 1. What factors did the court consider in ruling that

Wagner’s use was public?

2. What is Dunlop’s theory as to why Wagner’s con- duct did not make the prior use public?

filed the patent within a reasonable time of the invention. Landmark Case 24.2 sets out the public use test of the novelty standard.

Nonobviousness Standard The nonobviousness standard requires that an invention must be something more than that which would be obvious, in light of publicly available knowledge, to one who is skilled in the relevant field. In other words, a patent cannot be granted for minimal improvements that were relatively obvious to those in the field. For example, Joanna adds a small extender switch to her lawnmower (an existing patented invention) that will make it easier for taller people to kill the engine. Joanna is not entitled to a new patent because the invention is essentially a minimal (also called de minimus ) improvement and relatively obvious.

Patentable Subject Matter Standard Note that not all processes and inventions that are nonobvious and novel are patentable. The patentable subject matter standard bars laws of nature, natural phenomena, and abstract ideas from being patentable. Albert Einstein’s theory of relativity was ground- breaking. It was new and nonobvious beyond question. But should this natural phenomenon

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622 UNIT FIVE | Regulatory Environment of Business

be patentable? The patent system was not intended to cover every novel and nonobvious idea. The courts have held that some mathematical algorithms, materials common to nature ( penicillin, for example), or unapplied ideas are not patentable. Ultimately, patent laws cover processes and ideas based on human ingenuity.

Business Method Patents Because of the exclusion of certain subject matter from pat- ent protection, courts have historically struggled with the notion of giving patent protection to a process developed by a business in the name of efficiency or some competitive advan- tage. Some courts rejected novel, useful, and commercially successful business methods as nonpatentable subject matter. However, in 1998, a federal appeals court helped settled many issues related to business method patents and provided guidance for other courts in the land- mark case of State Street Bank & Trust Co. v. Signature Financial Group. 17 The State Street court articulated a cogent legal theory whereby business methods may be patentable so long as they accomplish something practically useful in a novel and nonobvious way. The case also provided a road map for the emerging Internet business community to plan Internet business models in such a way as to be eligible for patent protection. More recently, the U.S. Supreme Court upheld the notion that business methods, such as a system that institutions could use to hedge the seasonal risks of buying energy, were patentable.18

Design Patents Patent laws also protect inventors of any new, original, and ornamental design for an article of manufacture. Design patents are subject to the same requirements as utility or business method patents (novelty and nonobvious) and the design must be primarily ornamental (not primarily functional). Design patents are mainly concerned with protecting the appearance of an article. The shape of the classic Coca-Cola bottle is a famous example of a design based primarily on appearance, not function.

INFRINGEMENT, NOTICE, AND REMEDIES Infringement is defined in the Patent Act as “[W]hoever without authority makes, uses or sells any patented invention, within the United States during the term of the patent there- fore, infringes the patent.” Anyone who “actively induces infringement” of a patent is con- sidered an infringer as well. Infringement occurs in one of two ways: literal infringement or through equivalence.

Literal Infringement The courts have developed three rules for determining whether literal patent infringement has occurred. The rule of exactness applies when the infringer makes, uses, or sells an invention that is exactly the same as the claims made in the patent application, thus infring- ing on the patent. An infringement also occurs if the infringing device does more than is described in the patent application of the protected invention. This literal infringement is known as the rule of addition. Under the rule of omission, however, when the alleged infringing invention lacks an essential element of the patent holder’s claims in the patent application, infringement has not occurred.

Equivalence The rule of omission is subject to abuse because individuals may avoid infringement liabil- ity by omitting an element of the patented device and substituting another element that is substantially similar, but not exact. To prevent this abuse, the Supreme Court developed a

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17149 F.3d 1368 (Fed. Cir. 1998). The case involved a challenge to a patent issued to Signature for a process that facilitated a method whereby several mutual funds pooled their investments into a single fund that achieved management cost savings over many other funds. 18Bilsk: v. Kappos, 561 U.S. (2010)

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CHAPTER TWENTY FOUR | Intellectual Property 623

doctrine that allowed courts to find infringement if the invention performs substantially the same function in substantially the same way to achieve the same result. The doctrine, known as the doctrine of equivalence, however, is limited to an evaluation of whether any of the key elements of the claim have been interchanged with known equivalents.

The Patent Act sets forth appropriate measures that must be taken to properly inform users that an article is patented. This is often done by placing the word patent, the symbol “pat.,” or the patent number on the specific article. If no marking is identifiable, then the patentee is unable to collect damages from the infringers unless they were properly warned and still continued to infringe.

Legal Implications in Cyberspace

Computer Software and Internet Business Methods

Computer Programs Of course, technology continues to give us new challenges as to what is and what is not patentable material. In the early 1970s, the Supreme Court took the view that computer programs and the machines that process them are nothing more than glorified algorithms and, therefore, not patentable. But in 1981, the Court decided Diamond v. Diehr* and “clarified” (some would say reversed) its position, ruling that some computer programs could be patented. Even- tually, the courts developed a test to determine whether algorithm-based computer programming was patent- able. The test was designed to investigate whether the computer-related process was applied in some fashion to physical elements or processes. In other words, did the algorithm allow a certain physical transformation to take place? If the computer programs were accompa- nied by some physical transformation, then they were patentable.

Internet Business Method Patents After the court opened the door to business method patents in the 1998 State Street case (discussed earlier), many Internet- based businesses applied for patents. According to the USPTO, the number of patent applications for Internet business methods have increased nearly 800 percent. One of the most famous Internet business method pat- ents was granted to Amazon for its “One-Click” order- ing system that stores a customer’s billing and shipping information so it does not have to be reentered on subsequent visits to the site. In a highly publicized case during the technology boom of the late 1990s, Amazon (still a relative newcomer in the bookselling business at the time) sued mega-bookseller Barnes and Noble over Barnes and Noble’s use of an “Express Lane” option on

its Web site that was similar to Amazon’s patent in that the feature allowed consumers to “buy it now with just 1 click.” Barnes and Noble defended on the basis that the patent should not have been issued because the inven- tion was too obvious. After a preliminary defeat in the federal courts for Amazon,† the parties settled the dis- pute in March 2002. Although Amazon lost on what was essentially thought of as a procedural issue, one important victory was that they did not lose the patent on the basis of nonobviousness. Therefore, the court signaled that Internet business methods, so long as they fit the requirements for other utility and method patents, were protectible.

In some cases though, courts have been reluctant to enforce business method patents in the technology sector when the process described in the patent is too narrow due to the lack of technology at the time of the patent. In 2002, a California college professor sued Netscape, Microsoft, and AOL for infringing on a patent he obtained relating to efficiency in Web site interactiv- ity. The federal appeals court affirmed the ruling of the trial court, which found that the professor’s patents were invalid altogether and that the patent description was too generic to be enforceable.‡

*450 U.S. 175 (1981). The case involved a patent application for a computer program that facilitated molding uncured synthetic rubber into cured rubber. According to the patent application, the process differed from the previously employed method because of the use of specific mathematical formulas, which would allow for a more accurate measuring of material heating and feeding times. The patent was rejected by the USPTO because the patent examiner did not consider the process met the subject matter requirements of the Patent Act. †Amazon.com, Inc. v. Barnesandnoble.com, Inc., 239 F.3d 1343 (Fed. Cir. 2001). ‡Netscape Corp. v. Konrad, 295 F.3d 1315 (Fed. Cir. 2002).

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624 UNIT FIVE | Regulatory Environment of Business

Patent infringers are subject to the following damages: ■ Actual damages. Includes profit from lost sales and royalties for any sale made by the

infringer, for example. ■ Prejudgment interest. It is not uncommon for years to pass before an infringer is spot-

ted; thus, revenue from possible sales may have been withheld from the patentee for a long period of time.

■ Attorney’s fees. The prevailing party may receive reasonable attorney’s fees where the infringer has acted in bad faith (i.e., had received notice that the invention was patented and yet continued his infringing conduct).

CONCEPT SUMMARY Patents ■ A patent is a government-sanctioned monopoly right that allows an inventor the exclu-

sive rights over an invention or method for a limited period of time. ■ In order to obtain a patent, the invention or method must be novel, nonobvious, and of

proper subject matter (natural phenomena are not protected under patent laws). ■ Some business methods are patentable so long as they accomplish something practi-

cally useful in a novel and nonobvious way. ■ Infringement may occur through either literal means or through equivalence.

Type Coverage Source of Law Example Duration Trade secrets Secret processes, formulas,

methods, procedures, and lists that provide the owner with economic advantage.

State statutes based on Uni- form Trade Secret Act and/or state common law.

Customer lists with contact information, buy- ing patterns, and credit histories.

Life of the entity/owner.

Trademarks/ Service marks/ Trade dress

Words, symbols, or phrases that identify a particular seller’s product/service and distinguish them from other products/services. Trade dress extends trademark protection to shape or color scheme of a product.

Federal statute (Lanham Act) and some state and federal com- mon law.

Google (Trademark) VISA (Service mark) iPod’s shape (Trade dress)

Unlimited; so long as owner actively protects (“polices”) the use of the mark.

Federal statute (Copyright Act of 1976, as amended).

Rights of a recording artist and writer of a song.

Author: 70 years from death of the author. Work for hire: 120 years from date of creation or 95 years from publication.

Patents Inventors for exclusive rights to make, use, license, or sell an invention.

Federal statute: Patent Act

Rights to a newly discovered pharmaceutical.

20 years from date of filing except for design patents (14 years).

TA B L E 24 . 2 I n t e l l e c t u a l Pr o p e r t y Pr o t e c t i o n s

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CHAPTER TWENTY FOUR | Intellectual Property 625

Misappropriation p. 602 The acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means, or disclosure of a trade secret to another with- out express or implied consent.

Economic Espionage Act p. 603 A federal statute passed in 1996 providing criminal penalties for domes- tic and foreign theft of trade secrets.

Trademark p. 603 A word, symbol, or phrase used to identify a particular seller’s products and distinguish them from other products.

Service mark p. 604 A word, symbol, or phrase used to identify a particular seller’s services and distin- guish them from other services.

Trade dress p. 604 A product’s distinctive design, packaging, color, or other appearance that makes it unique from other products or goods.

Secondary meaning p. 606 A requirement for a descriptive trademark to gain protection, acquired when the consuming public primarily associates the mark with a particular product rather than any alternate meaning.

Bad faith p. 607 A legal concept in which a mali- cious motive on the part of the defendant in a lawsuit is necessary in order for a plaintiff to recover. Under the Anticybersquatting Consumer Protection Act, the court looks to nine factors in making a determination of bad faith intent.

Genericity p. 610 Also known as genericide, the act or process of losing trademark protection occurring when, in the mind of a substantial majority of the pub- lic, the word denotes a broad genus or type of product and not a specific source or manufacturer.

Federal Trademark Dilution Act p. 611 A federal law enacted by Congress in 1995, which permits mark holders to recover damages and prevent another from diluting distinctive trademarks.

Originality p. 612 A requirement in order to gain copyright protection in which the author must use his or her own creative capabilities to create the work or medium.

Creativity p. 612 A requirement in order to gain copyright protection in which there must be some cre- ative element used that made the compilation an origi- nal work.

Durable medium p. 612 A requirement in order to gain copyright protection in which the work must be in a tangible form such as in writing, digital, video, and so forth.

Direct infringement p. 613 A theory of copyright infringement occurring when the copyright owner can prove legal ownership of the work in question and that the infringer copied the work in a substantially similar manner without permission.

Indirect infringement p. 613 Also known as con- tributory infringement, a theory of copyright infringe- ment holding a third-party facilitator liable for damages when it has knowledge of the infringement and/or contributes to the infringement in some mate- rial way.

Vicarious infringement p. 614 A theory of copy- right infringement resulting when there has been a direct infringement and a third-party facilitator is in a position to control the direct infringement and benefits financially from the infringement.

No Electronic Theft Act p. 614 A federal law enacted in 1997 (also referred to as the NET Act), which provides for criminal liability for anyone who infringes on a copyright willfully for financial gain.

Fair use p. 614 A defense against copyright infringe- ment where the court will examine the purpose and nature of the use, the nature of the work, the amount used, and the market effect of the use to determine whether the use is permitted.

Per se p. 614 A Latin term literally meaning “of, in, or by itself” without any additional facts needed to prove a point.

Novelty standard p. 620 A standard to obtain a pat- ent requiring that an invention or process be unique and original and that a patent applicant show that no other identical invention or process exists.

Nonobviousness standard p. 621 A standard to obtain a patent requiring that an invention must be something more than that which would be obvious, in light of publicly available knowledge, to one who is skilled in the relevant field.

Patentable subject matter standard p. 621 A standard that bars laws of nature, natural phenom- ena, and abstract ideas from being patentable subject matter.

KEY TERMS

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626 UNIT FIVE | Regulatory Environment of Business

THEORY TO PRACTICE

Literal patent infringement p. 622 One way in which patent infringement occurs, applying when the invention or process violates either the rule of exact- ness or the rule of addition.

Rule of exactness p. 622 A rule for determining whether literal patent infringement has occurred that applies when the infringer makes, uses, or sells an invention that is exactly the same as the claims made in the patent application.

Rule of addition p. 622 A rule for determining whether literal patent infringement has occurred that applies when the infringing device does more than is

described in the patent application of the protected invention.

Rule of omission p. 622 A rule stating that when the alleged patent infringing invention lacks an essential element of the patent holder’s claims in the patent application, infringement has not occurred.

Doctrine of equivalence p. 623 A doctrine that allows courts to find patent infringement if the invention performs substantially the same function in substantially the same way to achieve the same result.

MANAGER’S CHALLENGE

WidgetCo. is a manufacturer and wholesaler of a line of widget products with annual revenue of $50 million. Maurice, a mid-level manager at WidgetCo., super- vises a work team responsible for assessing quality assurance for the widgets before they are shipped to various retailers around the United States. Maurice and his group have been highly successful in developing a quality assurance process, including the development of training manuals, a video series for new employees, and specific checklists and procedures to ensure that any defective or substandard widgets are detected and repaired prior to shipping.

1. Which forms of intellectual property protections are available to WidgetCo. to protect the quality assur- ance process and materials that Maurice’s team have developed?

2. What are the major advantages and disadvantages to each protection?

3. Compare the facts of the hypothetical in this Theory to Practice with the standards for qualification of a trade secret. Could the process be considered a trade secret under these standards?

4. What steps could the company take to achieve its objective of having the process protected under trade secret laws and avoid misappropriation?

5. If WidgetCo. wanted copyright protection for its manuals and training video series, how would they obtain protection under the Copyright Act? If the manuals are simply a compilation of facts known in the industry, is that protectable?

One major consideration in protecting a trade secret is the efforts by the company to keep the secret confiden- tial. Develop a written policy for WidgetCo. (in Theory to Practice above) to help assure that these trade secrets and materials would be protected and kept confiden- tial under the Uniform Trade Secrets Act. What con- siderations should management take into account when developing a policy on trade secrets? Be sure to think about primary stakeholders (such as employees who

may depart with the trade secrets) and secondary stake- holders (such as third-party visitors or outside auditors that may be privy to the processes and materials). Note that this is not intended to be a legal document. Rather, the policy should be thought of as a draft statement of internal control on trade secrets, processes, and materi- als. A sample answer may be found on this textbook’s Web site at www.mhhe.com/melvin .

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CHAPTER TWENTY FOUR | Intellectual Property 627

CASE SUMMARY 24.1 :: Bennett v. Shidler, 338 F.3d 1125 (10th Cir. 2003)

CASE SUMMARY 24.2 :: In re Reed Elsevier, Inc. F.3d 2007 WL 1086403 (Fed. Cir. 2007)

CASE SUMMARY 24.3 :: KSR International v. Teleflex, 550 U.S. (2007)

TRADE SECRET Harvey Bennett, Inc., is a company that developed a method designed to be taught to infants on how to survive in the water. The company developed a course in this technique called “swim-float-swim” and gen- erated revenue by training and certifying instructors who then teach the technique to the public at large for a fee. The instructors are trained extensively on the nearly 2,000 procedures necessary to accomplish the technique. All instructors signed a nondisclosure form

and an Agreement Not to Compete. When several of the instructors resigned and formed a venture called “Aquatic Survival,” Bennett filed suit claiming, among other allegations, misappropriation of the swim-float- swim system.

CASE QUESTIONS

1. Does the swim-float-swim qualify as a trade secret?

2. What factors would the court use to assess whether the technique is a trade secret? Discuss.

TRADEMARKS/SERVICE MARKS Reed Elsevier operated a Web site that allowed users to identify an attorney using a variety of criteria, includ- ing geographic location, practice expertise, and so forth. The Web site, www.lawyers.com , was first used in commerce by Reed in 1998. Later, Reed applied to have lawyers.com registered as a service mark.

CASE QUESTIONS

1. Is the mark too generic for protection?

2. If the court determines the mark is primarily descriptive, what further obstacle must Reed over- come in order to obtain protection for the mark?

PATENTS KSR designs, manufactures, and sells parts to auto manufacturers (not consumers) and developed a pedal device for Ford vehicles. KSR received a patent on the pedal device. KSR also sold products to General Motors (GM) and, in order to make the pedal device compatible for GM cars, KSR added an electronic throttle control to the pedal device. Teleflex claimed to have a patent for the pedal device that could be connected to such a throttle and, therefore, sued KSR

for patent infringement. KSR defended on the basis that the device produced for GM was simply a com- bination of two existing products and could not be patentable.

CASE QUESTIONS

1. What do you think Teleflex’s specific theory of infringement was?

2. Which element of patentability does KSR claim Teleflex is missing in the combined device?

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628 UNIT FIVE | Regulatory Environment of Business

COPYRIGHT Darden filed an application with the Copyright Office seeking to register his Web site, which he titled “APPRAISERSdotCOM.” He described APPRAISERSdotCOM as a derivative work based on “US Census black and white outline maps” and “clip art.” Darden’s application identified “graphics, text, colors, and arrangement” as the material that he added to the preexisting work and in which he claimed copyright protection. Additionally, Darden filed a separate application for registration of the

work “Maps for APPRAISERSdotCOM.” Darden described his “maps” work as a derivative work that, similar to the “APPRAISERSdotCOM” work, was based on preexisting U.S. Census black and white outline maps.

CASE QUESTIONS

1. Determine whether Darden’s compilation is protect- able using the Feist doctrine.

2. Does Darden’s idea contain the necessary elements for copyright protection? Discuss.

CASE SUMMARY 24.4 :: Darden v. Peters, 488 F.3d 277 (4th Cir. 2007)

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CHAPTER TWENTY FOUR | Intellectual Property 629

Self-Check ANSWERS

Trade Secrets 1. This type of customer data is protectable as a trade secret because of its potential value to a

competitor. 2. Probably not protectable unless the system is something highly unique. But the basis of schedul-

ing medical appointments is not typically protectable. 3. Formulas are protectable. 4. Unless the process is highly unique, it is not protectable because it is based on a public source. 5. Software source coding is protectable.

Fair Use 1. Covered by fair use. Limited amount used, noncommercial, and minimal market effect. 2. Not covered by fair use. Market effect and commercial nature of the use would exclude it from

the fair use defense. 3. Probably not fair use. The market effect would determine this question, but the commercial

nature and the fact that it is the entire DVD would weigh against fair use as a defense. 4. Not fair use. Commercial nature, profit motive, amount and substantiality used, and market

effect would bar any use of fair use in this case.

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