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The Ghost Rider Returns – In a Copyright Work For Hire Trial

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July 8  |  Newsletter  |   david

A fan of comic books and motorcycle gang movies, in the 1950s Gary Friedrich began to imagine a motorcycle-riding superhero.  The hero developed into a motorcycle stuntman when Evel Knievel rose to popularity in the late-1960s and in 1968 Friedrich gave his hero a flaming skull for a head.  He then fleshed out a story for this hero.

At that time, Gary Friedrich was a part-time free-lance comic book writer scripting issues of existing comic book serials as requested by Marvel and other publishers.  In 1971, Friedrich decided to try to publish a comic book starring his flaming-skulled hero and created a written synopsis on his own initiative and at his own expenses which he called “Ghost Rider.”

Friedrich decided to approach Marvel with his idea.  Marvel agreed to publish Ghost Rider in its series “Marvel Spotlight”, which was the way in which it auditioned new superheroes.  Friedrich assigned his rights in the Ghost Rider characters to Marvel.  In April 1972 Marvel Spotlight was published featuring Ghost Rider.  It was republished five times.  In each there was a copyright notice in favor of Marvel, but also a credit “Conceived & Written Gary Friedrich.”  In a separate publication Marvel acknowledged that Friedrich “dreamed the whole thing up.”

Ghost Rider quickly became very popular and in May 1973 Marvel launched a separate Ghost Rider comic book series.  Friedrich wrote the stories for several of these later comics on a freelance basis.  Marvel promptly filed copyright registrations for several of these subsequent Ghost Rider comic books.

The Copyright Act of 1909, which was in effect in 1972, provided that the original term of a copyright was for 28 years from the date of first publication.  The Copyright Act of 1909 also provided for a renewal and extension of the copyright for an additional 28 years upon the filing of an application to renew.

In 1976 Congress repealed the 1909 act and adopted a new copyright act, effective January 1, 1978.  The new copyright act provided for a much longer original term and discontinued the concept of a renewal copyright for new copyrights.  However, as to copyrights which were then existing and in their first term on January 1, 1978, the Copyright Act of 1976 continued the concept of having an original term of 28 years, but provided for a renewal term of 67 years.  If no application to renew the copyright was made, then at the expiration of the original term the copyright vests in the author if he is still living.

A copyright work for hire under the 1976 Copyright Act, as construed by the United States Supreme Court[i], is generally a work prepared by an employee (as that term is understood to mean under agency law which is broader than just a W-2 wage employee), or certain types of specially ordered or commissioned works if the parties expressly agree in a written instrument that it is to be considered a work for hire.  The prior law did not require an express agreement.  Instead, the copyright belonged to the person at whose “instance and expense” the work was created.[ii]

Because of this change in the law, in 1978 the then publisher of Marvel comics required Friedrich, and all other freelance artists, to sign a form work for hire agreement.  The agreement was a page long and contained two operative sentences.  The first sentence was 90-words long, the second 45.  The first sentence provided that all works which “have been or are in the future” created by Supplier (Friedrich) “have been and will be specially ordered or commissioned for use as a contribution to a collective work and . . . is . . . a work made for hire.”  The second sentence grants to Marvel all rights of ownership “forever.”

The initial copyright term for Ghost Rider expired in the year 2000, 28 years after it was first published.  Friedrich was unaware of  Marvel’s use of the Ghost Rider character during the renewal term until 2004 when he learned Marvel was preparing to make a Ghost Rider movie.  Friedrich’s attorney wrote to Sony Pictures, which was producing the movie, and asserted Friedrich’s rights in the Ghost Rider copyright.  In a response dated April 14, 2004, Marvel advised Friedrich that Ghost Rider was a work for hire.  Despite taking this position, however,  Marvel sent Friedrich a check when it reprinted Spotlight 5 in 2005.

On April 4, 2007, Friedrich filed suit in the United States District Court for the Southern District of Illinois against the current owners of Marvel and their licensees alleging copyright infringement.  He did so within three years of the April 14, 2004 letter from Marvel advising of its position that Ghost Rider was a work for hire.

The action was transferred to the Southern District of New York.  Marvel filed its answer asserting that Ghost Rider is a “work made for hire.”  It then filed an amended answer to include a counterclaim against Friedrich for copyright infringement.

After discovery, both sides moved for summary judgment.  Friedrich argued that he was the owner.  Defendants argued that Friedrich’s claim was barred by the statute of limitations[iii], and alternatively that Friedrich had assigned his renewal rights to Marvel.

The District Court[iv] concluded that there were genuine issues of material fact concerning the authorship of the work, but that by executing the agreement, even if Friedrich were the sole author, he conveyed those rights to Marvel “forever.”  The District Court reasoned that use of the word “forever” in the 1978 form work for hire agreement indicated the parties intent to convey the renewal rights.  It dismissed Friedrich’s claims, awarded damages to Marvel for copyright infringement and enjoined Friedrich from using the Ghost Rider copyright.

Friedrich appealed.  The Second Circuit vacated the district court judgment and remanded.[v]  It held that there were genuine issues of fact in dispute and therefore the summary judgment granted by the trial court was improper.

The first of three issues the Second Circuit held were in dispute involved the construction of the 1978 work for hire agreement.  The court looked to New York state law to construe the document and held that it was ambiguous and therefore extrinsic evidence should be used to determine its meaning.  It held that the run-on sentences of the document were ambiguous on their face calling them “dense sentences” and “an opaque cluster of clauses.”  It also found that the 1978 document was a standard-form created by Marvel and that the language was ambiguous as to whether it was only forward looking or also covered a work created prior to that date such as the Ghost Rider character.  It also found that the document was ambiguous as to whether it referred only to the original term of the copyright or also to the renewal term.  It found that there was evidence in the record which indicated Friedrich was doing other work for the current owner of Marvel at the time he signed the agreement and that he was specifically told the document only covered that current work and future work.  Citing earlier Second Circuit authority, it held that there is a strong presumption against the conveyance of renewal rights[vi] and although a word like “forever” may be indicative of an intent to convey renewal rights, this intent is to be determined by the trier of the facts and not upon summary judgment.[vii]

The second issue upon which the Second Circuit held there were facts in dispute involved when Friedrich’s claim accrued under the 3-year statute of limitations.  Following earlier Second Circuit authority[viii], the court held that the claim accrues when a reasonably diligent plaintiff would have been put on inquiry as to the assertion of an adverse claim to the copyright.  Friedrich filed suit on April 4, 2007.  The court looked to whether Marvel had asserted an adverse claim prior to April 4, 2004.  It looked at whether Marvel had publicly repudiated Friedrich’s claim, whether it had privately repudiated Friedrich’s claim, or whether it had impliedly repudiated Friedrich’s claim, and found that there were triable issues of fact as to each.

The third issue upon which the court held that there were facts in dispute involved ownership.  The Second Circuit agreed with the trial court that it was improper to grant summary judgment in Friedrich’s favor on the ownership issue.  When the facts are viewed in Marvel’s favor, as they would be in determining whether to grant summary judgment to Friedrich on this issue, it would be possible for a jury to conclude that Friedrich had only an uncopyrightable idea for a motorcycle-riding character when he first presented it to Marvel.[ix]

Although the unique facts of this case relate to a work created prior to the effective date of the current copyright act, for employers the overriding lesson is equally applicable now.  It is not only to have a written copyright work for hire agreement, but that it fits with the facts of the particular situation, that it clearly defines the relationship between the employer and employee, and that it states who is entitled to the copyright in the work.  Failure to do so can not only be costly to both parties in terms of legal fees, but also a great deal of time and money may be expended in exploiting the work only to learn after the fact that the profits may be going to someone else.


[i] Community for Creative Non-Violence v. Reid, 490 U.S. 730, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989).

[ii] Martha Graham School v. Martha Graham Center, 380 F.3d at 634-35.

[iii] The statute of limitations is three years.  The District Court opinion does not mention the statute of limitations argument, but the appellate opinion indicates that defendants raised that issue.  It must have appeared in other parts of the record.

[iv] Gary Friedrich Enterprises, LLC, et al. v. Marvel Enterprises, Inc., et al., 837 F. Supp. 337 (S.D.N.Y. 2011).

[v] Gary Friedrich Enterprises, LLC, et al. v. Marvel Characters, Inc., et al., Docket No. 12-893-cv (2d Cir. 2013).

[vi] Corcovado Music Corp. v Hollis Music, Inc. 981 F.2d 679, 684 (2d Cir. 1993).

[vii] Siegel v. Nat’l Periodical Publ’ns, Inc., 508 F.2d 909, 913 (2d Cir. 1974).

[viii] Kwan v. Schlein, 634 F.3d 224, 228 (2d Cir. 2011)

[ix] Under the 1909 Act, federal copyright protection attached to original works only when those works were published and had a notice of copyright affixed.  Under the 1976 Act, a copyright subsists in an original work of authorship only when fixed in any tangible medium of expression from which it can be perceived, reproduced or otherwise communicated.

No Dice: The Risks of Trade Secret Misappropriation

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October 29  |  Newsletter  |   david

Often the most important remedy in intellectual property litigation is an injunction.  If someone infringes your patent, copyright or trademark, you want a remedy that will require them to stop doing so.  It had long been held in intellectual property litigation that once an infringement was proven, an injunction would issue.

The Legal Background

The 2006 United States Supreme Court opinion in eBay, Inc. v MercExchange, LLC[1] changed that.  It was a patent infringement case and held that the requirements for obtaining a permanent injunction should be no different than the common law requirements for obtaining a permanent injunction in other types of cases which are that the plaintiff must prove (i) that it has suffered irreparable injury, (ii) that remedies at law (monetary damages) are inadequate to compensate for the injury, (iii) that considering the balance of hardships between the plaintiff and defendant, an injunction is warranted, and (iv) that the public interest would not be disserved by a permanent injunction.

In the years since eBay, there has been a great deal of discussion about the application of its holding to other types of intellectual property and other related areas of the law.  The decision in eBay specifically discussed the Copyright Act, and so it is easy to conclude that it also applies to copyright cases.  It has also been held to apply to trademark infringement cases[2] and to false advertising cases[3] brought under §43(a) of the Lanham Act (the federal trademark act); however, there has been some inconsistency in doing so.[4]

Now comes a trade secret case in Virginia.  A trade secret is a legally protected right of a business to its confidential, proprietary information.  Patent, copyright and trademark are ways for a business to protect its creative efforts.  Trade secrets provide another way.  For a general discussion of trade secret law, see Trade Secret Law.

The case is a big one.  It resulted in a $920 million judgment and a 20-year, world-wide injunction against the Korean manufacturer Kolon Industries, Inc. producing its competitive product.  The case is in the Richmond District of the United States District for the Eastern District of Virginia.  The court had personal jurisdiction over the South Korean defendant because some aspects of the misappropriation occurred in the United States and Kolon entered a general appearance in the case and filed a counterclaim (which was severed).  As would be expected in such a large case, every issue was contested which has resulted in numerous written opinions, including a 70-page opinion entered August 30, 2012 on DuPont’s post-trial motion for a permanent injunction.

The Factual Background

The following facts are from the court’s opinion.  They are egregious.  After a seven-week trial, a jury found that Kolon violated the Virginia Uniform Trade Secrets Act.  Using a fifty-one page verdict form, the jury specifically found that Kolon willfully and maliciously misappropriated and used 149 DuPont trade secrets for the manufacture of DuPont’s para-aramid fiber Kevlar®.

Kolon had attempted in the 1980s and 1990s to develop a commercial para-aramid product.  It was unsuccessful and in 1995 abandoned the effort.  In 2002, Kolon’s top executive directed that the company renew its efforts to produce para-aramid.  In 2005, Kolon announced that it soon would enter the para-aramid fiber market with its product Heracron®.  It did begin production but its efforts were less than successful.  Because it is a lucrative market, the company’s top management again made success in the manufacture of Heracron® a top priority.

Kolon continued its development efforts and was making some progress toward success, but it encountered significant problems in quality control and in efficient production, both of which kept Heracron® from being competitive in the market.  In its effort to become competitive, Kolon made the deliberate decision to acquire DuPont’s trade secrets and confidential information.

To achieve its objective, Kolon retained as “consultants” former DuPont employees whom it paid to divulge DuPont’s trade secrets.  Once such consultant, Mitchell, was a long-time former employee that DuPont had terminated in 2006.  Despite having entered into a non-disclosure agreement with DuPont, Mitchell divulged DuPont trade secrets to Kolon.  Apparently not satisfied that Mitchell was spilling all the beans, during a luncheon recess from a meeting in Korea, Kolon surreptitiously copied the hard drive of Mitchell’s laptop.

At trial, DuPont presented evidence that Kolon had incorporated the stolen DuPont trade secrets into Kolon’s own manufacturing facilities, including machine configurations that DuPont had used solely because of its need to fit machinery into limited space in its plant.

Kolon’s flagrant behavior didn’t end when the lawsuit was filed.  Kolon also engaged in some serious shenanigans during the trial.  DuPont discovered a number of screenshots that indicated employees of Kolon had deliberately deleted, overwritten or destroyed approximately 17,000 emails and other documents.  That resulted in Judge Payne granting an adverse inference instruction to the jury, meaning that the jury could infer that the documents destroyed were adverse to Kolon.

Whether eBay Applies to Permanent Injunction under Virginia Uniform Trade Secrets Act

Following trial, DuPont moved for a permanent injunction against Kolon using DuPont’s trade secrets.  In considering the issue of whether a permanent injection should issue against Kolon, Judge Payne conducted a comprehensive analysis which begins with the question of whether the eBay doctrine for issuance of an injunction, if applied to this case, would encroach upon the bedrock case of Erie R. R. v. Tompkins.[5]

Remember, the eBay case involved patent infringement – a violation of federal law for which the federal trial court had federal question jurisdiction.  The Kolon case involved trade secrets under Virginia law for which the federal trial court had diversity jurisdiction, not federal question jurisdiction.  As noted by Judge Payne, under the Erie doctrine, federal courts must apply the substantive law of the forum state in diversity of citizenship cases.  As he also notes, since Erie federal courts have struggled to distinguish substance from procedure.

Judge Payne then engages in a thoughtful analysis of the application of Erie to the issue of a permanent injunction, which courts and lawyers in other jurisdiction will find instructive.  He concludes that analysis by stating that there is a widely held perception the issue has not been resolved by the Supreme Court of the United States.

However, he then resolves the issue for the Kolon case by stating that the Fourth Circuit, which is direct authority for federal courts in Virginia, “has spoken directly on this admittedly complicated issue.…  In Capital Tool,[6] the Fourth Circuit concluded that the application of state law to the issuance of a final injunction in diversity cases is consistent with the principles announced in Erie when it articulated that:  ‘There is no reason to exclude form Erie state substantive law regarding the issuance of final injunctions. 837 F.2d at 172’.”

Judge Payne continues:  “(A) complainant need not allege or prove irreparable harm when it involves a statute that authorizes injunctive relief.  All that need be proved is a violation of the statute.” (Emphasis by Judge Payne) (citing Va. Beach S.P.C.A., Inc. v. S. Hampton Roads Veterinary Ass’n, 329 S.E.2d 10 (Va. 1985) and Envtl. Def. Fund., Inc. v. Lamphier, 714 F.2d 331 (4th Cir. 1983)).[7]

Judge Payne then holds:  “For the foregoing reasons, the Court finds that applying the standard for injunctive relief in eBay to DuPont’s request for a permanent injunction under the VUTSA would trench upon the rule of Erie.  Hence, the Court will apply Virginia’s principles as set forth in the decisions of the Commonwealth’s highest court.  Under those principles,  DuPont, having proved a violation of the VUTSA, does not have to prove irreparable harm or the lack of an adequate remedy at law to receive an injunction against the actual misappropriation of its trade secrets by Kolon.”  (Opinion p. 30)

Judge Payne then states:  “The conclusion that DuPont is not required to establish irreparable injury or the lack of an adequate remedy at law does not mean that DuPont is automatically entitled to injunctive relief.” (Opinion p. 31)   He then turned his attention to the factors under Virginia law which should be considered in determining whether to grant an injunction.

Injunction under Virginia Uniform Trade Secrets Act[8]

Kolon, relying upon Faiveley Transport Malmo AG v. Wabtee Corp.,[9] argued that the $920 million judgment against it makes in unnecessary and inappropriate to issue an injunction.  The Second Circuit in Faiveley commented that an award of damages often will provide a complete remedy for misappropriation absent a showing that, unless enjoined, the misappropriator will further disseminate the stolen secret.  Judge Payne gave Faiveley short shrift:  “That somewhat remarkable, overly simplified statement was made without the benefit of a full record, and it was dictum.”  (Opinion p. 33)

Judge Payne pointed to Kolon’s assertion that it could not afford the premiums on an  appeal bond and noted that they may have no assets in the United States forcing DuPont to attempt to enforce its judgment in Korea, to indicate there is no assurance DuPont will be successful in obtaining satisfaction of its judgment.   During the time DuPont would be required to spend in seeking to enforce its judgment, without an injunction, Kolon would be free to use the stolen trade secrets.  Judge Payne concluded that the $920 million monetary judgment would not preclude an injunction.

In balancing the equities between DuPont and Kolon, Judge Payne found that the equities strongly favored granting and injunction.  In considering the public interest in determining whether an injunction should issue, Judge Payne found that in a global economy where many international companies do not accord trade secrets the same respect and protection as they are granted under the Uniform Trade Secrets Act, which has been enacted by all states except Massachusetts, New York, North Carolina and Texas, it serves the public interest for those who violate the law to know that they will be caught, they will be prosecuted civilly, and they will not be able to profit from their stealing.  Judge Payne then found that injunctive relief will help serve as a deterrent to trade secret misappropriation.

Judge Payne thus found that the factors under Virginia law favor granting an injunction.  When granted, an injunction must be tailored to address properly the wrong that has been proved and to effectuate proper relief.

Type and Scope of Injunction

Judge Payne then addressed the type of injunction to issue – a “production” injunction or a “use” injunction.  DuPont requested an injunction prohibiting Kolon from making a para-aramid product altogether, not just prohibiting Kolon from using the stolen secrets in making the product.

Judge Payne determined that Kolon had not created a significant and comparable design for the product prior to stealing DuPont’s trade secrets.  He further determined that the misappropriated trade secrets are inextricably intertwined in Kolon’s production line and operating processes, and further that it would not be possible for Kolon’s employees to “unlearn” the secrets that were misappropriated.  He also determined that given Kolon’s flagrant misconduct, Kolon could not be trusted to police itself on an injunction that would prohibit only use of the stolen trade secrets.

The scope of the injunction deals with both its geographic scope and its duration.  DuPont requested a worldwide scope.  Judge Payne looked to the Restatement (Third) of Unfair Competition, authority from the Eleventh Circuit[10] and the Ninth Circuit,[11] and general principles of equity to conclude that an extraterritorial injunction is warranted.

Judge Payne considered the “independent development” standard in determining the duration of the injunction, but also cited with approval a treatise[12] which states that while the general principle and judicial preference is to limit injunctive relief to independent development time, courts seek to do equity and will enter an injunction for an arbitrary term if needed to accomplish an equitable result.  In this case, Kolon had not perfected the technology after almost 20 years of trying and the evidence was that it took DuPont 30 years to develop Kevlar.®

As a result, Judge Payne issued an injunction against Kolon prohibiting the production of any para-aramid fiber for 20 years, as well as a permanent injunction against the use of the trade secrets, and a permanent injunction against disclosure of the trade secrets not only to others outside Kolon but also against further disclosure to other employees of Kolon.

Footnote

On September 21, 2012, in a split decision a three-judge panel of the Fourth Circuit stayed the injunction pending Kolon’s appeal.

For his part, in 2010 DuPont’s former employee Mitchell was convicted of stealing numerous trade secrets concerning the making of Kevlar® and passing them to Kolon.

And now, on October 18, 2012, Kolon and five of its employees were indicted for their actions.  That may take some of the fight out of them.  Those employees could soon find themselves with a free one-way airplane ride to the United States, handcuffed to U.S. Marshalls.

What It All Means

For lawyers, the case is instructive because of its exhaustive analysis, first on the issue of a permanent injunction under the Uniform Trade Secrets Act.  It will be persuasive authority in all states, except the four which have not adopted the UTSA.  Perhaps more importantly, though, the case clearly sets cases brought under the UTSA, state law, outside the limitations of eBay on issuance of a permanent injunction when a statutory violation has been established.

For business men and women, the lesson is clear.  If you steal property of a competitor there is a significant downside if you get caught.  There is also a significant downside if you get caught later destroying evidence during the course of the trial.  No judge would take kindly to that.  It goes to the heart of being able to have a fair trial.  Kolon’s egregious misconduct permeates every aspect of this case and the court’s opinion.

Instead to taking their company to new heights and building an empire for themselves, the key executives of Kolon may instead be known for the company’s collapse.  They not only rolled the dice on the future of their company, they did so with no small amount of personal risk as well – time away from their families in a foreign country, living in the spartan accommodations of a U.S. prison.

Copyright 2012 David G. Harrison.  All Rights Reserved.

[1] 547 U.S. 388, 26 S.Ct. 1843,164 L.Ed.2d 625 (2006)

[2] See Audi AG v. D’Amato, 469 F.3d 534 (6th Cir. 2006);  North American Medical Corp. v. Axiom Worldwide, Inc., 522 F.3d 1211 (11th Cir. 2008); Voices of the Arab World, Inc. v. MDTV Medical News Now, Inc., 645 F.3d 26 (1st Cir. 2011)

[3] See PBM Products, et al. v Mead Johnson (4th Cir. 2011)

[4] See Reno Air Racing Association v. McCord, 452 F.3d 1126 (9th Cir. 2006); Abercrombie & Fitch Co. v Moose Creek, Inc., 486 F.3d 629 (9th Cir. 2007); Marlyn Nutraceuticals, Inc. v. Muchos Pharma GmBH & Co., 571 F.3d 873 (9th Cir. 2009)

[5] 304 U.S. 64 (1938)

[6] Capital Tool & Mgf. Co., Inc. v.  Maschinenfabrik Herkules, Hans Thoma Gmbh, 837 F.2d 171, 172 (4th Cir. 1988)

[7] Like Kolon,  Capital Tool involved the alleged violation of the Virginia Uniform Trade Secrets Act; but unlike Kolon, Capital Tool involved a request for a preliminary injunction, not a permanent injunction after a trial on the merits.  The trial court in Capital Tool denied the preliminary injunction which the Fourth Circuit affirmed.  The Virginia Uniform Trade Secrets Act provides that “(a)ctual or threatened misappropriation may be enjoined” (emphasis added).  Code of Virginia §59.1-337 A

[8] Code of Virginia §59.1-336 et seq.

[9] 559 F.3d 110 (2d Cir 2009)

[10] Nordson Corp. v. Plasschaert, 674 F.2d 1371 (11th Cir 1982)

[11] Lamb-Weston, Inc. v McCain Foods, Ltd., 941 F.2d 970 (9th Cir. 1991)

[12] Milgrim on Trade Secrets §15.02[1][e]

The Stamp War — Shoot Five: Gaylord v. United States – Copyright Infringement

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May 21  |  Newsletter  |   david

In litigation that already has lasted nearly twice as long as the war itself, volleys are still being fired over the copyright for a portion of the memorial to a war that ended in armistice and not peace.  The case is Gaylord v. United States.  On May 14, 2012, it was remanded by the U. S. Court of Appeals for the Federal Circuit to the U. S. Court of Federal Claims for another shot at determining the amount of damages, the fifth courthouse battle in this protracted campaign.

John Alli, a very good amateur photographer, wanted to do the right thing and tried to do the right thing, but nevertheless got caught in the cross-fire of what the trial court called an “open and contentious dispute” over copyright ownership to the sculpted figures in the Korean War Memorial on the National Mall in Washington. 

Wanting to give his father, a Korean War veteran, a meaningful retirement gift, Alli went to the Korean War Memorial on a winter day after a snowstorm and took numerous pictures.  He settled on one.  He thought it was good and decided to enter it in a photo contest.  He won.

Thinking his photo might have commercial value, Alli made some inquiries.  He was told by a mall vendor that the war memorial artwork was copyrighted.  Mr. Alli sought to locate the copyright holder of the sculptures so that he could obtain a license to commercialize his photo of them.  Through a series of referrals Alli ended up locating and talking with a Mr. Lecky of Coopers-Lecky Architects, P.C.  He entered into a licensing agreement with Lecky and agreed to pay a 10-percent royalty to an entity Lecky organized for the purpose.  There was no dispute that Alli is entitled to a copyright in his photograph as a derivative work.  The dispute is over the copyright to the underlying work, the sculpted figures in the memorial.

When the idea of creating the Korean War Memorial arose, an independent commission was created with the responsibility of constructing the memorial.  That commission sought the assistance of the Army Corp of Engineers.  The Army Corp of Engineers selected Cooper-Lecky Architects (CLA) to create, construct and install the memorial.  A contact was entered into between the Corp of Engineers and CLA which provided that CLA could not assert or establish a copyright claim in the project and that all designs, drawings and other works developed in the performance of the contract are the sole property of the government.

CLA entered into a sub-contract with an artist, the plaintiff, Mr. Frank Gaylord, to sculpt the human figures, a platoon of 19 soldiers he called the “Column,” which is a central component of the memorial.  The contract between CLA and Gaylord did not contain the provisions regarding copyright that were in the prime contract.  Instead, it provided that rights to copyright would be covered by a separate agreement.

There is no indication from the court opinions that Gaylord was aware of the copyright provisions in the prime contract between the Corp of Engineers and CLA.  Perhaps Lecky hadn’t carefully read his contract with the Corp of Engineers.  At one point the commission organized to create the memorial had claimed a copyright, but for unexplained reasons it withdrew all claims for copyright ownership or royalties.  A dispute ensued between Lecky and Gaylord over copyrights to the memorial.  Eventually, however, Gaylord and CLA entered into an agreement which acknowledged Gaylord owned the copyright to the Column.  A separate agreement granted CLA a license and provided a royalty schedule; however, Gaylord terminated the licensing agreement claiming Lecky had breached it.[1]

Although there may have been some confusion over the copyright claims[2], what appears from the opinions is that on one side the prime contract between CLA and the Corp of Engineers provided that CLA could not assert a copyright claim; and on the other side CLA acknowledged that Gaylord owned the copyright to the Column.

Despite this, when Alli located Lecky and inquired about copyright ownership of the underlying work, Lecky said that he, Lecky, was the “outright” owner of the copyright.  That was wrong and thus the troubles began.

At about this time, the U. S. Postal service wanted to create a commemorative stamp to honor Korean War veterans.  It held a competition and Alli entered his photograph of the Column.  He won.  The Postal Service entered into an agreement with Alli.  Mr. Alli told the Postal Service that it would also need permission of the owner of the copyright to the underlying work and referred the Postal Service to Lecky.  Apparently Lecky neglected to mention to either Alli or the Postal Service that Gaylord created the Column.  It appears both thought that Lecky had created it.  The appellate opinion indicates Lecky also did not tell Gaylord about his agreement with Alli.

The Postal Service then proceeded to produce approximately 86.8 million of the stamps from July 27, 2003 through March 31, 2005, and received over $17 million in sales.  Some of the stamps were used as postage, some were held by collectors.

The stamp came to the attention of Gaylord.  He took exception and filed suit against the United States for copyright infringement in the United States Court of Federal Claims.[3]  Gaylord also filed a companion suit against Alli in the U. S. District Court of Maryland, presumably where Alli lived.  That suit settled.

It must be assumed the prime contract which the government had with CLA did not contain a provision which required CLA to include the copyright ownership language in its sub-contracts.  It must also be assumed that neither Alli nor the Postal Service required a written representation and warranty from Lecky that he owned the copyright and provide indemnification against  infringement claims.  Ah, hindsight.  For whatever reason, CLA and Lecky avoided having the government bring a third-party claim against either of them.  There is also no mention of a direct claim by Gaylord against CLA for breach of contract.

On the issue of liability, the trial court (2008 opinion) held that Gaylord did have a valid copyright, but that the stamp fell under the “fair use” exception and thus there was no infringement by the Postal Service.[4]  The appellate court held that the fair use exception did not apply and there was infringement, and remanded for a determination of damages.

The Copyright Act provides that even if someone has a copyright in a work, another person may use the copyrighted work for purposes such as criticism, comment, news reporting, teaching, scholarship or research.[5]  Such use, which has become known as “fair use,” is not an infringement.  The statute sets out four factors which must be considered in determining fair use: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes, (2) the nature of the copyrighted work, (3) the amount and substantiality of the portions used in relation to the copyrighted work as a whole, and (4) the effect of the use upon the potential market for or value of the copyrighted work.

Whether use in a particular circumstance is fair use is not always easy to determine.  Cases are fact dependent.  The trial court analyzed these four factors leaning heavily on the first factor.  In evaluating the purpose and character of the use of the work, courts inquire whether the use is “transformative.”  That is, whether the use of the copyrighted work adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message.[6]

The trial court found that the photographic image was transformative because of its gray winter colors and snow, and that the Postal Service edited the photograph image for its stamp, making it even more monochromatic in appearance.

The appellate court didn’t go for that.  It held[7] that the photographic image was not transformative, dismissing the Postal Service’s argument that it was by saying nature’s decision to snow cannot deprive Mr. Gaylord of an otherwise valid right.  It analyzed the other three factors and held that the Postal Service’s use of the Column did infringe Gaylord’s copyright.  It sent the case back to the U. S. Court of Federal Claims for its first attempt at determining damages.

The statute which waives sovereign immunity and allows claims of copyright infringement to proceed against the United States also sets out the remedy.  It provides that the owner of the copyright may recover “reasonable and entire compensation.”

In the remand, Gaylord argued for a 10% royalty as reasonable compensation and offered evidence of other royalties he had received.  Gaylord calculated such a royalty would amount to slightly over $3 million.  As in other cases before it, the court looked to 17 U.S.C §504, the statute which provides remedies for copyright infringement claims.  It rejected a damage calculation based upon royalties as being authorized by either 28 U.S.C §1498(b) or 17 U.S.C. §504.  The Postal Service had paid Alli $1,500 to use his photographic image.  The highest amount the Postal Service had ever paid for an image to use on a stamp was $5,000.  The court called this range the “zone of reasonableness” and awarded Gaylord the maximum amount within that range, $5,000.  That was April 22, 2011.  Gaylord filed suit on July 25, 2006.  His copyright was infringed.  After nearly five years of litigation, he got $5,000.

Gaylord didn’t like that and so the case went back up to the U.S. Court of Appeals for the Federal Circuit.  The appeals court noted favorably that when a plaintiff, such as here with Gaylord, cannot show lost sales, lost opportunities to license, or diminution in the value of the copyright, other circuits have used “the fair market value of a license covering the defendant’s use” in calculating damages.  It then held that the value of this license should be calculated based upon a hypothetical arms length negotiation between the parties.  It stated that it is incorrect in a hypothetical negotiation inquiry for a court to limit its analysis to only one side of the negotiating table.  The trial court in this case had looked only to what the Postal Service would have paid and did not consider what Gaylord had received for royalties on other works he licensed.  The appellate court went on to say that the Postal Service could not insulate itself from paying for the damages it caused by resting on its past agreements and by creating internal policies that shield it from paying fair market value for what it took.

The Federal Circuit thus joins other circuits in holding that a royalty based analysis is proper in copyright infringement claims against the United States when the plaintiff cannot show lost sales, lost opportunities to license, or diminution in the value of the copyright because of the infringement.  It found that the trial court’s damage calculation was an abuse of discretion and reversed.

The Federal Circuit then provided guidance.  Mr. Alli had entered into a license agreement with CLA agreeing to pay a 10% royalty thinking it owned the copyright.  The Postal Service itself had licensed the stamp image to third parties for use on retail goods in exchange for a royalty of 8% of sales.  The appellate court then said that on remand the trial court’s analysis of a hypothetical negotiation may lead it to conclude that different license fees are appropriate for the three categories of infringing goods the court identified: (1) stamps used to send mail, (2) unused stamps purchased by collectors, and (3) commercial merchandise featuring an image of the stamp.

The legal significance of the case is that Federal Circuit has now held that a royalty based calculation of damages is appropriate in the circumstances of this case.

The practical lesson for businesses or individuals who want to license a copyrighted work is to retain a lawyer to (1) do a copyright search, and (2) incorporate into the license agreement a representation and warranty by the party granting the license that it is the sole owner of the copyright to the work as well as an indemnity against infringement claims.  Apparently in this case neither Mr. Alli nor the Postal Service did either of those things.

It’s understandable to me that Mr. Alli wouldn’t know to do so.  He is an amateur photographer who started out only wanting to create a gift for his father.  But it seems he soon got in over his head.  He should have consulted with a lawyer knowledgeable in such matters before entering into a license agreement with Mr. Lecky, but that mistake for an individual is not uncommon.

It is inconceivable to me, however, that the Postal Service apparently did not do so.  It has been caught up in long, and undoubtedly very expensive ligation, when an ounce of prevention could have avoided it.

For an artist looking for a lesson in this case, I’m not sure there is anything Mr. Gaylord could have done differently to better protect himself.  He registered five copyrights of his work at various stages of completion.  A copyright search would have shown his claim.

This case is one that should have had early mediation.  Perhaps they tried and couldn’t reach an agreement.  It’s hard to know why the parties seemed hardened into their positions.  The case is still ongoing after five years.  Avoiding lengthy and costly litigation would seem a strong incentive to mediate.  Ah, hindsight.

As for the outcome in the upcoming fifth battle of this campaign, in my book Mr. Gaylord deserves a hefty damage award.  My prediction is it will come in at high six figures or possibly low seven figures.  Too bad for the Postal Service.  It’s hurting economically and I’m sure doesn’t have extra cash laying around to pay such a damage award, but it could have avoided its predicament with only a little legal work up front.  If it didn’t conduct a proper due diligence investigation before entering into the transaction, or create the documents to protect it and provide it with a claim against Lecky, that’s it’s fault.  Perhaps this will be the final battle and within another year the troops can come home.

Copyright 2012 David G. Harrison.  All Rights Reserved.
 ___________________________________

[1] There is no indication that the question of whether Gaylord had a right to terminate the licensing agreement was ever litigated.  The trial court opinion indicates that Gaylord terminated “both” agreements; however, it is not clear from the appellate court’s recitation of facts that he terminated the agreement in which Lecky acknowledged that he, Gaylord, owned the copyright to the Column.  There would seem to be no advantage for him to do so.  The appellate opinion does recite that Lecky failed to notify Alli of his agreement with Gaylord, which would seem to imply it was still in existence.

[2] A copyright search indicates that Cooper Lecky Architects, PC had registered copyrights to some aspects of the memorial.

[3] United States Code §1498 (b) waives sovereign immunity for copyright claims against the United States and provides that exclusive jurisdiction for such actions is in the U.S. Court of  Federal Claims.

[4] The Postal Service also argued joint authorship of Alli and Gaylord which would permit Alli to license the work but would require him to account to Gaylord for any profit he made.  It also argued that the memorial is an “architectural work” covered by the Architectural Works Copyright Protection Act.  The AWCPA was enacted in 1990 and extended limited copyright protection to architectural works.  The AWCPA provides that copyright protection under AWCPA “does not include the right to prevent the making, distributing or public display of pictures, paintings, photographs, or other pictorial representations of the work, if the building in which the work is embodied is located in or ordinarily visible from a public place.”  The Postal Service argued that since the memorial has benches it is a “building” to which copyright protection could only be extended under the limited provisions of AWCPA.  That argument seems a reach and apparently the trial court thought so as well.  The Postal Service lost on both the joint authorship and AWCPA arguments.  Those holdings were affirmed on appeal.

[5] 17 U.S.C §107

[6] Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 579 (1994)

[7] Gaylord v. U.S., 595 F.3d 1364 (Fed. Cir. 2010)


Shock Jocks Get Zapped – Digital Millennium Copyright Act Violated

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June 26  |  Newsletter  |   david

On June 14, 2011, in the case of Peter Murphy v. Millennium Radio Group, LLC, Craig Carton and Ray Rossi, the United States Court of Appeals for the Third Circuit handed down the first appellate decision construing certain key provisions of the Digital Millennium Copyright Act.

 In 2006, a professional photographer was hired by a magazine to take a photo of two radio shock jocks who the magazine had just designated as “best shock jocks” in New Jersey.  (That there is any value in shock jocks, let alone a purported “best,” is worthy of discussion; but not to the point here.)  The photo depicted the two shock jocks standing, apparently nude, behind a sign with the radio station’s call letters.  The photographer created the image and retained the copyright to it.

The magazine, which had the copyright owner’s permission to use the photograph, ran it in their “Best of New Jersey” issue, along with a notice crediting the photographer.  The photo credit appeared in the gutter of the magazine alongside the photograph.

So far so good.  The radio station and the shock jocks were getting the publicity they wanted.  But then things took a turn.  Soon the shock jocks found themselves on the receiving end and,  I’m guessing, things weren’t as funny that way around.

Without seeking permission from the photographer, an unknown employee of the radio station scanned the photographic image appearing in the magazine article and posted the scanned image to the radio station’s web site and also to myspacetv.com.

The photographer took exception and hired a lawyer, a move we always appreciate.  His lawyer sent a cease and desist letter.  The shock jocks responded by escalating the trash talk, allegedly stating that people should not do business with the photographer because he would probably sue his partners.  They also, apparently intending a derisive comment, allegedly implied that the photographer, who identifies himself as a married heterosexual and the natural father of children, was a homosexual.  The opinion does not indicate whether the Internet images were taken down in response to the demand, and does not address a separate provision of the DMCA whereby a take-down demand can be made to the Internet Service Provider of the offending sites.

The photographer proceeded to file suit in the United States District Court for the District of New Jersey for violation of the DMCA, copyright infringement, and state law defamation.  The District Court found for the defendants and dismissed all claims on summary judgment.

On appeal, the Third Circuit vacated the District Court’s summary judgment order on all counts.  The Court analyzed the defendant’s “fair use” assertion to the infringement claim and found that since all that was done was post the image, there was no fair use exception to infringement.  This was not a case, such as a news organization using an image in the context of news reporting or opinion, where the fair use exception might apply.

The case is significant, however, not for its analysis of fair use, but because of its statutory construction analysis of two key provisions of the DMCA.

The Digital Millennium Copyright Act was enacted by Congress in 1998 to make the laws of the United States consistent with two 1996 treaties of the World Intellectual Property Organization, to which the United States is a signatory.

The Court’s technical analysis of the DMCA is important to lawyers, but most likely not of much interest to others.  I’ll abbreviate.  It involved whether one provision of the DMCA limited the language of another section.

Section 1202 of the DMCA prohibits any person from altering or removing any “copyright management information,”  and also prohibits any person from distributing any work knowing that the copyright management information has been altered or removed.  Remember that the copyright notice in the magazine appeared in the gutter of the magazine alongside the image, rather than being part of the image itself and the radio station did not post the separate copyright notice that appeared in the magazine.  Remember also that we’re talking now about a violation of DMCA, not infringement.

The photographer argued that by not including the copyright notice that appeared in the magazine, the “copyright management information” of the image was thus altered, and by posting the image to the Internet the image was distributed knowing that the copyright management information was altered.  Thus, it argued, by the plain language of Section 1202, a violation of DMCA occurred.

The radio station attempted to limit the application of Section 1202 by the language of Section 1201.  Section 1201 provides that no person shall “circumvent a technological measure that effectively controls access to the work.”   The defendants’ argued  that this should limit the scope of the definition of “copyright management information” in Section 1201.  They argued that the chapter as a whole protects various kinds of automated systems which protect and manage copyrights.  Therefore, they argued, information like the name of the author of a work is not “copyright management information” unless it also functions as part of an automated copyright protection or management system.  Thus, to remove the printed credit appearing alongside the magazine photograph when it posted only the photograph to the Internet, would not violate Section 1202 because the credit was not part of an automated system.

The radio station did have support for that argument.  Federal trial courts have split on the issue.  However, in this first federal appeals court case dealing with the matter, this court didn’t buy the defendants’ argument.  The unanimous three-judge panel referred to the photographer’s argument as “straightforward.”

 In a detailed statutory construction analysis, the court found that Sections 1201 and 1202 address different issues, and that the radio station and the shock jocks violated the DMCA.

 It would be an interesting factual situation if, unlike this case, a defendant had in its possession the original digital photo, but instead of posting the original to the Internet instead posted a scanned copy.  What’s the difference?  A digital photograph can contain an embedded digital tag such as a copyright notice, that would be seen if the original image had been uploaded to the Internet.  It would not be seen in a scanned image which was uploaded.  We’ll leave that issue for another day.

Since this decision was by a three-judge appellate panel, the radio station and shock jocks could move to have the case reconsidered by all the judges.  My guess is that the shock jocks won’t have anything more to say.  It’s probably time to open the wallet wide and settle the case.

It does seem the court reached the right result, although the analysis needed to reach that conclusion doesn’t seem to me as straightforward as this panel considers it to be.  Look for this issue to live on in other circuits and perhaps one day reach the Supreme Court.

In perhaps a fitting ending to this case, by the time the case was argued on appeal the shock jocks were no longer together and were no longer employed by the radio station.  And it all seemed like so much fun at the time.

Copyright 2011, David G. Harrison.  All rights reserved.

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Dig This – Trademark Infringement by Plaintiff

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July 31  |  Newsletter  |   christina

In a pair of unpublished opinions issued last month, the Fourth U. S. Circuit Court of Appeals in Richmond affirmed District Court judgments and emphatically reminded trademark plaintiffs that there can be a high price to pay if you get it wrong – losing on counterclaim for trademark infringement of defendant’s mark, damages, and an order to pay defendant’s attorney’s fees.

Losing your trademark infringement case and having to pay your own attorney’s fees is not an ideal outcome.  Worse still is being ordered to pay the multimillion dollar bill of the opposing party’s attorneys.

That is exactly what happened in Super Duper, Incorporated v. Mattel, Incorporated, decided June 10.  Super Duper filed applications with the United States Patent and Trademark Office to register several trademarks.  Mattel, Incorporated opposed registration.   The parties were unable to reach a settlement.  Apparently preferring a federal court forum to the Trademark Trial and Appeal Board, Super Duper filed a declaratory judgment action in the United States District Court for South Carolina requesting the court to rule that its trademarks did not infringe those of Mattel.  Mattel counterclaimed for trademark infringement, dilution, unfair competition and fraud.

It did not go well for Super Duper.  After a weeklong trial, the jury returned a verdict of trademark infringement for Mattel in the amount of $400,000.  That’s not the outcome Super Duper envisioned.  I’m guessing neither was this.  The court increased the damage award  to just under $1 million and awarded Mattel over $2.6 million in attorneys fees.

Same thing in Employers Council v. Feltman, an infringement and  cybersquatting case decided June 21.  The court found the facts sufficiently egregious to justify an award of attorney’s fees.

The lesson:  Get an adequate analysis of the trademark law issues before you use a mark.  It’s a lot cheaper than trying to dig yourself out of a hole later on.

Google This

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September 30  |  Newsletter  |   christina

In an opinion issued August 8, the United States District Court for the Eastern District of Virginia held that sponsored ads which appeared with search results on Google, in the circumstances of that case, violate trademark law.

Government Employees Insurance Company brought suit against search engine giant Google because it discovered that when the search term “GEICO”, which is a federally registered trademark of the plaintiff insurance company, is entered as a search term in the Google search engine, sponsored ads of its competitors would appear adjacent to the search results.  That happened because Google used the term “GEICO” in its computer coding for the sponsored ads.  In addition to the term “GEICO” appearing in Google’s computer coding, some of the sponsored ads also contained the term “GEICO.”

A trademark is infringed under federal law if a company uses in interstate commerce a word or design, which is substantially similar to the trademark or service mark of another company, in connection with the sale, distribution, or advertising of goods or services, in a manner which is likely to confuse an ordinary consumer as to the source of origin of the goods or services.   Cases often turn on the issue of likelihood of confusion.  Actual confusion occurs when a customer thinks he is buying from company “A” when in fact he is buying from company “B.”  It is not necessary for a plaintiff to show actual confusion to establish infringement, only the likelihood of confusion.   The legal theory of “initial interest confusion” is a variation of the issue of likelihood of confusion.  Some courts  have recognized this theory that a trademark may be infringed when a consumer is mislead into investigating company B’s product or service because of B’s advertising a name or mark which is confusingly similar to A’s.  A’s mark would be infringed even if the consumer did not purchase B’s product, or at some point after the consumer’s initial confusion but prior to his purchase, the consumer came to realize that A and B are not affiliated and that he was buying from B, not A.

The court in GEICO based its decision upon initial interest confusion.  The case has drawn widespread interest because Google is a party and because of the impact the case could have on the future of the Internet.  But the court’s opinion is curious in several respects and does not provide the guidance which many hoped it would.  The Court severely criticized the survey methodology used by GEICO in attempting to demonstrate consumer confusion caused by use of the term “GEICO” in the sponsored ads.  Google, however, presented no evidence on that issue apparently thinking its attack on GEICO’s survey methodology would be sufficient to prevent GEICO from establishing its burden of proof.  It didn’t work.  The Court held that even though the survey results offered by GEICO were flawed, they were sufficient to establish likelihood of confusion.  The Court previously ruled that GEICO had established the other elements of trademark infringement.  Accordingly, the Court held GEICO’s trademark was infringed.

In another curious aspect of it’s opinion, however, the Court stopped short of holding Google liable for the infringement and instead reserved that issue, apparently in an effort to put settlement pressure on the parties.  Since the companies which purchased the sponsored ads are not parties to the suit, there is no one other than Google who can be held liable.

The one thing that is clear from the opinion is that Google’s use of the term “GEICO” solely in its computer coding, which is invisible to the computer user, without more, does not constitute trademark infringement.  It is because of the additional fact that some of the advertisers also used the term “GEICO” in their sponsored ads that the Court held there was infringement.

The Court does not describe in any detail how GEICO’s name was used by its competitors in the sponsored ads, so we cannot easily follow the Court’s discussion of initial interest confusion to determine how that legal theory applies to the facts of this case.  We only know that the tainted survey concluded there was confusion.

The theory of initial interest confusion has never been accepted by the United States Court of Appeals for the Fourth Circuit.  An appeal of GEICO would go to the Fourth Circuit.  In an opinion in another Internet trademark case  which was decided by a unanimous panel on August 24, only two weeks after the trial court released its written opinion in GEICO, the Fourth Circuit addressed the legal theory of initial interest confusion.  While not expressly rejecting it, the appellate panel stated:  “(W)e have followed a very different mode of analysis. . . .”  The settlement value for GEICO just dropped significantly.

While initial interest confusion may not be a viable theory in the Fourth Circuit, it remains important for a company to protect it’s trade name or mark by registering it as a trademark or service mark.  In a case where the facts would fit an initial interest confusion framework but using a different analysis, the Fourth Circuit has protected the owner of a trademark in an Internet context.

Assuming GEICO and Google do not settle, expect an appeal to the Fourth Circuit.  It will provide an opportunity for perhaps another panel of the Fourth Circuit to address the legal theory of initial interest confusion in the context of the Internet and expressly adopt it or reject it.  An appeal will be closely watched for guidance to web page designers, to companies which advertise on the Internet, and to practitioners in this developing area of the law.  If the Fourth Circuit should reject the theory, it will result in a split among the Circuits which could lead to an appeal being heard by the United States Supreme Court which has not previously addressed the issue.

Fight to Knock Down Pop-Ups Loses Round Two

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July 31  |  Newsletter  |   christina

The application of trademark law to the Internet is still in its formative stages.  In a major decision handed down June 27, those annoying pop-up ads survived a significant legal challenge.  The United States Court of Appeals for the Second Circuit reversed the decision of the trial court and held that WhenU.com’s spyware did not infringe the federal trademark of 1-800 Contacts, Inc.

WhenU is an Internet marketing company that anonymously downloads spyware onto your computer to monitor the sites you visit.  If you visit a site, the spyware program randomly generates a pop-up of one of WhenU’s customers which sells the same category of products.  In this case, when a computer user visited 1-800’s web site, a pop-up of its competitor, Vision Direct, Inc., appeared.

Plaintiff, 1-800 Contacts, Inc., filed a ten count complaint against WhenU.  The trial court granted 1-800’s request for a temporary injunction based upon its federal trademark infringement count.

In an interlocutory appeal, the Second Circuit panel reversed the trial court and not only vacated the in-junction but also held as a matter of law that WhenU does not “use” 1-800’s trademarks in violation of the Lanham Act when it (1) includes 1-800’s website ad-dress, which is almost identical to 1-800’s trademark, in its spyware program directory,  or (2) causes eye care product pop-ups to appear when viewing 1-800 Contact’s site.

The Second Circuit’s opinion is consistent with the opinions in two other cases brought against WhenU.    Perhaps the result would be different if WhenU used 1-800’s trademark in the text of the pop-up ad.  A case involving that issue brought against Internet search engine giant Google is pending in U.S. District Court for the Eastern District of Virginia.

The 1-800 case is not over either. It was remanded for further proceedings on the remaining nine counts.

Don’t Fall In Love With Your First Idea

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October 31  |  Newsletter  |   christina

If your company wants to use a word as its trademark, a recent case  decided by a federal appellate court points out the need to consider carefully the word you select.  Although its application was initially denied, Freebies Publishing eventually succeeded in registering a stylized type version of the word “Freebies” as a federal trademark.  It also registered the domain name “freebies.com” which it used to provide information about free product offers.  Retail Services, Inc. provides point-of-sale incentive offers which print out with a retailer’s cash register receipt.  To facilitate a promotional contract it had with Blockbuster, Inc., Retail Services, Inc. registered the domain name “freebie.com” so that Blockbuster customers could manage the “Freebie Points” they accumulated by renting videos and DVDs.

Freebies Publishing demanded that Retail Services stop using the word “freebie” in connection with its business.  When it refused, Freebies Publishing brought a non-binding arbitration proceeding under the agreement pursuant to which domain names are registered seeking to prohibit Retail Services from using the domain name “Freebie.com.”  The arbitrator agreed with Freebies Publishing and ruled that Retail Services should transfer its domain name to Freebies Publishing.

At this point Freebies Publishing has a federally registered trademark and an arbitrator’s ruling in its favor regarding the domain name.  In what must have seemed to them an abrupt shift in their good fortune, what happened next is that Freebie Publishing not only had its trademark cancelled, but it also barely escaped from court without having to pay the attorney’s fees of the opposing party as permitted by statute  in “exceptional cases.”  Rather than comply with the arbitrator’s non-binding ruling, Retail Services responded by filing a declaratory judgment proceeding in federal court seeking to have the Freebies Publishing trademark declared invalid arguing that the word “freebies” is a generic term.  After reviewing the evidence which included over 1,600 websites that have the word “freebie” or “freebies” as part of their domain names, as well as Freebies Publishing using the word “freebies” in a generic sense in its own web site, the court ruled in favor of Retail Services by summary judgment and ordered the registered trademark of Freebies Publishing cancelled.

The mistake Freebies Publishing made with their trademark application is that they put too much effort into persuading the government’s trademark examining attorney that the word “Freebies” is not a generic word, but rather a descriptive word which had acquired secondary meaning.  Instead, they should have put their effort into selecting a better word to trademark in the first place.  Their mistake is a common one.  If not a generic word, many companies come up with a word or phrase which “describes” their product or service and want it trademarked.  That is also not a good idea.  It is more difficult to register a descriptive word, and even if registered on the Principal Register, it is entitled to less protection.

Trademarks identify and distinguish goods produced by one person from those manufactured and sold by others and indicate the source of the goods.   They are often analyzed based upon four general categories of distinctiveness:  (1) Fanciful, (2) Arbitrary, (3) Suggestive, and (4) Descriptive.  Fanciful, Arbitrary, and Suggestive marks may be registered.  A Descriptive mark is eligible to receive the protection of being registered on the Principal Register only if it has acquired “secondary meaning”.  It has been used in the market for a sufficient length of time that buyers have developed a “mental association” of the mark with the company that owns the mark.  Although “the concepts of ‘generic name’ and ‘trademark’ are mutually exclusive because a generic term can never function as a mark to identify and distinguish the products of only one seller” , it is useful to think of  “generic”  as a fifth category which is to be avoided.  Although trademarks are analyzed based upon these categories, the lines separating one from the next can be razor thin.

The Trademark Manual of Examining Procedure refers to a “Distinctiveness/Descriptiveness Continuum” with Fanciful marks the strongest, followed by Arbitrary marks, then Suggestive marks.  Descriptive marks are weak, and as Freebie Publishing learned, if the word you have trademarked can be construed as generic, or if it might later become generic, don’t spend money building an advertising campaign around it.  The mark may be canceled at any time.

Fanciful marks are terms that have been “coined” or invented for the sole purpose of functioning as a trademark.  Such marks comprise words that are either unknown in the language (PEPSI®, KODAK®, EXXON®), or are completely out of common usage.   Arbitrary marks consist of words that are in common linguistic use but, when used to identify particular goods or services, do not suggest or describe a significant ingredient, quality or characteristic of the goods or services (APPLE® for computers; OLD CROW® for whiskey).  Suggestive marks are those that, when applied to the goods or services at issue, require imagination, thought or perception to reach a conclusion as to the nature of those goods or services.  A suggestive term differs from a descriptive term, which immediately tells something about the goods or services.   A suggestive mark connotes, without describing, the product (COPPERTONE®, ORANGE CRUSH®) .

The lesson:  Don’t fall in love with your first idea about what would be a good word for your company to trademark.  Not only do you need to understand the differences between “strong” and “weak” marks, this is also the time to be creative.  If your background is administration, you’d probably better stay out of it altogether.  The purpose of a trademark is to help build brand identity so that over time, when a potential customer sees the mark, he or she will associate it with the source of origin – your company.  To have a strong mark, it must be necessary for the buyer to “exercise his imagination”  in order to make this association.  The solution for your company is to be creative and select a word which will require it.