Intellectual Property Law Blog

It's Not Over For MGA's Bratz Doll Line Yet

The Ninth Circuit recently stayed an injunction entered against MGA Entertainment, Inc., that would have otherwise required MGA to ensure that none of its popular Bratz dolls, the subject of a copyright dispute with toy giant, Mattel, Inc., are available on store shelves as of January 21, 2010. The injunction's requirement that MGA also turn over its portfolio of Bratz related trademarks to Mattel was stayed as well. Mattel obtained an injunction against MGA after a jury found that a former Mattel employee, Carter Bryant, came up with the Bratz doll idea while under Mattel's employ, that Mattel owned the copyrights in the Bratz doll designs, and that MGA, who hired Carter Bryant after he left Mattel, infringed Mattel's copyrights.

]]> MGA's appellate brief submitted to the Ninth Circuit asserted, among other arguments, that the district court erred in concluding that Mattel owned every idea of its employees and that even if Mattel did own these ideas, the Bratz dolls did not infringe any copyright owned by Mattel. On the question of copyright ownership, MGA takes the position that Bryant was a low level employee, that the Bratz doll idea was unrelated to his employment at Mattel (i.e., not created within the scope of his employment), and that Mattel therefore did not own the idea/concept for the Bratz dolls. MGA further argued that certain terms of Bryant's employment agreement, which assigned to Mattel any inventions created or conceived during employment, were unconscionable and therefore unenforceable. On the issue of copyright infringement, MGA argued that the applicable standard for determining copyright infringement on the dolls at issue was virtual identicality (as opposed to the substantial similarity standard applied by the district court) because of the nature of the works at issue - dolls with facial and anatomical features.

Mattel's appellate brief in opposition asserts that its employment agreement with Bryant extended its ownership over employee inventions/concepts beyond those created within the scope of employment (i.e., works made for hire). Were that not the case, Mattel argued, the employment agreement is merely superfluous of existing law which automatically vests an employer with ownership of works made for hire. On the issue of copyright infringement, Mattel argued that the district court applied the appropriate test - substantial similarity - in determining whether MGA's dolls infringed Mattel's rights in Carter Bryant's sketches/designs for the dolls. Mattel asserts that the numerous details that form the dolls' particularized expression and features warrant more than the "thin" copyright protection provided by the virtual identicality test that MGA argues is applicable.

In MGA's concluding remarks to its appellate brief, MGA requested that the Ninth Circuit decide its appeal on an expedited basis, or alternatively, grant a stay of the district court's injunction pending the appellate court's decision. In oral argument before the Ninth Circuit, MGA again pleaded for a stay of the district court's injunction, explaining that the injunction would be ruinous for MGA. The Ninth Circuit panel inquired at oral argument whether the district court's remedy, effectively requiring MGA to turn over the Bratz line to Mattel, was appropriate, potentially hinting that the district court remedy will not stand. An alternative and perhaps more acceptable remedy as suggested by the court would be some sort of royalty arrangement. The court also ordered the parties to participate in expedited mediation. While MGA has temporarily succeeded in obtaining a stay of the district court's injunction, the appellate court decision on these issues and the determination of MGA's future is still to come.

For more information regarding MGA's Bratz case please click here.

Authored By:
Ashley Merlo
(714) 424-8218
AMerlo@sheppardmullin.com

Federal Circuit Grants Patent Term Extensions

In a much anticipated decision, the Federal Circuit held yesterday that two pharmaceutical companies, Wyeth and Elan Pharma, were entitled to extended patent term adjustments because the U.S. Patent and Trademark Office failed to perform a correct calculation of the adjustment. Wyeth v. Kappos, No. 2009-1120 (Fed. Cir.). The decision has broad implications because the incorrect calculations were performed as a result of a flawed interpretation of the patent term adjustment statute, 35 U.S.C. sec. 154(b), that the USPTO was applying to all patentees.

]]> Under section 154(b)(1)(A) (the "A clause"), the USPTO is supposed to extend the term of a patent one day for each day that the USPTO fails to meet certain examination deadlines. Under section 154(b)(1)(B), the USPTO is supposed to extend the term of a patent one day for each day issuance is delayed due to the USPTO's failure to issue a patent within three years after the actual filing date of the application. Section 154(b)(2)(A) provides that, to the extent that periods of delay overlap, the period of any adjustment granted shall not exceed the actual number of days the issuance of the patent was delayed.

Under the USPTO's interpretation of the overlap provision, the overlap between "A" adjustments and "B" adjustments could arise and begin during the first three years of a patent application. The effect of this interpretation was that the USPTO used the greater of the "A" delay and the "B" delay to determine the appropriate adjustment, but never combined the two. Wyeth and Elan disputed this interpretation, arguing that the period of delay for purposes of the B clause could not start until three years after an application's filing date.

The Federal Circuit agreed with Wyeth and Elan, holding that "[b]efore the three-year mark, no 'overlap' can transpire between the A delay and the B delay because the B delay has yet to begin or take any effect." Thus, if a patent application issues three years and thirty days after filing, and thirty days of A delay are incurred before the three-year mark, then the applicant is entitled to a sixty day adjustment.

The Federal Circuit did not indicate whether its holding will have any retroactive effect. Patent applicants who have recently received an issue notification should consider whether to request patent term adjustment in light of Wyeth v. Kappos.

Authored By:
Darren Franklin
(213) 617-5498
DFranklin@sheppardmullin.com

Supreme Court Hears Oral Argument Regarding Patentability of Business Method Claims

The Supreme Court recently heard oral argument in In Re Bilski, in which the Court will make a ruling on the limits of patentable subject matter.

]]> Since the Supreme Court's decision in State Street Bank v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998), businesses have been concerned with the issue of patentability of software and business methods. In State Street, the Supreme Court ruled that a computer programmed with novel software is patentable even if the output is merely numbers, which resulted in a surge in business method patent applications. Since there were no prior business methods against which to vet the new applications, the United States Patent and Trademark Office ("PTO") granted many applications that covered things already in the prior art. The PTO then retracted, delaying the processing of business method patents for years before eventually rejecting them. Bilski's was one of the rejected patents.

At issue in Bilski are claims relating to a method of managing risk in commodities trading. The PTO examiner determined that the invention did not constitute patentable subject matter under 35 U.S.C. § 101, and the Board of Patent Appeals and Interferences ("BPAI") affirmed the decision. Bilski appealed the rejection to the Federal Circuit. In affirming the BPAI, the Federal Circuit promulgated a new test for patent eligibility for method claims (the "machine-or-transformation" test), stating that an invention is patentable if "1) it is tied to a particular machine or apparatus, or 2) it transforms a particular article into a different state or thing." The Supreme Court granted certiorari to consider whether this machine-or-transformation test conflicts with precedent that allowed for broad patent eligibility for new and useful processes other than laws of nature, physical phenomena and abstract ideas.

The Justices questioned Bilski's attorney about whether business method patents could be intended by the authors of the Patent Act to be patentable. Early on, Justice Scalia asked Bilski's attorney why patentable subject matter could not be limited to "machines and inventions. In arguing that the "machine-or-transformation test" is unduly restrictive and against the intent of 35 U.S.C. §101, Bilski's attorney urged that the Court should broadly construe what should be considered a patent-eligible process, noting that "today the raw materials are just as likely to be information or electronic signals, and to simply root us in the industrial era because that's what we knew I think would be wrong and contrary to the forward-looking aspect of patent law."

The Court appeared to be skeptical of whether business method patents should be patent eligible, attempting to define the boundaries of what kinds of method claims should be permitted to be patentable. The Justices offered several hypotheses testing Bilski's argument. Justice Ginsberg, for instance, mentioned means of tax avoidance, how to resist a corporate takeover and how to chose a jury. Justice Sotomayor expressed a concern over patents for speed dating, while Justice Breyer discussed an original method of teaching antitrust law that would keep 80% of students awake. Justice Sotomayor also appeared to suggest that the Federal Circuit had gone too far in broadening the scope of patentable subject matter, asking "How do we limit it to something that is reasonable?" The Justices appeared to be concerned that permitting business method claims to be construed as broadly as possible would be unreasonable, since doing so would cause "anything that helps any businessman succeed is patentable," as mentioned by Justice Breyer. Bilski's attorney later responded that while many of the hypotheticals offered by the Justices should meet the test of patentable subject matter under Section 101, they would likely be invalid as obvious – but that the vetting of a process should turn not on the threshold issue of patentability, but instead on the issue of obviousness.

The government argued that the Federal Circuit's "machine or transformation" test is not rigid or inflexible, but rather that there simply must be some link between the process and a machine or transformation of matter in order for a process to be patent-eligible. It distinguished Bilski from State Street Bank, in which the Federal Circuit construed the statutory term "machine," rather than the term "process." Justice Sotomayor appeared to agree with the government's argument, stating that no ruling in Bilski would change State Street. Chief Justice Roberts questioned the government's attorney on his written brief, asking why a footnote indicated that, while the Bilski process was unpatentable, it might be patentable if executed on a computer. He analogized such a situation to a process being unpatentable unless typed out on a typewriter, and appeared to find it troubling.

If the Supreme Court affirms the Federal Circuit's decision in Bilski, software and other business method claims will remain patent-eligible. But, the questions posed by the Justices suggest that the Supreme Court is open to limiting the scope of patentable subject matter. If the Supreme Court does decide to limit patent-eligible subject matter, the validity of many business method patents may be called into question.

Authored By:
Crystina P. Coats
(858) 720-7404
CCoats@sheppardmullin.com

Federal Circuit Clarifies Standard For Proving "Fraud" in Trademark Renewals

On August 31, 2009, the United States Court of Appeals for the Federal Circuit issued a decision holding that, in order for a trademark registration to be canceled on the basis of fraud, the party challenging the registration must prove that the registrant had actual intent deceive the United States Patent and Trademark Office (“PTO”). Recent decisions by the Trademark Trial and Appeal Board (“T.T.A.B.”), including Medinol v. Neuro Vasx, Inc., 67 U.S.P.Q.2d 1205 (T.T.A.B. 2003), had previously applied a broader objective inquiry into whether the applicant “knew or should have known” with respect to allegations of fraudulent representation, resulting in the cancellation of various trademark registrations. Here, the Court explicitly rejected application of such a standard and affirmatively stated that cancellation is only justified where there is proof of subjective fraudulent intent.

]]> This ruling, issued in In re Bose Corporation, Opposition No. 91/157,315, 2009 WL 2709312 (Fed. Cir. Aug. 31, 2009), stems from an appeal of the decision of the T.T.A.B. ordering cancellation of Bose’s “WAVE” trademark under 15 U.S.C. § 1064(3), finding that the “registration was obtained fraudulently”. Bose Corp. v. Hexawave, Inc., 88 U.S.P.Q.2d 1332 (T.T.A.B. 2007). Hexawave, Inc., which petitioned for cancellation, alleged that the trademark renewal application filed by Bose on January 8, 2001 contained fraudulent statements regarding the scope of Bose’s use of the “WAVE” mark in commerce. Specifically, the renewal application, signed by Mark E. Sullivan, general counsel to Bose, stated that the “WAVE” mark was still in use in commerce for various goods, including audio tape recorders and players. Hexawave offered evidence that Bose ceased the manufacture of such devices between 1996 and 1997 and that Mr. Sullivan knew that those products had been discontinued when he signed the application. Mr. Sullivan testified that he believed the “WAVE” mark was still being used in commerce with respect to those devices because Bose continued to accept the devices for repair and then transported them back to customers. The T.T.A.B. held that this belief was not reasonable, and that the renewal application contained fraudulent representations justifying the cancellation of Bose’s “WAVE” mark in its entirety. The T.T.A.B., as a result, issued an order cancelling the registration of the “WAVE” trademark.

Reversing the T.T.A.B., the Federal Circuit stated that a distinction must be drawn between “false” and “fraudulent” representations, the latter of which requires an actual intent to deceive. Absent solid proof of such intent, the drastic remedy of cancellation is not warranted. The Court held that the T.T.A.B., through application of the “knew or should have known” standard, erroneously lowered the burden of proof to one equated with mere negligence and that “subjective intent, however difficult to prove, is an indispensable element in [this] analysis.” In re Bose, 2009 WL 2709312, at *4.

This unequivocal ruling from the Federal Circuit should come as welcome news to mark holders, as it minimizes the risk that registrations and renewals will be subject to cancellation based on oversight or mistake. However, it should also serve as a reminder to all responsible parties to ensure that all documents filed with renewal of a registration are carefully reviewed and updated prior to submission to the PTO to reflect any changes in commercial use of a mark.

Authored By:
Kimberly K. Smith
(212) 332-5024
KSmith@sheppardmullin.com

and

Theodore C. Max
(212) 332-3602
TMax@sheppardmullin.com

426,000 Patent Applications Filed in China During First Half of 2009

The Chinese government’s emphasis on boosting innovation might be proving fruitful. According to the latest statistics from the State Intellectual Property Office (“SIPO”), the government entity responsible for prosecuting patents, there were 426,000 patent applications filed and 252,000 patents granted in China during the first half of 2009. Compared with the first half of 2008, patent filings are up 31.3 percent and patent grants are up 23.1 percent.

]]> China’s patent system allows for three types of patents: invention patents, utility model patents, and design patents. China invention patents are similar to utility patents in the United States. The patent term for invention patents is 20 years from the filing date. Patents for invention are substantively examined. It typically takes two to five years for an invention patent to issue.

China utility model patents may be obtained only for three-dimensional products. The United States does not have a similar patent category. The patent term for utility model patents is 10 years from the filing date. A utility model patent will normally issue much faster than an invention patent because utility model patent applications receive only a preliminary examination and not a substantive examination. A utility model patent typically issues in about 12 to 18 months.

China design patents are similar to U.S. design patents. The patent term for design patents is 10 years from the filing date. Similar to utility model patent applications, design patent applications do not receive a substantive examination. A design patent typically issues in about 12 to 18 months from filing.

Out of the 426,000 patent applications filed, 148,000 were invention patent applications (34.8%), 142,000 were utility model patent applications (33.4%), and 136,000 were design patent applications (31.8%). For the first time, invention patent applications filed by Chinese enterprises accounted for over 70 percent of the total invention patent applications filed. Also for the first time, the number of invention patents granted to Chinese enterprises surpassed those granted to foreign enterprises.

Among the 426,000 patent applications, 375,000 applications were filed by Chinese enterprises, representing 88 percent of the total number of applications filed. Out of the 375,000 applications, 54.7 percent were for service inventions, and 45.3 percent were for non-service inventions. A “service invention” is an invention by an employee of a company made in the execution of his or her tasks. A “non-service invention” is made by an individual inventor. For service inventions, the right to apply for a patent belongs to the entity, and, after grant, the entity will be the patent holder. For a non-service invention, the right to apply for a patent belongs to the inventor, and, after grant, the individual will be the patent holder.

A key reason for the sharp increase in patent filings by Chinese enterprises is the creation of reward systems by provincial governments. For example, for enterprises and individuals located in Beijing, the Beijing government will subsidize the applicant of an invention patent application the following: (1) up to 950 RMB in application fees; (2) up to 1200 RMB in examination fees; and (3) 50 percent of other filing fees actually incurred. For invention patent applications, the official filing fee is 950 RMB and the examination fee is 2500 RMB. This means the Beijing government is subsidizing over 50 percent of the official filing fees for invention patent applications. In Beijing, the rewards for utility model patent applications and design patent applications are substantially less, with a maximum amount of 150 RMB. Provinces across China employ reward systems similar to the Beijing system.

In addition to encouraging the filing of patent applications, SIPO has been focused on creating practical measures to facilitate patent examination. Since 2002, SIPO has increased the number of patent examiners and strengthened the professional training of examiners.

Unlike Chinese enterprises, patent applications filed by foreign (non-Chinese) enterprises were down by 7.3 percent from the first half of 2008. Broken down by country, there was a 29.6 percent decrease in filings by Korean companies, a 8.4 percent decrease in filings by U.S. companies, and a 4.7 percent decrease in filings by Japanese companies. Some experts believe the decline is due to the financial crisis. Cutbacks by multinational enterprises may include the reduction of patent applications filed in China. However, in the areas of hybrid vehicle and medical devices, patent applications filed by foreign enterprises actually increased.

As of June 30, 2009, SIPO has received a total of 5.276 million patent applications and granted 2.753 million patents.

This article was originally posted on Sheppard Mullin's China Law Blog, which can be found at www.chinalawupdate.cn

Authored By:

Ping Chu
86.21.2321.6000
PChu@sheppardmullin.com

and

Julie Yu
86.21.2321.6052
JYu@sheppardmullin.com

Removal of UPC Codes Constitutes Trademark Infringement

On June 19, 2009, in Zino Davidoff SA v. CVS Corp., the Second Circuit enjoined CVS, a national retail chain, from removing unique production codes ("UPC") from Davidoff product packaging for its "Cool Water" fragrances on the grounds of trademark infringement.[1] Davidoff, a high end luxury brand, imprints a unique UPC on every product for quality control purposes and to protect against diversion and counterfeiting. The code contains basic information about each product unit, including "where and when it was produced, ingredients used, and distribution path."[2] The UPC code ordinarily is used to track goods that are sold to and by unlicensed distributors. The Davidoff UPC also allows Davidoff to spot defects easily and swiftly recall or remove products from the market when such defects are noted. The UPC is used to protect the reputation of the brand and its trademarks.

]]> Davidoff licenses its Cool Water trademark to Coty Inc. for the manufacture and distribution of Cool Water fragrances. In an effort to maintain the prestige of its brand, Davidoff restricts distribution of Cool Water products to luxury retailer and has declined to sell CVS. When Davidoff found out that CVS was selling its Cool Water perfume and cologne without the UPC codes, it sent CVS a cease and desist letter in 2005. Without the UPC code, there was no way of knowing whether the goods were genuine or counterfeit. CVS assured Davidoff they would stop selling the counterfeits but, only a year later in 2006, Davidoff discovered that CVS had continued to sell the counterfeit products and brought an action against CVS for trademark infringement.

Davidoff was permitted by the District Court as part of discovery to inspect CVS's inventory. Davidoff found 16,600 items with the UPC removed. Either the part of the box containing the code was cut, chemicals were used to wear it down, or the bottom of the bottles were ground to wear the UPC code away.[3] Davidoff sought a preliminary injunction to enjoin CVS from selling these items. CVS voluntarily agreed to stop selling counterfeit goods, but argued that, since there was no question as to the genuineness of the goods with the UPC removed, CVS should be allowed to sell its inventory.

In Original Appalachian Artworks v. Granada Electronics, Inc., the Second Circuit held that, where a distributor was selling the Plaintiff's genuine products which had been diverted, such goods infringed the Plaintiff's trademark where the products were materially different and likely cause consumer confusion as to the source.[4] Trademark owners may restrict distribution and licenses territorially because different types of licensed products may be sold in different places with ingredients or at prices relative to the local economies. In addition, global distribution strategies may vary. There is a high risk that goods will be diverted and that opportunists will purchase goods in one market at the lowest price and sell them in a different market at a higher price, thereby making a large profit. In Original Appalachian Artworks, the trademark owner was able to demonstrate that the products manufactured and intended for distribution in Spain were materially different from the goods intended for distribution in the United States, where the language on the packaging and product was in Spanish.

The Second Circuit in Zino Davidoff SA, took a different approach, relying not so much on the differences between the products sold in CVS and genuine Davidoff goods, but rather on the removal of the UPCs to find that there was trademark infringement. The Second Circuit ruled that the removal of the UPC alone constitutes trademark infringement, even if the goods bear the trademark and are genuine. The Court relied on the test in Warner-Lambert Co v. Northside Dev. Corp., 86 F.3d 3 (2nd Cir. 1996), which held that a trademark holder was entitled "to an injunction against one who would subvert its quality control measures upon a showing that (i) the asserted quality control procedures are established, legitimate, substantial, and nonpretextual, (ii) it abides by these procedures, and (iii) sales of products that fail to conform to these procedures will diminish the value of the mark."[5] The Court concluded that the UPC was a legitimate quality control measure upon which Davidoff could rely to prevent counterfeit products from damaging its brand's good will and reputation. As a result, Davidoff was entitled to enjoin CVS from selling goods from which the UPC had been removed.

The Second Circuit found additional compelling reasons to rule for Davidoff, noting that the removal of the UPC exposes Davidoff to a greater risks of harm to its good will and reputation as the result of counterfeiting. As part of its broad protection, Davidoff routinely trains its retailers about the use of the UPC, ensuring that if there is a counterfeit product with no code, or a product with a fake code, the retailers will remove the product before it reaches the consumer. The Court also noted that the act of removing the code requires tampering with and alteration of the packaging. Not only is the removal of the code an impediment to monitoring and preventing counterfeit products but removal of the UPC diminishes the value of the genuine product and tarnishes the trademark.

The Court applied the Warner Lambert precedent by holding that the interference with the quality control measure by itself would suffice as grounds for the issuance of an injunction.[6] In stating that a claim does not hinge on the fact that the Cool Water goods sold were defective, the Court held that the trademark holder need only prove a risk of injury to the mark in order to find irreparable harm. It is likely that, as a result of this decision, removal or interference with UPCs and other quality control measures will be increasingly held to be the basis for trademark infringement actions under similar factual circumstances. Not only does the UPC protect the product from tampering and help to track counterfeits, but the use of a UPC may give trademark holders greater ability to protect their trademark from diversion and counterfeiting. The concurring opinion in Original Appalachian Artworks may have been prescient, as Judge Cardamone asserted that, since the Lanham Act imposes an affirmative duty for the trademark owner to protect his mark, "[i]t would be anomalous . . . to burden the trademark owner with this 'affirmative' duty and then . . . deny him a federal forum in which to control his licensees."[7] With the new precedent set by Zino Davidoff SA, trademark owners can use UPC codes as another way to protect and enforce their valuable trademarks.

This article was originally posted on Sheppard Mullin's Fashion and Apparel Law Blog, which can be found at www.fashionapparellawblog.com.

Authored By:

Theodore C. Max
Sheppard Mullin New York
TMax@sheppardmullin.com

and

Amanda Jaffe

[1] Zino Davidoff SA v. CVS Corp., No. 07-2872 (2nd Cir. 2009).

[2] Id. at *12.

[3] Id. at *6.

[4] Original Appalachian Artworks, Inc. v. Granada Electronics, Inc., 816 F.2d 68 (2nd Cir. 1987).

[5] Id. at *10.

[6] Id. at *9.

[7] Original Appalachian Artworks, 816 F.2d at 75 (citation omitted).

What Is the Jurisdictional Pre-Requisite for Copyright Litigation?: Do Denim v. Fried Denim

On June 17, 2009, Judge Laura Taylor Swain of the Southern District of New York dismissed the copyright claims of jeans maker Do Denim against rival manufacturer Fried Denim Inc., holding that the mere filing of the copyright applications, fees and deposits did not satisfy the jurisdictional requirement that a copyright be registered before a lawsuit is initiated. Do Denim v. Fried Denim, No. 08Civ.10947, 2009 U.S. Dist. LEXIS 51512, at *7 (S.D.N.Y. June 17, 2009). This decision highlights the importance of copyright registration, as a jurisdictional prerequisite for plaintiffs hoping to protect their designs.

]]> In 2005, Plaintiff Do Denim created two back pocket designs for its jeans -- the "Wings Design" and the "Dragon Design." Defendant Fried Denim allegedly copied these unique designs in the production and sale of its own jeans. Among other things, Plaintiff claimed that the Defendant's copying and use of the "Wings" and "Dragon" designs constituted copyright infringement.

The Copyright Act provides that "no civil action for infringement of the copyright in any United States work shall be instituted until pre-registration or registration of the copyright claim has been made in accordance with this title." 17 U.S.C. § 411(a) (emphasis added). Although Plaintiff had delivered the deposits, applications and fees required for copyright registration in both of its designs, the Copyright Office had yet to respond. Defendant Fried Denim argued that because of this lack of response, registration had not "been made" and therefore the Court lacked subject matter jurisdiction. Plaintiff replied that its delivery and filing of the applications, fees and deposits was in fact sufficient to constitute "registration" being "made," thereby conferring upon the Court the requisite subject matter jurisdiction.

This issue has been a divisive one in recent years. As Judge Laura Taylor Swain notes in her opinion that although the Second Circuit has yet to address the question of when a registration has "been made" for the purpose of copyright litigation, it is the subject of a current circuit split between the Tenth Circuit and the Eighth Circuit. The Tenth Circuit concluded in La Resolana Architects, PA v. Clay Realtors Angel Fire, 416 F.3d 1195 (10th Cir. 2005) that "only upon registration or refusal to register is a copyright holder entitled to sue for copyright infringement. The Eighth Circuit held in Action Tapes, Inc. v. Mattson, 462 F.3d 1010,1013 (8th Cir. 2006) that the copyright owner may sue for infringement once the owner has delivered the deposits, application, and fee required for registration. Judge Swain ultimately sided with the Tenth Circuit in her opinion, thereby dismissing Do Denim's copyright claims.

It is interesting to note that although the Second Circuit has not examined this area before, the Southern District of New York has. In City Merchandise v. Kings Overseas, No. 99 CV 10456, 2001 U.S.Dist. LEXIS 3176, at *4 (S.D.N.Y. March 22, 2001), Judge Richard Conway Casey stated that "it is well settled that the court lacks subject matter jurisdiction unless the claimant has a registration or its registration has been refused." This holding, coupled with Judge Swain's recent opinion in Do Denim, clearly demonstrates where the Southern District of New York stands on the registration issue.

These decisions emphasize the importance of securing copyright registration before attempting to protect a copyright, especially in the Southern District of New York. Additionally, potential defendants in copyright matters should be mindful at the outset to ask the potential plaintiff for a valid copyright registration. As Do Denim v. Fried Denim demonstrates, this simple step may stop a premature copyright litigation dead in its tracks.

Authored By:
Kathryn Hines
(212) 332-5026
KHines@sheppardmullin.com

and

Theodore C. Max
(212) 332-3602
TMax@sheppardmullin.com

Branded: Product Placement and Video Games

Video games and feature films have a lot in common. Both tell stories and have exciting visuals and music. Although one is "interactive," recent Blu-ray HD discs are now turning linear films into more immersive, interactive experiences. Rights and talent deals for both have likewise followed a path towards convergence with terms and consideration often being negotiated and drafted the same way. Nowhere is this trend more obvious than the increasing popularity of product placement in enhancing the economic value of video games by making the game play more realistic while providing increased marketing value and good will by allowing the game developer and product owner, generally at no out-of-pocket cost, to reach new audiences.

]]> Product placement often runs the risk of detracting from its habitat by unduly emphasizing the product without an adequate plot hook. It is not uncommon for a critic to remark upon a particularly clumsy product placement in a movie. Games offer an appealing alternative: an immersive environment that may be actually enhanced by the incorporation of a branded product.

The trend toward incorporating brands into video games is a recognition of a the value these brands can bring to a virtual world. Brands normally pop up in games in one of three ways:

Branded Entertainment. The brand is the game. Examples include Bond games (GoldenEye, I knew thee well), Activision’s Spiderman games, or Electronic Arts’ FIFA and Madden games. Popular brands have a built in audience, which reduces some of the risk in developing the game. Also, the game play may be more engaging since the game's universe is familiar to the player.
Product Placement. Various definitions may be applied, but here product placement will refer to contractual arrangements between a game company (for ease of reference, the "Developer") and an external company (the "Company") for the insertion of the Company's product into the game universe. Examples of this might include a golf club into a golf game or a guitar in a music simulation.
Extra-Contractual Use. Sometimes virtual representations of real items appear without a contract. Typically this occurs in one of two ways: (1) the Developer inserts the item with the view that its incorporation constitutes fair use or does not otherwise constitute an infringing use of the item; (2) users insert the item into the game (e.g. a game mod that replaces Fallout 3's Nuka-Cola with Coca-Cola).

Of these three, let’s talk about Product Placement. Since the price of admission is often 0 dollars, this is an opportunity for the Company to be less concerned with the amount of exposure the product receives and more concerned with how it can incorporate the product into the game in a way that makes gamers pause and think: that’s cool. Gamers can be very sensitive to aesthetics and perceived corporate pandering so the wise company will find ways to work with the Developer to incorporate their product into the game in an innovative or intuitive way rather than insist upon restrictive brand guidelines.

As an initial matter, the external company should determine whether a particular game is an appropriate place for the product. For example, a golf club manufacturer may be enthusiastic about its club being placed in a golf game, but it may be less enthusiastic about it being used to bludgeon zombies in a survival horror (though I really cannot see why as such a placement expands the product into the critical zombie apocalypse preparedness market) ^[1] In addition to this general question, there are a few other central issues that should be addressed:

QUALITY: Quality refers to how the product will appear inside the game and what characteristics will be attributed to the product. Companies should ask whether the virtual item will be an exact replication, a generic item with branding affixed, or a revamped setting-appropriate manifestation. Often mockups will provide an example of what the item will likely look like (though the mockup will rarely be offered as a guaranteed representation of in-game appearance). Companies with sensitive public images should also ask what the item will be used for in the game. The company should also ask whether the product will be assigned certain ratings or characteristics and how those ratings or characteristics compare to other items of the same type. Finally, the company may wish to condition the product placement on the expected rating of the game or, alternatively, at least insist that the game be rated and properly labeled.

PLACEMENT: Where will the item appear? Rather than thinking of the placement in terms of "screen time," which is almost impossible to control in a game, the placement should be viewed in terms of the role the item will play. Perhaps the item will be an unlockable piece of decoration for an avatar, a functional tool that may be equipped, or a piece of virtual detritus that is strewn about to add to the ambiance. Each of these roles will likely effect how and when a player will interact with the company's item. The Company should work the with the developer to create a placement that enhances the image of the product without unduly disrupting the flow of the game. This will require flexibility in most cases.

CONTROL: Who will have the final say with respect to the product? Programming unique items into games can be time consuming and costly. Removing the item may be extremely difficult or impossible. The logistics of programming therefore require the Developer to maintain significant control over how an item will be implemented into a game. This means the Company's opportunity to influence how the item will appear is during the initial approval process, which occurs prior to the item's incorporation into the game. As a result, all restrictions and obligations should be clearly set forth during that approval process (that way both the Company and the Developer have the chance to determine whether the placement is in their best interests). The company should go into this understanding that gamers often provide their own game enhancements, whether or not authorized by the Developer's click-through terms-of-use, which can put the placed product beyond any meaningful control. That is, of course, the risk or price for reaching out to an untapped gamer demographic.

DURATION/TERMINATION: A company should also be aware of the permanency of a product placement. Removing items from a game may be costly or impossible. As a result, the Company should expect injunctive rights to be hard to obtain. Often the best a Company may walk away with is the right to demand that the item be left out of future releases of the game or the right to demand a patch to the game to remove the item as soon as it is commercially reasonable. A liquidated damages provision may be an appropriate solution in some cases, as it provides the Company with a clear option for recovery while protecting the Developer from the risk of a costly patch that may result in them passing on the product placement.

External companies should view product placement as a partnership with the game developer. A well placed item enhances a game's environment, which improves the game play experience. Companies that are flexible in their negotiations and encourage creativity in the placement will find new and interesting opportunities to put their products in front of a typically hard to reach gamer demographic.

Authored By:
Shawn Foust (GamerTag: OMG SRSLY)
(310) 228-3724
sfoust@sheppardmullin.com

and

Edwin Komen
(202) 772-5328
ekomen@sheppardmullin.com

^[1] TANGENT. Think about the advertising possibilities here: "GolfCo Clubs are a PREFERRED zombie bludgeon device." "Buy now and receive free Virus-X vaccination!" "GolfCo Clubs: Great Score Today, Protection From Undead Hordes Tomorrow!"

Joseph Abboud Is Back: Personal Name Trademark Controversy Continues

On June 10, 2009, the Second Circuit vacated a summary judgment decision that permanently enjoined menswear designer Joseph Abboud from making commercial use of his own name. J.A. Apparel Corp. v. Abboud, No. 08-3181-cv, 2009 U.S.App. LEXIS 12537, at *3 (2d Cir. June 10, 2009). Judge Amalya Kearse authored the decision for the Second Circuit and reversed the district court's decision and remanded the case for proceedings consistent with the Second Circuit's opinion. This case sets forth important guidelines for fashion designers when entering into agreements regarding personal name trademarks and rights of publicity and privacy.

]]> The Contract Construction Issue:

In 2000, Joseph Abboud, a famous American designer, entered into a sale agreement with J.A. Corporation ("Sale Agreement") that conveyed all of Abboud's right, title and interest in and to his "names, trademarks, trade names, service marks, logos, insignias, and designations" in exchange for $65.5 million. J.A. Apparel Corp. v. Abboud, No. 08-3181-cv at *4 (emphasis added).

J.A. contended that the word "names" unambiguously refers to Abboud's personal name. Abboud argued that the term "names" as it is used in the Sale Agreement is ambiguous and means "brand names," but does not include the commercial use of his name. The Second Circuit examined whether or not the Sale Agreement was ambiguous and the word "names" refers to Joseph Abboud's personal name. The Second Circuit held that under New York law, if a contract is ambiguous, extrinsic evidence as to the parties' intent when drafting the contract may be considered. See Seiden Associates, Inc. v. ANC Holdings, Inc., 959 F.2d 425, 429 (2d Cir. 1992). In his defense, Abboud sought to introduce extrinsic evidence to support his narrower construction of the Sale Agreement. However, the district court agreed with J.A. that the language of the Sale Agreement "unambiguously" conveyed all rights to use Joseph Abboud's personal name commercially, thereby precluding Abboud from introducing extrinsic evidence.

Judge Kearse held that both parties presented plausible interpretations of the Sale Agreement and that the word "names" as used in the Sale Agreement is ambiguous. Given this ambiguity, the judgment of the district court was vacated and the case was remanded so that Abboud and J.A. could marshal evidence, including extrinsic evidence, to prove their respective cases at trial.

The Trademark Fair Use Defense Issue:

The district court's rejection of Abboud's fair use defense against J.A.'s trademark infringement claim against Abboud also was reviewed on appeal by the Second Circuit. J.A. contended that Joseph Abboud's use of his own name on advertisements for his new clothing line constituted trademark infringement because Abboud had transferred all rights and J.A. now is the exclusive owner of the "Joseph Abboud" trademark and all of the commercial rights in and to his personal name. Although Abboud conceded that J.A. owned the "Joseph Abboud" trademarks, he argued that, nevertheless, he is entitled to use his personal name for commercial purposes under the fair use defense. The Second Circuit held that, when assessing a fair use defense, courts must consider whether the use at issue was: (1) other than as a trademark; (2) in a descriptive sense; and (3) in good faith. J.A. Apparel Corp. v. Abboud, No. 08-3181-cv at *25. The district court had ruled against Abboud on the fair use defense, claiming that his use of the Abboud name in advertising was not "other than as a mark" and was not in good faith. The Second Circuit vacated and remanded this judgment, holding that the district court's finding that Abboud had not acted in good faith was without merit and that the district court's finding that the use was not other than as a mark was erroneous because the district court had not considered the proposed uses themselves. If on remand the district court rules in favor of Abboud on the scope of the assignment of the intellectual property analysis, it would not be necessary to return to the fair use defense issues.

The Second Circuit opinion demonstrates that designers should be careful and proceed with absolute caution when licensing or selling their personal name trademarks and names, especially if the designer intends to retain rights in and to his or her personal name rights of publicity and privacy, including for commercial purposes. Additionally, designers need to take care to make sure that all intentions are explicitly captured in any Sales Agreement or licensing contract to avoid litigation and uncertainty.

Authored By:
Theodore C. Max
(212) 332-3602
tmax@sheppardmullin.com

California Passes New Electronic Discovery Act Effective Immediately

On June 29, 2009, Governor Schwarzenegger signed into law California's Electronic Discovery Act, which is effective immediately. All discovery propounded or responded to must now comply with the new law. These rules are very similar to the recent revisions to the Federal Rules of Civil Procedure, and bring California in line with the federal e-discovery standards.

]]> Under the new Act, the party requesting production of electronically stored information (ESI) may specify the format in which it should be produced (e.g., native format, or TIFF, with or without certain metadata, etc.). If no format is specified, the responding party must produce the ESI in either the same format as it is ordinarily kept (likely in native format or an archived/compressed format) or in a "reasonably usable" form. The responding party need only produce the ESI in one form. If a requesting party fails to specify the format of production in its request, and the responding party produces the ESI in a "reasonably usable format," the requesting party cannot then compel a different form of production.

A responding party can resist production of ESI on the grounds that it is not “reasonably accessible.” The factors for determining inaccessibility are undue burden and cost. If a responding party claims that ESI is inaccessible, though, it must still identify the types or categories of sources of ESI that it asserts are not reasonably accessible.

A responding party can resist production of ESI that it claims is not reasonably accessible by moving for a protective order or by opposing or objecting to the subpoena or request. The responding party has the burden of proving that the ESI is not reasonably accessible. Once that burden is met, the burden shifts to the requesting party to show good cause for production despite the fact that the ESI is not reasonably accessible.

If good cause is shown, the court may still order production with conditions, including cost-shifting. The factors that the courts may consider in determining good cause are similar to the federal criteria, including: the existence of more accessible sources; duplicative nature of the discovery sought; the cost of accessing the ESI versus the party’s need for the discovery; the importance of the issues involved; the amount in controversy; and the parties’ resources.

Employers Should Carefully Consider Whether To Sue Former Employees For Threatened Trade Secret Misappropriation Based On Recent California Court of Appeal Decision Awarding Over $1.6 Million To Former Employees

A recent decision by a California Court of Appeal should give employers pause before they use California's trade secret laws to try to stifle competition in violation of California law.

In the case of FLIR Systems, Inc. v. Parrish, the Court of Appeal affirmed a decision by the trial court awarding $1,641,216.78 in attorneys’ fees and costs to two former employees who successfully defended a trade secret action brought by their former employer. The Court agreed with the trial court that the action was filed and maintained in bad faith within the meaning of the California Uniform Trade Secrets Act.

]]> In this case, two former employees of Indigo Systems Corporation ("Indigo") left Indigo and decided to start a new company based on a business plan developed by one of them years ago when he was self-employed. The former employees discussed their plans with Indigo. When Indigo's parent company, FLIR Systems, Inc. ("FLIR"), passed on the idea set about to find a new business partner, the former employees entered into negotiations with Raytheon Company ("Raytheon") after assuring Indigo and FLIR that they would not appropriate any of Indigo's trade secrets.

FLIR became concerned that the new company would undermine its market share and sued for injunctive relief and damages on the theory that the former employees would inevitably misappropriate trade secrets, arguing threatened misappropriation. Raytheon pulled out of the deal with the former employees and the former employees then advised FLIR and Indigo that they were not moving forward with the new company.

At the trial for a permanent injunction, the trial court found no misappropriation or threatened misappropriation of trade secrets. The trial court also found that the action was brought in bad faith based on a theory of "inevitable disclosure" – a theory previously rejected by the California Supreme Court because it conflicts with California's strong public policy in favor of employee mobility.

The Court of Appeal agreed with the trial court that FLIR and Indigo brought the action for injunctive relief to stifle competition because they were concerned that the proposed new company would have been a direct competitive threat. FLIR and Indigo had no evidence or even a reasonable suspicion that the former employees had misappropriated trade secrets or had threatened to do so, or that FLIR and Indigo had suffered any damages or were threatened with imminent harm. The Court of Appeal held that "Mere possession of trade secrets by a departing employee is not enough for an injunction."

This case provides employers with an important reminder of California's strong public policy in favor of employee mobility and the right to compete with a former employer. Employers cannot use the California Uniform Trade Secrets Act to do an end-run around California Business and Professions Code section 16600 by, for example, bringing a trade secret action against a former employee to prevent them from forming a competing business or joining a competitor unless there is evidence of threatened or actual misappropriation of trade secrets. Filing a trade secret action simply to preserve a competitive advantage in the marketplace is risky and could result in expensive sanctions. Employers should consult with counsel and carefully consider their motivation for filing any trade secret action and the evidence they have to support such a claim before the action is filed. A former employer's honest assessment of the strength of the case and motivation for litigating should continue throughout the litigation.

Authored By:
Michele Haydel Gehrke
(415) 774-3131
mgehrke@sheppardmullin.com

An Advertising Face-Off: Images and the Right of Publicity

The California Supreme Court heard oral argument on June 3 in an important “right of publicity” case, Christoff v. Nestle USA Inc. Issues included whether the single publication rule applicable to mass communication-based torts applies to right of publicity claims; whether use of another’s likeness on a product label is a “publication” for purposes of the rule; whether its continuing use on product labels and in various product advertisements constitutes a “republication” for each use giving rise to new causes of action; and whether the discovery rule applies to right of publicity claims.

]]> Click here to read more.

Authored By:

Guylyn Cummins
(619) 338-6645
gcummins@sheppardmullin.com

Does Edwards v. Arthur Anderson Bar The Use of Employee Confidentiality Agreements?

In Edwards v. Arthur Andersen, the California Supreme Court reaffirmed California's strong public policy against covenants not to compete. The primary issue in Edwards was whether the Ninth Circuit's "narrow restraint" exception was a proper interpretation of California law. Under the narrow restraint exception, employers could enforce noncompetition agreements that did not "entirely preclude" an employee from practicing his or her trade, such as an agreement not to solicit specified customers for a specified period of time after employment. The agreement in Edwards was drafted to fall under this judicially-created exception. The Court rejected the "narrow restraint" exception, expressed a stark disapproval for judicially created exceptions to California Business and Professions Code Section 16600, and held that any time an agreement restricts an employee's "ability to practice his [] profession" in any way not explicitly excepted by the statute, it is void.

]]> Click here to read more.

Authored By:

Jennifer G. Redmond
(415) 774-2910
jredmond@sheppardmullin.com

and

Adam Tullman
(415) 774-2976
atullman@sheppardmullin.com

Effective Immediately, Trademark Owners Need To Protect Their Trademarks From Registration As Usernames On Facebook

Social network Web site Facebook announced that, beginning this Saturday, June 13, at 12:01 am U.S. EDT, all Facebook users will be allowed to choose a personalized username for their Facebook profiles. This username will replace the numerical string that appears on the URL for each user's profile page. Facebook users will be able to choose names on a "first-come first-served" basis. All at once, millions of Facebook users will be choosing usernames. If you are a registered trademark owner, or represent such an owner, it's important that you immediately register your trademark(s) with Facebook at this link in order to prevent the trademark from being registered by others as a username on Facebook.

]]> Facebook will shortly be posting a notice on each of their users pages inviting users to provide a new username. Usernames can be five or more letters, numbers or periods. Usernames can be individual names and any word or letter combinations; and although they may be the real names of the user, they may be any non-random characters which are trademarks or the names of others, perhaps famous individuals. The characters selected may be trademarks, including famous trademarks, of companies in the United States and/or around the world.

Trademark owners can attempt to prevent the registration of a username that infringes their trademark by completing the form referenced earlier in this article. Rights holders must provide a registration number for such trademark(s) on this form. Once submitted, Facebook presumably will block the registration of that trademark as a username by any of its members.

Because of the importance of this to trademark owners, and the landrush that will take place as Facebook users flock to register new usernames, a leading trademark organization, the International Trademark Association (INTA), has alerted its members to take the opportunity to fill out the Facebook form.

Companies owning registered trademarks -- and trademark lawyers on behalf of their clients -- should fill out the Facebook form immediately. Presumably, a trademark registration is necessary, as a registration number is required and, if not provided, Facebook will not block the trademark. It is unclear whether the existing registration needs to be in the United States, and/or what, if any, verification will be made or required. It appears that this is on a first-come first-served basis and no verification will be made. No explanation is provided as to why the trademark community was not given more notice of this, or why procedures were not developed ahead of time in conjunction with the trademark community, in order to protect trademarks.

Facebook notes that such usernames will be searchable through Facebook and other search engines, such as Google, so this will provide an additional opportunity for mischief or tarnishment arising from the content nature of Facebook pages, using a registered trademark as a username. Facebook is indicating that new Facebook members will not initially be able to join and apply for usernames at this time, in order to prevent a rush of cybersquatters to now register with Facebook and take advantage of these username opportunities. Facebook has also indicated that, once registered, usernames will not be transferable, although Facebook accounts and contacts certainly have the opportunity to be changed, as the individuals behind them move their Internet addresses or locations.

Authored By:

Neil A. Smith

(415) 774-3239

nsmith@sheppardmullin.com

Limiting Liability in Clinical Trials: Non-Lawyers, Lawyers Beware

Clinical trials are the lifeblood of biotech. Finding the right service providers (CROs, safety, IVRS, consultants, contract manufacturers and many others), as well as the right clinical investigators and sites, results in a complex web of legal obligations and potential liabilities. Limitation of liability clauses can reduce a party's exposure if a contractual obligation is breached. More often, limitations of liability provisions are used to shift risk to the sponsor of the clinical trial. But, if your contracts are well negotiated and drafted, the risks can be carefully and fairly allocated between the parties in a balanced and reasonable manner. Because of the complexity of the legal relationships and liabilities found in clinical trials, this article is limited to a brief description of limitation of liability clauses, and their general strengths and weaknesses.

]]> Click here to read full article.

Authored By:

Beni Surpin

(858) 720-8950

bsurpin@sheppardmullin.com

and

Blaine E. Templeman

(212) 332-3854

btempleman@sheppardmullin.com

and

Michael Murphy

(858) 720-7423

mmurphy@sheppardmullin.com