IP Update - June 2010 - Part 2

Trademarks

Small Trademark Licensee Scores a Touchdown Against the NFL
Keith M. Stolte

In one of his last opinions, Justice John Paul Stevens, together with all eight of his Supreme Court brethren, handed a novelty clothing manufacturer a touchdown in its antitrust lawsuit against Reebok International, the National Football League (NFL) and the NFL's 32 member teams. The unanimous Court held that the NFL and its teams could be subject to Sherman Act liability for conduct relating to their exclusive trademark licensing agreements for sports merchandise. American Needle, Inc. v. National Football League, Case No. 08-661 (Supr. Ct., May 24, 2010) (Stevens, Justice).

Between 1963 and 2000 the NFL granted, on behalf of its member teams, non-exclusive trademark licenses to a number of vendors including American Needle permitting them to manufacture and sell apparel bearing the insignias of the member teams. In December 2000, the teams voted to authorize the NFL to do away with its series of non-exclusive licenses and grant exclusive licenses for use of their intellectual property on sports merchandise. Accordingly, the NFL declined to renew American Needle's license and instead granted Reebok an exclusive, 10-year license to manufacture and sell trademarked headwear for all 32 teams.

American Needle filed suit against Reebok, the NFL and the owners of the 32 teams, alleging that the defendants violated the Sherman Act by illegally restraining trade and attempting to monopolize the market for NFL trademarked merchandise. Following a short discovery period the district court entered summary judgment in favor of the NFL and held that the Sherman Act did not reach parent-subsidiary relationships such that the court found existed between the NFL and its member teams. The Court of Appeals for the Seventh Circuit affirmed, concluding that the NFL teams shared a common economic interest in licensing their intellectual property.

Hoping for an even broader decision insulating it from future antitrust actions, the NFL took the unusual step of joining American Needle in seeking certiorari. Other sports leagues (i.e., the NBA and the NHL) filed amicus briefs in support of the NFL's position. The narrow issue the Supreme Court agreed to decide was whether the licensing activity of the NFL and its 32 team members must be viewed as that of a single enterprise for purposes of Section 1 of the Sherman Act would and thus be immune from antitrust liability.

The Supreme Court answered that question in the negative, noting, "[t]he NFL teams do not possess either the unitary decisionmaking quality or the single aggregation of economic power characteristics of independent action. Each of the teams is a substantial, independently owned, and independently managed business."

The Court also determined that the teams directly compete in the market for intellectual property. "To a firm making hats, the [New Orleans] Saints and the [Indianapolis] Colts are two potentially competing suppliers of valuable trademarks. When each NFL team licenses its intellectual property, it is not pursuing the common interests of the whole league, but is instead pursuing interests of each corporation itself." The Court concluded that decisions by the NFL member teams to collectively license their separately-owned trademarks to a single vendor are decisions that "deprive the marketplace of independent centers of decisionmaking." The Court held that such conduct may constitute concerted action for which liability under Section 1 of the Sherman Act may attach. Accordingly, the Court reversed and remanded the case to the district court for a determination of liability under the "rule of reason."

Post-Purchase Confusion Trumps First Sale Doctrine
Rita Weeks

Finding against a company that created new products that incorporated another company's genuine and lawfully purchased trademarked product, the U.S. Court of Appeals for the Ninth Circuit found that the "first sale" doctrine is not a defense if such new products create a likelihood of confusion among persons observing such products after purchase. Au-Tomotive Gold, Inc. v. Volkswagen of America, Inc., Case No. 08-16005 (9th Cir., May 6, 2010) (Fletcher, J.)

Au-Tomotive Gold (Auto Gold) manufactured and sold various automobile accessories for specific car brands, including Volkswagen. Volkswagen automobiles bear decorative badges on the hoods or trunks, consisting of the letters VW inside a circle. Among Auto Gold's products are "marquee" license plates, which are plain license plates onto which Auto Gold mounted genuine "VW" badges. Auto Gold purchased the replacement badges from an authorized Volkswagen supplier.

After receiving a cease and desist demand from Volkswagen, Auto Gold filed suit seeking a declaratory judgment that it did not infringe or dilute the VW trademarks. Volkswagen counterclaimed for federal trademark infringement, counterfeiting, false designation of origin and dilution under the Lanham Act and related state law claims. Both parties moved for summary judgment. The district court granted summary judgment to Auto Gold on all claims, finding that the VW trademarks were "functional" and not entitled to trademark protection. Volkswagen appealed.

The Ninth Circuit reversed, finding that Auto Gold's use of Volkswagen's marks was "neither aesthetic nor independent of source identification," but that consumers purchased Auto Gold's products directly because of the products' identification with the VW brand. The Ninth Circuit, in remanding the case, also determined that Auto Gold's production and sale of automobile accessories bearing the VW trademarks, including the marquee license plates, created a sufficient likelihood of confusion to constitute trademark infringement.

On remand, the district court granted summary judgment to Volkswagen and awarded a permanent injunction against Auto Gold. This time Auto Gold appealed with respect to the issue of infringement by the marquee license plates, arguing that its sale of the license plates was protected by the "first sale doctrine.

Generally, the first sale doctrine protects the resale of trademarked products when consumers will not be confused as to the source or sponsorship of the products. The Ninth Circuit explained that the first sale doctrine comports with the principle that in the absence of consumer confusion, "the right of a producer to control distribution of its trademarked product does not extend beyond the first sale of the product." Auto Gold argued that because it had lawfully purchased the VW badges before incorporating them into its marquee license plate products, its use of the VW marks was protected by the first sale doctrine.

The Ninth Circuit rejected this argument, explaining that it did not base its finding of a likelihood of confusion on pre-purchase confusion among purchasers of the marquee license plates. Instead, the Ninth Circuit determined that post-purchase confusion was likely among non-purchasers who observed the marquee plates used on automobiles. The Ninth Circuit explained that post-purchase confusion creates a free-rider problem. Although Auto Gold had paid for the trademarked products, i.e., the VW badges, its purchase covered the trademarked badges only, not the use of the trademark. As such, the court explained, "[I]f a producer profits from a trademark because of post-consumer confusion about the product's origin, the producer is, to that degree, a free-rider." This conclusion was supported by the fact that "customers buy marquee license plates principally to demonstrate to the general public an association with Volkswagen."

Practice Note: So long as the likelihood of consumer confusion is eliminated when incorporating another's trademarked product into a new product, such as through the use of prominent disclaimers, the first sale doctrine will ordinarily protect the sales of such products. Au-Tomotive Gold illustrates that the first sale doctrine will not apply, however, if the association between the trademarked product and the new product is not made clear to consumers at all stages of the purchasing process. To strengthen one's first sale defense, disclaimers and other messages to consumers should be used prominently to negate the existence of a likelihood of confusion both pre-purchase and post-purchase, even with respect to potential confusion among persons who observe a product after another has bought it.

One More Round with "Victor's Little Secret"
Paul Devinsky

In a trademark dilution case that was the subject of an earlier U.S. Supreme Court ruling and a new federal dilution law, the U.S. Court of Appeals for the Sixth Circuit has enjoined a "sex toy" shop from using the name "Victor's Little Secret." V-Secret Catalogue, Inc. v. Victor Moseley, Case No. 08-5793 (6th Cir., May 19, 2010) (Merritt, J.) (Moore, J., dissenting).

In 1998, the proprietors of the Victoria's Secret brand became aware of a sex shop owned by Moseley, then called Victor's Secret. Victoria Secret sued for trademark dilution. After the district court enjoined Moseley's use of the store name, the case made it all the way to the U.S. Supreme Court. (See IP Update, Vol. 9, No. 10 .) The Supreme Court reversed the district court and ruled that actual harm, rather than a mere likelihood of harm, must be shown by a trademark holder in order to prevail in a dilution case.

Congress, in response to the burden the Supreme Court ruling placed on trademark holders, passed the Trademark Dilution Revision Act of 2006, which provided that the standard for proving a dilution claims is "likelihood of dilution."

Meanwhile, the Victoria's Secret case against Moseley was remanded to the district court, which reconsidered it based on the same evidence but using the new dilution law. Again, the district court issued an injunction. Again Moseley appealed.

The issue on the second appeal was whether Victor's Little Secret created a likelihood of dilution by tarnishment by selling "lewd sexual toys." Surveying the circuit courts, the 6th Circuit found that that there a consensus that associations between a famous mark and "bawdy sexual activity" was, in terms of the new federal law, "likely" to cause disparagement.

Although Moseley had an opportunity to do so, he failed to introduce evidence that tarnishment was unlikely. Consequently, the 6th Circuit ruled that the new federal dilution law supports a finding of tarnishment in this case:

"The new law seems designed to protect trademarks from any unfavorable sexual associations. Thus, any new mark with lewd or offensive-to-some sexual association raises a strong inference of tarnishment. €¦ It seems clear that the new act demonstrates that Congress intended that a court should reach a different result in this case if the facts remain the same."

Judge Moore dissented, arguing that because Victoria's Secret failed to present evidence that anyone is likely to think less of Victoria's Secret because of the Moseley's store, the trademark dilution claim should fail. She also objected to the standard of tarnishment based solely on the sexual nature of the junior mark, which she said "sanctions an almost nonexistent evidentiary standard."

Are the Relevant People Confused?
Michael J. Keller

The U.S. Court of Appeals for the Eleventh Circuit remanded for trial a finding of summary judgment in favor of the defendant that infomercials for selling cars called SLASHER SHOWS were not confusingly similar to plaintiff's registered trademarks SLASH-IT! SALES EVENT or SLASHER SALE. Caliber Automotive Liquidators, Inc. v. Premier Chrysler, Jeep, Dodge, LLC, et al. Case Nos. 07-00556; 08-16179, (11th Cir., May 7, 2010) (Higginbotham, J.).

Caliber provides services to car dealerships in the form of sales events at which Caliber's staff arrives at the dealership prior to the event and posts advertising and motivates the sales people. During the event the sales people "histrionically slash the car prices and seal the deal." The defendants ran infomercials called SLASHER SHOWS, featured a SLASHER man, a SLASHER countdown and featured off-camera voices shouting "SLASH IT!" Caliber sued for trademark infringement. The district court granted summary judgment to the defendants finding that, despite the fact Caliber's car dealership customers were confused, the defendant's retail customers were not confused. Therefore, no reasonable jury could find a likelihood of confusion between Caliber's marks and Premier's services.

Caliber appealed on the basis that there was a likelihood of confusion because the district court acknowledged actual confusion, but devalued it because the Premier Slasher Show did not confuse Premier's retail customers. Caliber also maintained that the court understated the strength of Caliber's marks. In briefing, all parties conceded actual confusion was the "most weighty consideration." Caliber focused on the confusion among its customers. The 11th Circuit found the district court erred in it analysis. First, the "quantum of evidence needed to show actual confusion is relatively small," such that the district court should not have overvalued the lack of confusion by the general public. Second, since Caliber's marks had incontestable status, they were presumptively strong because incontestable marks are presumed to have secondary meaning.

Evaluating the remaining confusion factors, the court found that the SLASHER marks of both parties created the same impression. The similarity of the plaintiff's and defendant's trade channels (retail outlets and customers) was such that a reasonable consumer could attribute the products to the same source. The court also noted that Caliber failed to show that the defendants adopted a SLASHER mark with an intent to trade on Caliber's reputation. However, weighing the factors as a whole, the court deemed Caliber to have "presented sufficient evidence on the strength of its marks and of actual confusion amongst the relevant customers to avoid summary judgment."

"Would You Rather . . . ?" May Be Distinctive
Bryan James

Giving significant weight to the presumptive effect of a registered trademark—where the U.S. Patent and Trademark Office (USPTO) does not require proof of secondary meaning, the U.S. Court of Appeals for the Ninth Circuit reversed the district court's summary judgment that the mark "WOULD YOU RATHER . . .?" is "merely descriptive" and should be stricken from the federal trademark registry. However, the Court observed that this is a difficult case and expressed no opinion on how the district court is to resolve the conflicting facts on remand.
Zobmondo Entertainment, LLC v. Falls Media, LLC, Case No. 08-56831 (9th Cir., Apr. 26, 2010) (Gould, J.).

To be protectable, a trademark must be "distinctive." Marks that are merely descriptive—describing a product's qualities or characteristics in a straightforward way—are not considered to be inherently distinctive and are only protectable if they acquire distinctiveness in connection with the party's goods in commerce. By contrast, "suggestive" marks require imagination or multistage reasoning to understand a mark's significance and relation to a product and so are more distinctive and more deserving of protection.

Both Falls Media and Zobmondo market board games using the "WOULD YOU RATHER" phrase to introduce funny or bizarre choices. The USPTO issued a trademark on the phrase to Falls Media in 2005.

In subsequent litigation brought by Falls Media based on the registration, the district court held, on summary judgment, that despite the presumption of validity Falls Media's "WOULD YOU RATHER . . .?" mark was "merely descriptive" and had not acquired any secondary meaning that might make the descriptive mark protectable. Falls Media appealed.

The 9th Circuit reversed, noting first that the presumption of validity and distinctiveness that comes with federal registration is strong. The court also examined two main tests used to distinguish suggestive from descriptive marks. The first test—the "imagination" test—attempts to determine if an imaginative leap is required by the ordinary consumer to understand the nature of the product being referenced. Here, the court found the test to be indeterminate. "WOULD YOU RATHER . . .?" has no literal meaning to tell someone that the game would serve up a bizarre or humorous choice. On the other hand, someone familiar with the game might not think the phrase very suggestive. In the absence of survey evidence, it was unclear what consumers would understand the phrase to mean.

The second test—the "competitors' needs" test—assesses whether competitors need to use the mark to identify their own goods and services, which would suggest the mark is more likely to be descriptive. The court noted that Zobmondo had 135 alternate names for its game during development and had sold a similar game called "The Outrageous Game of Bizarre Choices." The court said that on summary judgment the test weighed strongly against a finding that the mark is "merely descriptive."

The court considered other factors and evidence, but after drawing all inferences in favor of Falls Media, none of the contrary factors were found sufficient to outweigh the presumption of validity afforded the registered trademark.

No Restitution in Integrum Due to Lack of Vigilance in Delegated Renewal Process
Cheng Tan

It is common practice for companies to delegate their trademark renewal processes to an external agency, bypassing their professional representative. However, use of such agencies raise potential risks that must be properly managed or a loss of registration may result. Rodd & Gunn Australia Ltd v. Office for Harmonization in the Internal Market(OHIM) Case T-187/08 (General Court, Apr. 20, 2010).

A Community Trade Mark (CTM) registration, owned by Rodd & Gunn Australia (a New Zealand company) (R&G), was registered by R&G's trademark counsel, who then informed the CTM representative (PW&F) that responsibility for the renewal had been transferred to an external renewal agency, Computer Patent Annuities (CPA).

PW&F was notified by OHIM of the deadline of February 28, 2007 to renew the registration. On April 3, 2006, R&G's trademark counsel instructed CPA to renew the mark. No action was taken by CPA, and on January 2, 2007, following an internal check, a CPA employee told his superiors that he would attend to payment of the renewal fee that same day. However, he did not. On March 19, 2007, OHIM notified PW&F of the cancellation of the mark. On May 21, 2007, PW&F filed a request for the renewal of the mark and an application for restitutio in integrum.

In the first instance decision, the application for restitutio in integrum was rejected and the mark remain cancelled on the basis that PW&F did not exercise the due care required. After R&G appealed, the Board of Appeal (Board) dismissed the appeal on the follows grounds:

• The professional representative should have exercised due care but PW&F had not done so, as it had not undertaken any activity or exercised any control over the renewal of the mark.
• The proprietor of the mark had acted carelessly by relieving its professional representative of the task of monitoring the legal status of the mark and delegating the renewal of the mark to a third party (i.e., CPA).
• If the duty of due care fell on CPA, then this was a failure on its part. Internal checks showed that 42 marks required action. CPA's failure to observe time limits was not isolated or inexplicable, but was a serious internal problem.

The decision was further appealed to the General Court.

The General Court upheld the Board decision, refusing restitution in integrum.

"In the present case, there is no need for the Court to rule on whether a non-professional representative can renew a Community trade mark, and therefore whether the proprietor of the mark exercised all due care required by the circumstances in that regard; it suffices to point out that, in any event, CPA did not exercise all due care required by the circumstances.

It is clear from the evidence ... that the failure to renew the mark did not result from exceptional circumstances but from a more general lack of vigilance on the part of CPA. It should be added that [R&G's trademark counsel] did not bother to ascertain whether, prior to the date of expiry of the registration of its mark, renewal had been properly effected, even though, in its letter of 3 March 2006, [R&G's trademark counsel] indicated that it wished to have confirmation in that regard from CPA."

In those circumstances, the Board did not err in rejecting the application for restitution in integrum.

Practice Note: There remains an expectation on the professional representatives to act with due care in monitoring registrations even when renewal responsibility has been delegated to a third party. The additional risk posed when renewals have been delegated to third parties should be countered with additional checks within the proprietor's organization and its professional representatives.

Copyright

Circuit Split on Whether Copyright Registration Must Be Obtained Before Filing an Infringement Action
Rita Weeks, Whitney D. Brown and Ulrika E. Mattsson

Copyright owners in the Ninth Circuit recently received same clarity concerning meeting the statutory prerequisites for filing copyright infringement actions from the U.S. Court of Appeals for the Ninth Circuit. Answering the question of what copyright "registration" actually means and when its protection begins, 9th Ninth Circuit held that plaintiffs need only file a copyright application with the U.S. Copyright Office to be eligible to file an infringement lawsuit, rather than waiting to obtain a copyright registration certificate. Cosmetic Ideas, Inc. v. IAC/Interactive Corp., Home Shopping Network, HSN General Partner LLC, Case No. 08-56079 (9th Cir., May 25, 2010) (Trager, Distr. J., sitting by designation).

Plaintiff Cosmetic Ideas created a piece of costume jewelry known as the "Lady Caroline Lorgnette Necklace" in 1997. Cosmetic Ideas began manufacturing and selling the piece in 1999 and continues to manufacture and sell the piece through various retailers and websites. In 2008, Cosmetic filed a copyright infringement action, alleging that defendant Home Shopping Network had sold a virtually identical necklace between 2005 and 2008. When Cosmetic Ideas filed the infringement action, it had filed a copyright application for the necklace but had not yet secured a copyright registration. The defendants filed a motion to dismiss the action, arguing that Cosmetic Ideas had failed to state a claim upon which relief may be granted and that the court lacked subject-matter jurisdiction over the infringement claim because Cosmetic Ideas did not possess a copyright registration when it filed the action. After the district court granted the defendants' motion, Cosmetic Ideas appealed.

The 9th Circuit, finding that the "plain language" of the Copyright Act contains an ambiguous definition of "registration" and does not provide guidance for the registration requirement of §411(a), vacated and reversed the district court's decision. Addressing this ambiguity, the court noted that the Copyright Act contained support for both an "application approach," whereby federal copyright protection begins at the application stage, as well as a "registration approach," whereby that protection begins only after the copyright applicant has obtained a registration certificate from the Copyright Office. As the Court noted, "in some places the Act seems to equate registration with affirmative approval from the Copyright Office, in others the Act suggests registration is accomplished by completing the process of submitting an application."

In view of the conflicting language in the Copyright Act, the court looked to legislative intent. Determining that Congress "valued having a robust federal register of existing copyrights," the court concluded that the "application approach better fulfills Congress's purpose of providing broad copyright protection." In choosing the "application approach," the court cited the benefits of granting copyright applicants the right to sue for infringement before receiving a registration certificate, such as minimizing harm from an infringer's acts that a copyright applicant would endure while waiting for the Copyright Office to issue a registration certificate.

Practice Note: The circuit courts are now split on the issue of whether an infringement action may be instituted after the copyright holder's application is received by the Copyright Office or not until the Copyright Office acts on the application and issues a registration certificate. The Fifth and Seventh Circuits have adopted the "application approach," while the Tenth and Eleventh Circuits have adopted the "registration approach." Addressing a related issue, but without ruling on this specific question, the U.S. Supreme Court in Reed Elsevier v. Muchnick, recently held that while registration is a precondition to filing a claim of copyright infringement, fulfillment of that requirement should not bar federal court jurisdiction over an infringement lawsuit. The 9th Circuit's decision in Cosmetic Ideas follows this holding and furthers loosens the formality of the Copyright Act to create a functional, litigation-friendly result.

The Sneaky Chef Cookbook Gets "Thin" Copyright Protection
Whitney D. Brown

In a case involving competing cookbooks aimed at mitigation child and obesity, the U.S. Court of Appeals for the Second Circuit affirmed a district court decision dismissing claims of copyright infringement, trademark infringement and trademark dilution. Missy Lapine, The Sneaky Chef, Inc., v. Jessica Seinfeld, Jerry Seinfeld, HarperCollins Publishers, Inc., Departure Productions LLC, Case No. 09-4423 (2nd Cir., April 28, 2010) (Swain, J.)

Missy Lapine, author of The Sneaky Chef: Simple Strategies for Hiding Healthy Foods in Kids' Favorite Meals, initiated the suit shortly after Jessica Seinfeld, wife of comedian Jerry Seinfeld, published Deceptively Delicious: Simple Secrets to Get Your Kids Eating Good Food. Lapine alleged that Seinfeld's book copied her cookbook, the innovative expression of the idea of sneaking vegetables into children's food "by means of €¦ comprehensive instructions for making and storing a variety of vegetable purees in advance, and using the purees in specially created recipes for children's favorite foods." Lapine also alleged trademark infringement, claiming that consumer confusion would likely result from the similarity of the two cookbooks, given their titles and similar cover designs featuring a "winking woman standing near carrots and holding a plate of brownies."

The appeals court determined that the idea of tricking children into eating healthy foods by hiding vegetables and other health foods into more indulgent foods cannot be copyrighted, given the longstanding principle that "in no case does copyright protection extend to any idea, procedure, process, system, or method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such a work." According to the appeals court, similarities between the two cookbooks in the expression of this idea, such as their instructions for preparing dishes or language about children's healthy eating, constituted "unprotectible elements that flow naturally from the work's theme rather than the author's creativity." Applying the "total concept and feel" test, the appeals court affirmed the district court ruling that the two cookbooks lacked the required substantial similarity to support an inference of copyright infringement, citing The Sneaky Chef's "extensive discussion of children's nutrition," and Deceptively Delicious' "bright colors and more photographs."

The 2nd Circuit also rejected Lapine's claims of trademark infringement and trademark dilution, finding that the books differed enough in appearance to prevent consumer confusion and noting that the use of the famous "Seinfeld" name further reduces the likelihood of such confusion.

Creating a Circuit Split, the Second Circuit Rejects "Independent Economic Value" Test
Hasan Rashid

The U.S. Court of Appeals for the Second Circuit rejected the "independent economic value" test adopted by four other circuits and upheld an award of statutory damages for copyright infringement of music on a per-album basis, not a per-song basis. Bryant v. Media Right Productions, Inc., Case No. 09-2600, 603 F.3d 105 (2nd Cir., Apr. 27, 2010) (Wood, J., sitting by designation).

The plaintiffs are songwriters who produced two albums, "Songs for Dogs" and "Songs for Cats." Each album and each song on the albums were individually registered with the U.S. Copyright Office. The plaintiffs entered into a marketing agreement with Media Right Productions. This agreement did not include a license to make copies. Despite this exclusion, Media Right entered into a distribution agreement with Orchard Enterprises whereby Orchard distributed the copyrighted music, including the sales of individual songs through online retailers.

The plaintiffs brought suit seeking statutory damages for infringement of each song impermissibly distributed. Under the Copyright Act, a court can award damages between $750 and $30,000 for all infringements with respect to one work. Although the district court found infringement, it rejected the plaintiffs' proposed per-song damages calculation. Instead, it treated the albums as compilations, calculating damages on the theory that each album, not each song, was the infringed work.

The 2nd Circuit agreed, despite contrary precedent in other circuits. The First, Ninth, Eleventh, and D.C. Circuits apply the "independent economic value" test, which provides that damages may be awarded for infringement of a work included within a compilation if the work has its own economic value. Citing the Copyright Act's legislative history, the 2nd Circuit rejected this test and held that a collection's status as a compilation does not depend on whether its parts are individually valuable. Instead, the court focused on the manner in which the songs were released. Because the plaintiffs originally released their works as albums, rather than as individual songs, the court upheld the award of damages on a per-album basis.

No Honor Among "Insatiable" Porn Purveyors
Paul Devinsky

The U.S. Court of Appeals for the Second Circuit, in a case decided on pre-emption, affirmed the dismissal of the basis of copyright complaint for unauthorized publication, tortious interference and conversion brought by an author against three book publishers and adult film star. Dianne Miller v. Holtzbrinck Publishers LLC, MacMillan Publishers Inc., Saint Martin's Press, Heather Hunter, Michelle Valentine Case No. 09-0919 (2nd Cir., May 14, 2010) (Underhill, Distr. J. sitting by designation).

After the publishers released a book "Insatiable: The Rise of a Porn Star," purportedly written by Hunter but that Miller claims and was in fact written by her at the adult film star's request, Miller filed suit, alleging unauthorized publication, tortious interferences and conversion. Miller alleged that Hunter agreed to pay her $25,000 for ghost-writing the book, but never intended to make good on the deal and that the publishers knew that Hunter had not written the book, but nevertheless published it without regard to rights of the actual author, i.e., Miller.

After district court dismissed the claims, including the conversion and tortious interference claims, Miller appealed. Miller argued that the Copyright Act did not preempt her tortious interference or conversion claims.

The 2nd Circuit, viewing unauthorized publication as the "gravamen of [her] complaint," found that the rights Miller was trying to protect were "coextensive with an exclusive right already safeguarded by the [Copyright] Act," and were therefore preempted.

In terms of Miller's fraud claims against Hunter, the court noted that although Miller did not expressly plead a breach of contract, "the essence of her fraud claim was that Hunter did not intend to perform an oral agreement" between the two. On this issue the 2nd Circuit agreed with the district court that Miller did not meet the pleading standard for fraud, despite seeking special damages, and "failed to allege any actual pecuniary loss stemming from the fraud." Thus, the 2nd Circuit concluded that the district court properly dismissed the fraud claims.

First Amendment Does Not Protect Anonymity of Alleged Copyright Infringers
Clifford R. Lamar II (Dale)

The U.S. Court of Appeals for the Second Circuit affirmed a district court's denial of a motion to quash a third-party subpoena served on the common internet service provider (ISP) of defendants alleged to have illegally swapped music files over the internet. Arista Records LLC v. Doe 3, Case No. 09-0905 (2d Cir., Apr. 29, 2010) (Kearse, J.).

In this copyright infringement action, the plaintiff record companies alleged that 16 defendants illegally downloaded and distributed music files over the internet. All 16 defendants attend SUNY at Albany, which serves as defendants' ISP. During their pretrial investigation, plaintiffs' investigators were able to identify the defendants solely by IP addresses assigned by the ISP. The plaintiffs moved for a third-party subpoena to obtain the identities of the defendants from the ISP. The court granted the motion, but required the ISP to provide each defendant with the subpoena. The defendants moved to quash the subpoena.

Three defendants raised the argument that a qualified right to use the internet anonymously existed under the First Amendment. Also, the defendants argued plaintiffs' failure to plead a prima facie case of copyright infringement required the court to quash the subpoena. Furthermore, the defendants argued that the "heightened pleading standards" of Twombly required plaintiffs' complaint to aver "on personal knowledge" at least one specific act of infringement for each defendant.

The magistrate judge denied the defendants' motion to quash, finding that all prongs of the five-part test set out in Sony Music favored the plaintiffs, even when weighing the claimed First Amendment right of anonymity. The magistrate judge ruled that "the notion of allowing others to have access to one's database by virtue of the Internet in order to pluck from a computer information and data that the computer owner or user wishes to share renders void any pretext of privacy." The district court affirmed the order, finding no clear error. Doe 3 filed an appeal to the 2nd Circuit.

On appeal, the 2nd Circuit found Doe 3's arguments to have no merit. Writing for the unanimous panel, Judge Kearse held that the First Amendment did not protect anonymity when used to mask copyright infringement or to facilitate such infringement by other persons. The panel did make a point of noting its skepticism of the magistrate's reasoning that any pretext of privacy was rendered void when sharing files over the internet.

The court also rejected Doe 3's contention that Twombly and Iqbal raised the pleading standard to require "specific evidence" of infringement. The court held that plaintiffs' complaint sufficiently alleged "plausible" allegations of copyright infringement by providing an attached exhibit that included factual assertions of IP addresses, the song files available on defendants' P2P databases, and different dates and times each was available. However, the court cautioned that no opinion was being made as to whether a plaintiff seeking a subpoena to identify an anonymous internet user must provide a similar "concrete showing of a prima facie claim of actionable harm" as the plaintiffs in this case had done.

Searching for Photos? Go Ahead, Google Those Thumbnails
Dr. Sandra Reinheimer

The German Federal Supreme Court has decided that Google is not liable for unlawful copyright infringement for displaying thumbnail preview images of the artist's photographs in its search engine. Maud Tutsche v. Google Inc., Case No. I ZR 69/08 (Ger. Fed. Supr. Ct., April 29, 2010).

Google's search engine includes a function that allows users to search for images by using text-based search terms. The search result reveals images that third parties have published on the internet in connection with the search term (e.g., the artist's name), displaying these images as scaled-down preview pictures (thumbnails) which have a smaller pixel size than the images shown on the original website and include a link allowing the user to access the website displaying the original photographs.

Claimant Maud Tutsche is an artist who maintained a website displaying pictures of her own works. Tutsche argued that Google had unlawfully infringed her copyright by displaying thumbnails of pictures of her artwork without her express approval.

Both the Jena Court of Appeal and the Erfurt District Court had already dismissed Tutsche's lawsuit. Although these courts held that the Google's display of thumbnails constituted an unlawful copyright infringement (for lack of an express or an implied legal declaration of Tutsche authorizing Google to use her works as preview pictures), they found that Tutsche's lawsuit was an abuse of rights pursuant to Section 242 of the German Civil Code and therefore dismissed it. Tutsche appealed.

The Federal Supreme Court took the view that even if Google behavior encroached upon the claimant's right of presentation of her works pursuant to Section 19a of the German Copyright Act, it could not be considered unlawful since the claimant had impliedly consented to the display of thumbnails. In the Federal Supreme Court's view, Google could reasonably interpret Tutsche's behavior as an implied consent to display her works as preview pictures since the she had made available the complete content of her website without using existing technical tools to block search engines from finding and displaying her works.

In an obiter dictum, the Federal Supreme Court expressly excluded from its rational the display of images which had been posted by unauthorized third parties and explained that in such cases a search engine provider might be liable for copyright infringements once it had obtained knowledge of the unlawful nature of the data it had stored pursuant to the E-Commerce Directive No. 2000/31.

Practice Note: In its judgment, the German Federal Supreme Court decided one of the fundamental issues concerning the use of copyright protected material in the internet in favor of search engine providers. At the same time, the German Federal Supreme Court clearly defined those circumstances where consent of the copyright owner will be implied and those circumstances where it will not.

Trade Secrets

Use of Executable Machine Code Does Not Constitute Misappropriation
Vinod J. Mapranath

The California Court of Appeals ruled that simply using executable machine code does not qualify as trade secret misappropriation if the source code was not acquired, disclosed or used. Silvaco Data Systems v. Intel Corp., Case No. H032895 (Cal. Ct. App., Apr. 29, 2010) (Rushing, J.).

This case focuses on the differences between source code and executable machine-readable code. Essentially, source code is human readable code that is written by a programmer. It can then be converted to executable machine code by undergoing transformation(s) after compilation and linking processes. Silvaco Data Systems develops electronic design automation (EDA) software that companies such as Intel use to develop and simulate their products.

In 2000, in a suit against Circuit Semantics, Inc. (CSI), the court ruled that CSI had misappropriated Silvaco's trade secrets and that CSI had incorporated them in its own product. After that judgment, Silvaco brought an action against Intel alleging that by using CSI's software for simulations, Intel had also misappropriated the same Silvaco trade secrets.

California trade secret misappropriation law requires that a trade secret be acquired by improper means, disclosed without the owner's consent or used without the owner's consent.

The court ruled that acquisition of a trade secret requires that the acquirer affirmatively "secure dominion over the thing" and not merely passively receive it. The court found that Intel had not acquired the trade secret, because Intel never came into possession of CSI's underlying source code; instead, it only executed CSI's machine-readable code.

The court also quickly dismissed the argument that Intel had disclosed the trade secret, noting that since Intel had never acquired the source code, "there [was] no evidence that it ever had the source code to disclose."

The court, noting that use of a trade secret requires direct exploitation of the secret, also ruled that Intel did not use Silvaco's trade secret merely by executing CSI's software because simply executing object code was not considered "use" of the underlying source code. In general, the use requirement is not met when the conduct consists "entirely of possessing, and taking advantage of, something that was made using the secret." In this regard, the court observed that if every purchaser of a software product was considered a user of trade secrets, it would stunt software sales and serve as a disincentive to innovation.

Finally, the court analogized the difference between knowledge of source code and possession of executable code to a "customer in [a] pie shop who is accused of stealing the secret recipe €¦ [but] does not, by buying or eating the pie, gain knowledge of the recipe used to make it."

Unprotected Information Can Not Become a Trade Secret Simply by Changing the Storage Medium
Leigh J. Martinson

The U.S. Court of Appeals for the Second Circuit ruled that the printouts from an automated computer system did not qualify as trade secrets because the printouts contained the same information available in the unprotected policyholder files. Nationwide Mutual Insurance Co., Nationwide Mutual Fire Insurance Co., Nationwide Life Insurance Co., Nationwide Prop. & Casualty Insurance Co. V. Bruce J. Mortensen, Patricia Bland, David H. Donaldson, Case Nos. 08-5214, 08-5226, 08-5258, and 08-5450 (2nd. Cir., May 11, 2010) (Parker, J.)

Nationwide Mutual Insurance Co. (Nationwide) hired a number of independent insurance agents. As part of the terms of their agreement, the hired agents exclusively sold Nationwide policies. In addition, the independent agents were given a number of pre-existing customers to service. As part of this arrangement, the agents maintained physical policyholder files containing information relevant to the customers' insurance needs, including documentation that they received from both the customers and Nationwide. The agents also had use of a password-protected Nationwide computer system that contained the same information.

In the months leading up to the agents terminating their agency agreements with Nationwide, the independent agents met with representatives from other insurance companies and shared policyholder information generated from the computer system. After terminating their agreements, the independent agents began competing with Nationwide. In response, Nationwide sued on a number of theories, including violation of the Connecticut Uniform Trade Secrets Act. The independent agents counterclaimed for a number of alleged violations.

The district court rejected Nationwide's trade secret claim on summary judgment. It also dismissed all the agents' counterclaims. Both parties appealed.

On appeal, Nationwide focused solely on the printouts generated from the computer system, a strategy apparently predicated on the fact that a number of other courts had rejected the argument that the agents' policyholder files themselves qualify as trade secrets. The 2nd Circuit noted that in order to qualify as a trade secret, materials cannot be "readily ascertainable by proper means" from another source. The court reasoned that because the printout information was merely a better protected form of the information contained in the physical policyholder files, the printout information was not magically elevated to a trade secret. The court stated the focus is not on the medium, but on whether the information itself was adequately protected—and it was not.

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