Property, intangible

a blog about ownership of intellectual property rights and its licensing

  • Not Enough Ownership

    Defendant Lingfu Zhang was accused of downloading the movie Fathers & Daughters via BitTorrent. Plaintiff Fathers & Daughters Nevada, LLC was the author and registered copyright owner of the film and sued Zhang. But copyright ownership is tricky.

    F&D had a sales agency agreement with non-party Goldenrod Holdings and its sub-sales agent Voltage Pictures.1 Goldenrod and Voltage were given the right, as described by the court, to license most of the exclusive rights in the copyright in the film, including rights to license, rent, and display the motion picture in theaters, on television, in airplanes, on ships, in hotels and motels, through all forms of home video and on demand services, through cable and satellite services, and via wireless, the internet, or streaming. F&D reserved all other rights, including merchandising, novelization, print publishing, music publishing, soundtrack album, live performance, and video game rights to itself. Goldenrod and Voltage could execute agreements with third parties in their own names and they had “the sole and exclusive right of all benefits and privileges of [F&D] in the Territory, including the exclusive right to collect (in Sales Agent’s own name or in the name of [F&D] …), receive, and retain as Gross Receipts any and all royalties, benefits, and other proceeds derived from the ownership and/or the use, reuse, and exploitation of the Picture ….” The agreement described eight categories for deductions from the gross receipts, with the amounts redacted in the version given to the court. The pay out of any adjusted gross receipts after all the deductions were taken was also redacted.

    Goldenrod entered into a distribution agreement with Vertical Entertainment, LLC, granting Vertical a license in the US and its territories for the:

    sole and exclusive right, license, and privilege … under copyright, … to exploit the Rights and the Picture, including, without limitation, to manufacture, reproduce, sell, rent, exhibit, broadcast, transmit, stream, download, license, sub-license, distribute, sub-distribute, advertise, market, promote, publicize and exploit the Rights and the Picture …

    The “Rights” were:

    (i) theatrical rights;
    (ii) non-theatrical rights, meaning prisons, educational institutions, libraries, museums, army bases, hospitals, etc., but expressly excluding ships and airlines;
    (iii) videogram rights, meaning videocassettes, DVDs, blue-ray discs, CD-ROMs, and similar media; retail channels including “through standard retail channels by means of download to any tangible or hard carrier Videogram storage device using any and all forms of digital or electronic transmission to the retailer,” and internet based retailers;
    (iv) television rights;
    (v) digital rights, meaning the exclusive right “in connection with any and all means of dissemination to members of the public via the internet, ‘World Wide Web’ or any other form of digital, wireless and/or Electronic Transmission &hellip including, without limitation, streaming, downloadable and/or other non-tangible delivery to fixed and mobile devices,” which includes “transmissions or downloads via IP protocol, computerized or computer-assisted media” and “all other technologies;”
    (vi) pay-per-view and video-on-demand rights; and
    (vii) incidental rights.

    The license also included the right to assign, license or sublicense any of the enumerated rights.

    As mentioned, Goldenrod retained the right of distribution to ships and airlines, plus clip rights, stock footage, merchandising, soundtrack, sequel, prequel, remakes, spin-offs, and royalties from retransmission and other collection agencies. The parties subsequently clarified that Vertical could distribute digital copies as long as Vertical uses commercially reasonable efforts to ensure that Vertical’s internet distribution and streaming could only be received within its contract territory, was made available over a closed network where the movie could be accessed by only authorized persons, and could only be accessed in a manner that prohibited circumvention of digital security or digital rights management security features.

    The distribution agreement said that Goldenrod retained “the right to pursue copyright infringers in relation to works created or derived from the rights licensed pursuant to this Agreement,” which would include Zhang’s BitTorrent distribution.

    Does F&D have standing to pursue the copyright infringement claim for Zhang’s alleged BitTorrent download?

    The critical inquiry is to consider whether the substance of the rights or portions of rights that were licensed were exclusive or nonexclusive. Vertical plainly received exclusive rights. Vertical received the exclusive right to “manufacture, reproduce, sell, rent, exhibit, broadcast, transmit, stream, download, license, sub-license, distribute, sub-distribute, advertise, market, promote, publicize and exploit the Rights and the Picture and all elements thereof and excerpts therefrom” in the United States and its territories for almost all distribution outlets, except airlines and ships. This constitutes an exclusive license.

    F&D argued that its retained rights were enough to give it standing, but the court didn’t agree:

    F&D misunderstands Section 501(b) of the Copyright Act. [¶] As Section 501(b) states, and the Ninth Circuit has made clear, after a copyright owner has fully transferred an exclusive right, it is the transferee who has standing to sue for that particular exclusive right. The copyright owner need not transfer all of his or her exclusive rights, and will still have standing to sue as the legal owner of the rights that were not transferred. But the copyright owner no longer has standing to sue for the rights that have been transferred.

    The BitTorrent download “squarely falls within the digital rights exclusively licensed to Vertical,” meaning that F&D couldn’t assert the claim. F&D’s ships and airplanes exclusion didn’t save the day, “The alleged violation also includes illegally viewing the movie in the United States, which is the exclusive broadcast territory of Vertical, except for airplanes and oceanliners, which are not relevant to this lawsuit.”

    Goldenrod’s express retention of the right to sue for illegal downloads didn’t matter; the court noted that, since one could not assign a bare right to sue, “the Court finds that a party similarly cannot retain a simple right to sue. Just as Goldenrod (or F&D) could not assign or license to Vertical or anyone else no more than the right to sue for infringement, it cannot transfer the substantive Section 501(b) rights for display and distribution in the United States and its territories, including digital rights, but retain only the right to sue for one type of infringement of those transferred rights (illegal display and distribution over the internet).”

    But wait, a beneficial owner also has standing to sue for infringement. “The classic example of a beneficial owner is ‘an author who has parted with legal title to the copyright in exchange for percentage royalties based on sales or license fees.” F&D had one problem with this argument though – lack of evidence:

    The sales agency agreement provides that Goldenrod may enter into license agreements and collect monies in its own name. Thus, Goldenrod may collect the monies from Vertical in Goldenrod’s name. The sales agency agreement also provides, however, that monies obtained from licensing the movie shall be deemed “Gross Receipts.” As described in the factual background section, the first eight steps in distributing Gross Receipts could not be considered royalties to F&D.

    It is conceivable that in the final step, after the monies become “adjusted gross receipts,” there may be some type of distribution that might be considered royalties to F&D. That entire section, however, is redacted in the copy provided to the Court. Thus, there is no way for the Court to know whether the adjusted gross receipts are divided in such a manner that could be considered royalties to F&D. F&D did not provide the Court with an unredacted copy or any evidence showing how F&D can be deemed to be receiving royalties. The Court would have to engage in pure speculation as to how adjusted gross receipts are divided, and the Court will not do so.

    Case dismissed.

    Fathers & Daughters Nev., LLC v. Zhang, Civ. No. 3:16-cv-1443-SI (D. Or. Jan. 17, 2018)

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    1. Not mentioned by the court, Voltage Pictures has a notorious reputation for “copyright trolling,” which is using the court system to obtain the identity of a file downloader without any intention of suing them and then demanding money. ↩
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  • The Questionable Benefit of Not Keeping Your Corporations Straight

    One of the most difficult ownership questions is who owns intangible assets created by a person who is the sole shareholder of a legal entity. There isn’t any receipt, or a check written against the corporate account, as evidence of ownership. Trademarks can be the most difficult because people don’t tend to think of them as assets at all.

    Dr. Harvey Barnett started teaching infants and young children acquatic survival skills in 1966 and did so until his retirement. He had formed several different legal entities, at least five, which the opinion refers to collectively as the “Barnett Companies.” The business was a family affair; Barnett’s wife taught water safety to children and trained instructors, and the couple’s children worked in the business too. The titular trademark owner in the cancellation was J. Barnett Holdings, Inc., an entity formed on the advice of counsel in 2002 to hold the intellectual property of the Barnett Companies. J. Barnett Holdings claimed there was an unwritten license to a Barnett company called Infant Swimming Resource, LLC (ISR) to license the intellectual property to instructors, who get written licenses to use various trademarks.

    The petitioner was Survival Swim Development Network, Inc.; the mark was SELF RESCUE. The cancellation was sustained on the basis of that the mark was merely descriptive, but one of the other claims was that the registration was void ab initio because the application was not filed by the owner of the mark.

    Dr. Barnett filed the application for a collective mark in his own name on March 31, 2012, giving a date of first use in commerce of November 26, 2008. He assigned it to J. Barnett Holdings a few months later. He testified that he filed the application in his own name because “I was the author of — I was the author,” because he was the founder and owner of the Barnett Companies “and the originator of the self rescue technique,” and because a state court in Colorado had ruled in 2011 that he and the Barnett Companies were essentially one and the same entity. The application was assigned during its prosecution and, after the assignment, Ms. Barnett signed a substitute application amending the application from one for a collective mark to one for a service mark, but also stating that ISR was the owner of the mark. A follow up office action stated “The request to change the owner name raises a question regarding whether the proper party filed the original application and/or whether the mark was assigned to the proper party” and advised that an application is void ab initio if not filed by the owner. The response to the office action said “the owner of the application was correctly initially filed in the name of J. Barnett Holdings, LLC, and that Infant Swimming Resource, LLC was mistakenly listed in Applicant’s previous response as the owner of the application.” The mark thereafter registered.

    The Board established that “To prevail on its claim that the involved application was void ab initio, Petitioner must show, by a preponderance of the evidence, that Dr. Barnett, the original applicant, was not the owner of the mark when he applied to register it.” The petitioner claimed that Dr. Barnett was not the first to use the mark. In an application for a collective mark, the first use date statement is that “the mark was first used by group members at least as early as …,” and there is also a mandatory statement explaining how the owner exercises control over the group, which for Dr. Barnett’s application was that “all members must have written permission to use the term Self Rescue prior to their utilizing the term.” But Dr. Barnett had no documentary evidence that either statement was true, nor that he controlled the use of the mark on any documents or website.

    The Board seemed unwilling to find that Dr. Barnett could be the owner of the mark. But we have the earlier lawsuit, where a court held that ISR was an alter ego of Dr. Barnett and that “Dr. Barnett and his companies were legally one and the same,” plus some pesky binding precedent:

    Dr. Barnett’s ownership of ISR, in and of itself, would be an insufficient basis upon which to claim that ISR was a related company, or that its use of “Self-Rescue” was attributable to him personally. Great Seats [ v. Great Seats Inc.], 84 USPQ2d [1235,] 1243 [(TTAB 2007)](citing In re Hand, 231 USPQ 487 (TTAB 1986); Smith v. Coahoma Chem. Co., 264 F.2d 916, 121 USPQ 215 (CCPA 1959)). But as the Board noted in In re Hand, the CCPA in Smith v. Coahoma Chem. Co. had clearly implied that “if facts were presented to show that an individual[‘s] ownership of a corporation was so complete that the two legal entities ‘equitably constituted a single entity,’ then sufficient control by the individual with use by the corporation inuring to the individual’s benefit would be found.” 231 USPQ at 488 (quoting Smith, 121 USPQ at 218).

    The court in the Heumann litigation found in 2011, a little more than a year before Dr. Barnett filed the application, that the Barnetts’ trial testimony about the various Barnett Companies “showed that the web of corporations that they formed were meaningless window dressing for what was in fact a kitchen table operation.” The court observed that the Barnetts “often could not keep their own corporations straight” and that even though ISR had been formed in 2002, there were no corporate records for ISR as of 2011, “none whatsoever.” The court also found that an Infant Swimming Research business plan “described the ISR techniques as the intellectual property of Harvey Barnett, not the property of any of his corporations.” The court concluded that Infant Swimming Research and ISR were alter egos and that Infant Swimming Research was “the alter ego of Dr. Barnett,” and entered judgment against Dr. Barnett and ISR, enabling the Heumanns to collect the judgment that they had obtained against Infant Swimming Research against Dr. Barnett and ISR.

    The court’s judgment, which was made of record by Petitioner, and obtained by the prime mover behind Petitioner, who was represented in that case by the same attorney representing Petitioner in this one, permits us to infer that Dr. Barnett and ISR “equitably constituted a single entity,” Smith, 121 USPQ at 218, when the application was filed in 2012, such that any use of “Self-Rescue” by ISR at that time inured to Dr. Barnett’s benefit and made him the owner of the mark. We therefore find that Petitioner failed to prove, by a preponderance of the evidence, that Dr. Barnett did not own the “Self-Rescue” mark when the application to register it was filed, and we dismiss Petitioner’s non-ownership claim.

    Well, that’s an interesting way to turn lemons into lemonade – I suppose. The registration was still cancelled, so it didn’t much matter. But it is in essence a reverse veil-piercing, a theory that should be viewed skeptically. I’m also a bit skeptical of the registrant’s argument; how one could get schooled in piercing the corporate veil in 2011, file an application a year later, but then clais not to have grasped the finer points of keeping entities separate, strikes me as equally likely to prove he meant to own it personally. But we have a cancellation, where the registration is prima facie evidence of ownership and the burden is on the petitioner to prove non-ownership, rather than the burden on an applicant to prove ownership. Which might have made all the difference here.

    Survival Swim Dev. Network, Inc. v. J. Barnett Holdings, LLC, Cancellation No. 92061915 (TTAB Dec. 12, 2017).

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  • Battle Lines Drawn

    I previously reported on a case involving a missing patent assignment from an employee. The missing document didn’t prevent the Patent Office from issuing the patent though; the successor to the rights of the other co-inventors submitted the inventor’s employment agreement to the Patent Office and it thereafter issued the patent. However, the district court held that the language of the employment agreement was not a present assignment of the invention and so ownership had never been transferred. The district court opined that problem could have been managed, but wasn’t, by suing the recalcitrant co-inventor for specific performance of her contractual obligation to assign, or by exercising the provision in the employment agreement that allowed the employer to act as the inventor’s attorney-in-fact and execute the assignment. But neither happened and the infringement suit was dismissed because all owners weren’t joined.

    The Court of Appeals for the Federal Circuit affirms the district court. The majority opinion isn’t all that interesting, mostly just confirming the reasoning of the district court.

    But the concurring opinion, but Judge O’Malley, and the dissent, by Judge Newman, are much more interesting. Judge O’Malley concurs in the result but uses this case as an opportunity to object once again to the Federal Circuit’s view that an unwilling co-inventor can bar a patent infringement lawsuit altogether, an argument previously made by Judges Newman and O’Malley (also joined by Lourie and Wallach) in their dissent from a denial of a rehearing en banc in STC.UNM v. Intel Corp., 767 F.3d 1351 (Fed. Cir. 2014) (blogged here). If anyone needs to brief this argument, a wholesale cut and paste from this opinion is all that you need.1

    Judge Newman’s dissent exposes the problems with the Federal Circuit’s strong textualist interpretation of employment agreements in general and the wording of the assignment provision specifically. The Federal Circuit has settled on a bright line in deciding whether there was a present assignment of a future right or only a promise to assign in the future – looking only at the grant language to see whether the wording is “does hereby assign” or “shall assign,” or an equivalent. Judge Newman’s dissent takes a more holistic view of the document, describing at great length all the spots in the employment agreement that implied that the employer was to own any patents, nine places to be exact. Certainly the understanding of the parties at the time the agreement was signed was that the employer would own any patent rights. And what seems obvious now about the wording wasn’t so obvious at the time, where there was uncertainty about whether it was even possible to assign an expectancy interest in a future patent, a point that some still disagree with. But bright lines have more certainty, even if occasionally harsh.

    Advanced Video Techs. LLC v. HTC Corp., Nos. 2016-2309, 2016-2010, 2016-2011 (Fed. Cir. Jan. 11 2018).

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    1. But for an opposing view on the point, see David Hricik’s post over at Patently-O. ↩
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  • Termination of a Public License

    I’ve been thinking lately about the concept of a “license.” This is a typical statement of what it is:

    [A] license is not a contract; rather, a license is “permission to use a copyrighted work in a particular specified manner …” Saxelbye Architects, Inc. v. First Citizens Bank & Tr. Co., 1997 U.S. App. LEXIS 30320, 1997 WL 702290, at *3 (4th Cir. Nov. 3, 1997). Indeed, “[a] nonexclusive license may be granted unilaterally by a copyright holder” so no meeting of the minds is required. Crump v. QD3 Entm’t, Inc., 2011 U.S. Dist. LEXIS 14157, 2011 WL 446296, at *4 (S.D.N.Y. Feb. 8, 2011) (citation omitted).

    But that’s not actually correct, it’s mixing apples an oranges. More accurately, a license is a defense to infringement which may or may not be in a contract. The implied copyright license with its origin in Effects Assocs. v. Cohen, 908 F.2d 555 (9th Cir. 1990) is an example of a license, a defense, that isn’t a contract. But licenses can be contracts too.

    Confusion reigns because an agreement will be named a “license.” But an error in understanding the difference between a license, which is a defense, and a document called a “license,” can lead to an error in analysis. Take the case that the quote is from, Philpot v. Media Research Center, Inc. Larry Philpot is a photographer who puts his photos on Wikimedia under a Creative Commons Attribution-Share Alike license. This license allows the display of the copyrighted work at no cost on the condition that a user gives attribution to the source of the work (and other obligations not at play here). Defendant Media Research Center used Phipot’s photos

    Kenny Chesney 2013

    Kid Rock 2013

    to illustrate political articles but did not provide the required attribution. Philpot sued.

    MRC claimed that it had a non-exclusive license as granted in the Creative Commons license. Philpot “unpersuasively argue[d] that defendant was not a party to the license because there was no meeting of the minds with respect to the terms of the license.” This is the statement leading to the above quote “a license is not a contract,” which is followed by the conclusion “Accordingly, the mere fact that plaintiff uploaded the Photographs to Wikimedia under a nonexclusive [Creative Commons license] is sufficient to grant a license to defendant.”

    Having concluded that the legal issue wasn’t a contract one, the proper analysis would be to inquire whether MRC was within the scope of the license. If not, the use is a copyright infringement. Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1121 (9th Cir. 1999). Said another way, if you claim as a defense to infringement that you have a license, you won’t have the defense if your use isn’t what the license allows.

    But the Philpot court didn’t go there; instead, it reverted to contract theory. The CC-BY-SA license has a termination clause, “The License and the rights granted hereunder will terminate automatically upon any breach by You of the terms of this License.” The court concluded:

    Here, the parties do not dispute that attribution was a material term of the license, and the parties agree that defendant publicly displayed the Photographs without attribution. Thus, a reasonable juror could find that defendant breached the license, and as a result, the license was terminated. After termination of the license, defendant’s continued use of the Chesney and Kid Rock Photographs would then be grounds for plaintiff’s copyright infringement action provided there is no other defense, including fair use.

    Note the confusing use of the word “license” to mean “agreement” in “material term of the license” and “defendant breached the license, and … the license was terminated.” The court stumbled to the right result but in a very confusing way. And I didn’t think too much of its fair use analysis either.

    Philpot v. Media Research Ctr. Inc., No. 1:17-cv-822 (E.D. Va. Jan. 8, 2018).

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  • A Circuit Split That Isn’t, At Least Not Yet

    Here is a really interesting decision in a bankruptcy case. If those words make you cringe, stop reading now because we’re going into the weeds.

    The question is what rights a trademark licensee has when its licensor declares bankruptcy. As a general rule, the trustee can elect to reject an e​xecutory contract under § 365(a). However, because the loss of a license can be so devastating to a licensee, there is a special section of the Bankruptcy Code, § 365(n), that allows licensees to continue to use licensed trade secrets, patents, copyrights and mask works. Trademark are absent from the list, but that wasn’t an oversight. As explained in an earlier post, the quality control requirement for a trademark license meant these licenses were different in character, so trademark rights were excluded from the provision. The Senate Report explained, “Since these matters could not be addressed without more extensive study, it was determined to postpone congressional action in this area and to allow the development of equitable treatment of this situation by bankruptcy courts.” I guess we’re getting that treatment, because the Court of Appeals for the First Circuit just issued an opinion, Mission Product Holdings, Inc. v. Tempnology, LLC, expressly disagreeing with the Seventh Circuit opinion in Sunbeam Products, Inc. v. Chicago American Mfg., LLC, 686 F.3d 372 (7th Cir. 2012).

    In Mission Product, the debtor-in-possession/licensor Tempnology sought to reject an agreement with Mission. There were three license grants in the agreement considered by the bankruptcy court: an exclusive distribution license, a non-exclusive “intellectual property” license that excluded trademarks, and a trademark license.

    The distribution license gave Mission the exclusive right to distribute certain products manufactured by Tempnology within a specific market (§ 1 if you’re interested). The “intellectual property” license (§ 15(b)) granted Mission the right to make new product, i.e., a “non-exclusive, irrevocable, royalty-free, fully paid-up, perpetual, worldwide, fully-transferable license with the right to sublicense (through multiple tiers), use, reproduce, modify, and create derivative work based on and otherwise freely exploit the [Tempnology] Property in any manner for the benefit of [Mission], its licensees and other third parties.” By the time we reach this decision, Tempnology had conceded that the rejection of the agreement did not apply to this “intellectual property” license grant. The trademark license (§ 15(d)) was a “non-exclusive, non-transferable, limited license” for the term of the Agreement “to use [Tempnology’s] trademark and logo (as well as any other Marks licensed hereunder) for the limited purpose of performing its obligations hereunder, exercising its rights and promoting the purposes of this Agreement.”

    Mission unsuccessfully argued that the distribution license was an intellectual property license that should be exempt from rejection. No dice, though:

    We start in section 365(a) with the universe of all executory contracts that a debtor may seek to reject; section 365(n)(1) then focuses on a subset of that universe (“executory contract[s] under which the debtor is a licensor of a right to intellectual property”); subsection (n)(1)(B) then says what happens to intellectual property rights granted under such contracts (the licensee may “retain its rights”); and the parenthetical merely makes clear that those rights “to such intellectual property” include any exclusivity attributes of those rights. In this manner, subsection (n)(1)(B) protects, for example, an exclusive license to use a patent, but does not protect an exclusive right to sell a product merely because that right appears in a contract that also contains a license to use intellectual property. … Given that the right to sell a product is clearly not included within the statute’s definition of intellectual property, we are not going to treat it as such merely because of a coincidental practical effect it may have in limiting the scope of the manner in which a patent might be exploited .…

    Whether one can reject a trademark license is where the First Circuit differs with the Seventh Circuit. Acknowledging that § 365(n) doesn’t apply:

    There is, though, an alternative argument [to §365(n)] for finding that a right to use a debtor’s trademark continues post-rejection. That argument rests not on equitable dispensation from rejection, but instead on an exploration of exactly what rejection means. The argument, as accepted by the Seventh Circuit in Sunbeam, runs thus: Under section 365(g), section 365(a) rejection constitutes a breach of contract that “frees the estate from the obligation to perform.” Sunbeam, 686 F.3d at 377. “But nothing about this process implies that any rights of the other contracting party have been vaporized.” Id. Therefore, reasoned the Seventh Circuit, while rejection converts a debtor’s duty to perform into a liability for pre-petition damages, it leaves in place the counterparty’s right to continue using a trademark licensed to it under the rejected agreement. In so reasoning, the Seventh Circuit found itself unpersuaded by the contrary approach taken by the Fourth Circuit in Lubrizol. Sunbeam, 686 F.3d at 378; see also In re Exide Techs., 607 F.3d 957, 964-68 (3d Cir. 2010) (Ambro, J., concurring).

    Of course, to be precise, rejection as Congress viewed it does not “vaporize” a right. Rather, rejection converts the right into a pre-petition claim for damages. Putting that point of vocabulary to one side, and leaving open the possibility that courts may find some unwritten limitations on the full effects of section 365(a) rejection, we find trademark rights to provide a poor candidate for such dispensation. Congress’s principal aim in providing for rejection was to “release the debtor’s estate from burdensome obligations that can impede a successful reorganization.” Bildisco & Bildisco, 465 U.S. at 528. Sunbeam therefore largely rests on the unstated premise that it is possible to free a debtor from any continuing performance obligations under a trademark license even while preserving the licensee’s right to use the trademark. See Sunbeam, 686 F.3d at 377. Judge Ambro’s concurrence in In re Exide Technologies shares that premise. See 607 F.3d at 967 (Ambro, J., concurring) (assuming that the bankruptcy court could allow the licensee to retain trademark rights even while giving the debtor “a fresh start”).

    Careful examination undercuts that premise because the effective licensing of a trademark requires that the trademark owner — here Debtor, followed by any purchaser of its assets — monitor and exercise control over the quality of the goods sold to the public under cover of the trademark. See 3 J. Thomas McCarthy, McCarthy on Trademarks & Unfair Competition § 18:48 (5th ed. 2017) (“Thus, not only does the trademark owner have the right to control quality, when it licenses, it has the duty to control quality.”). Trademarks, unlike patents, are public-facing messages to consumers about the relationship between the goods and the trademark owner. They signal uniform quality and also protect a business from competitors who attempt to profit from its developed goodwill. See Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 636 (1st Cir. 1992). The licensor’s monitoring and control thus serve to ensure that the public is not deceived as to the nature or quality of the goods sold. Presumably, for this reason, the Agreement expressly reserves to Debtor the ability to exercise this control: The Agreement provides that Debtor “shall have the right to review and approve all uses of its Marks,” except for certain pre-approved uses. Importantly, failure to monitor and exercise this control results in a so-called “naked license,” jeopardizing the continued validity of the owner’s own trademark rights. McCarthy, supra, § 18:48; see also Eva’s Bridal Ltd. v. Halanick Enters., Inc., 639 F.3d 788, 790 (7th Cir. 2011) (“[A] naked license abandons a mark.”); Restatement (Third) of Unfair Competition § 33 (“The owner of a trademark, trade name, collective mark, or certification mark may license another to use the designation. … Failure of the licensor to exercise reasonable control over the use of the designation by the licensee can result in abandonment . …”).

    The Seventh Circuit’s approach, therefore, would allow Mission to retain the use of Debtor’s trademarks in a manner that would force Debtor to choose between performing executory obligations arising from the continuance of the license or risking the permanent loss of its trademarks, thereby diminishing their value to Debtor, whether realized directly or through an asset sale. Such a restriction on Debtor’s ability to free itself from its executory obligations, even if limited to trademark licenses alone, would depart from the manner in which section 365(a) otherwise operates. And the logic behind that approach (no rights of the counterparty should be “vaporized” in favor of a damages claim) would seem to invite further leakage. If trademark rights categorically survive rejection, then why not exclusive distribution rights as well? Or a right to receive advance notice before termination of performance? And so on.

    So the First Circuit held that the trademark license could be rejected.

    But hold on, these two cases are not about the same kind of trademark license. In Sunbeam, the licensor, in financial distress, asked the licensee to manufacture 1.2 million box fans. The licensee would only do so with a guarantee that, if the licensor didn’t pay for the fans, the licensee could sell them itself and keep the proceeds. Three months later the licensor was put into involuntary bankruptcy and the trustee sold the assets of the business to Sunbeam Products. Sunbeam didn’t want the licensee to sell the fans so the trustee rejected the contract, the licensee nevertheless sold the fans, and Sunbeam brought an adversary action. Thus, the trademark license in Sunbeam was for a known quantity of fans presumably manufactured to the quality standards of the licensor and no future use after the fans were sold. In contrast in In re Tempnology, Mission has an ongoing license to create whatever products it wants and be immune from a charge of patent, trade secret or copyright infringement brought by Tempnology. But it wanted more, it wants to use the trademark for these products too. The First Circuit reasonably balked at the concept that Tempnology would have to choose between granting a naked license or the burden of continuing to exercise quality control when the point of the bankruptcy was to rid itself of this particular licensee, one Tempnology thought was the reason for its financial woes.

    We can recognize the validity of both positions. In Sunbeam, the successor-in-interest to the trademark rights did not have to make that choice; the goods were of known quality and the trademark license of limited term and purpose, to sell 1.2 million fans. In Mission, the licensee, by virtue of retaining the “intellectual property” license, could create new products without any kind of limitation. The difference in the cases is the parameters of the license granted, confirming it was wise on the part of Congress to avoid making any hard-and-fast rules about trademarks.

    Mission Product Holdings, Inc. v. Tempnology, No. 16-9016 (1st Cir. Jan 12, 2018).

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  • In the Category of Unusual “Writings”

    I don’t expect to ever see something that trumps the pawn ticket as a writing documenting a transfer (or attempted transfer) of rights. But, in the copyright realm we have a contender – an Annual Report. It’s embedded below:

    Roberts v Storix 2003 Annual Report

    It says “2003 represents the first 10 months in the life of Storix as a Corporation. Prior to 2003, Storix Software was a sole proprietorship. All assets from Storix Software were transferred to Storix Inc., as of its incorporation as of February 24, 2003.”

    The 9th Circuit held that this was a valid writing transferring copyright. It’s notable that it is an affirmation of a jury’s conclusion (and a non-precedential opinion).1

    The appeals court opinion doesn’t tell us how it is that Johnson came to sue the company of which, in 2003, he was President – we have to dig into the district court case for that. Johnson was a sole proprietor, d/b/a “Storix Software,” from 1998 until he incorporated in 2003. He was the sole owner of the corporation until 2011, when he was diagnosed with cancer which he thought might be terminal, so he gave ownership of 60% of the company to employees. After Johnson recovered he returned to work and developed new software, but the company didn’t adopt it. From a Johnson brief:

    However, without any reasonable inquiry, investigation, testing, or otherwise independent analysis of Johnson’s work, the board members rejected and refused to implement any such network security features, claiming they were not necessary. When Johnson tried to exercise his right, as the owner of the Original Work, to control the design of the derivative works, the other Storix, Inc. board members denied him such right, claiming that Johnson was no longer “in a management position.”

    So we have a lawsuit. Johnson challenged two aspects of the Annual Report, that he hadn’t signed it in his personal capacity and that it wasn’t contemporaneous with the assignment of the software. The second point is easy; at least in the 9th Circuit it doesn’t have to be a contemporaneous writing.

    The first point is a little more interesting. Section 204(a) of the Copyright Act says “A transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner’s duly authorized agent.” This is how the appeals court addressed the point:

    First, Section 204(a) does not necessitate the form of the signature to be in the transferor’s personal capacity. The purpose of Section 204(a)’s writing requirement is to prevent inadvertent transfers and fraudulent claims of copyright ownership. Magnuson v. Video Yesteryear, 85 F.3d 1424, 1428-29 (9th Cir. 1996). That concern is virtually absent when Johnson himself admitted to writing and signing the Annual Report that memorialized a transfer of at least some assets to his own wholly-owned company. Johnson conceded that a transfer of some assets did occur, including computers, desks, supplies, and “whatever was necessary to continue doing business as Storix, the same thing that I was doing as Storix Software.”

    I have a couple of problems with this reasoning. “Memorialized a transfer.” Indeed, it is evidence of a transfer but not a transfer itself. It uses the past tense to describe the transaction, “were transferred.” This is a description of a past event, not the occurrence of the event itself.

    It’s also a bit of an artful dodge to avoid the question of Johnson’s capacity when signing by relying on the rationale for § 204 instead of what it actually requires. There is no question that “Anthony Johnson, President,” would have been the assignee and the statute requires a writing “signed by the owner of the rights conveyed.” I suppose you can argue that Johnson as President was the duly authorized agent for Johnson personally, but the court didn’t.

    But we’re talking here about 10 years before anyone probably thought about the ownership of the copyright, without rights to which the company would not exist. Needless to say, there was no written license, something a prudent copyright owner would have put in place if the relationship had been what Johnson claimed. I also suspect that, had it been in Johnson’s interest before 2011 for the company to own the copyright, to bring a copyright infringement lawsuit for example, Johnson and his company would have agreed the company owned the copyright. So I don’t have any beef with the outcome, it is expedient and equitable. But it’s a bit of squirrely reasoning at an appeals court level. Which I guess is why they make them non-precedential.

    Johnson v Storix, Inc., No. 16-55439 (9th Cir. Dec. 19, 2017).

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    1. One of Johnson’s arguments on appeal was that the interpretation of the document wasn’t an issue for the jury. However, its interpretation required extrinsic evidence on what “all assets” meant, so it was a question for the jury. Interestingly, the trademark “Storix Software,” registered in 2002 before the incorporation, wasn’t assigned to the corporation until 2006. So there was at least some evidence that intellectual property assets were not all assigned to the corporation in 2003. ↩
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  • A Good Opinion for Copyright Applicants

    “Rappers are skilled in poetry and rhythm—not necessarily in proper copyright registration procedures.” With that comment, the Court of Appeals for the Eleventh Circuit reverses a decision from the District Court for the Southern District of Florida that invalidated three copyright registrations for the same work and consequently dismissing the lawsuit. You can read my post on the district court case here, with the gory details on what went wrong with each registration.

    Before digging into the appeals court decision, a little history lesson first. The Copyright Act was amended in 2008 to codify a standard for invalidating copyright registrations. The House Report at 24 explained the reason it was added:

    It has also been argued in litigation that a mistake in the registration documents, such as checking the wrong box on the registration form, renders a registration invalid and thus forecloses the availability of statutory damages. To prevent intellectual property thieves from exploiting this potential loophole, the Act makes clear that a registration containing inaccuracies will satisfy the registration requirements of the Copyright Act unless the mistake was knowingly made and the inaccuracy, if known, would have caused the Register of Copyrights to refuse the registration. And in cases where mistakes in a copyright registration are alleged, courts will be required to seek the advice of the Register of Copyrights as to whether the asserted mistake, if known at the time of application, would have caused the Copyright Office to refuse registration.

    These additions are now subparts (b) and (c) of section 411. The Copyright Office, in its 2008 Annual Report, p. 13, commented “it amends section 411 of the copyright law to codify the doctrine of fraud on the Copyright Office in the registration process.”

    But if the intent was to make it more difficult to invalidate a registration, the provision, in my opinion, has utterly failed. Courts readily invalidate registrations, and this opinion may illuminate why.

    With that, we reach the opinion. Section 411 says that one can invalidate a registration if “inaccurate information was included on the application for copyright registration with knowledge that it was inaccurate” and the inaccuracy would have caused the Register to refuse the registration. The copyright owners, William L. Roberts, who is rapper Rick Ross, Andrew Harr and Jermaine Jackson, argued in the district court without success that this is a fraud standard, with the district court responding “Title 17 U.S.C. § 411(b) says nothing about an intent to defraud the Copyright Office. Rather, the plain text of the statute requires only that the application be made ‘with knowledge that it was inaccurate.’”

    The rappers were successful, though, in the appeals court. 11th Circuit precedent, both before and after 2008, had a scienter requirement, that “intentional or purposeful concealment of relevant information” is required for the invalidation of a registration. The court helpfully summarized the standard:

    (1) the application must contain inaccuracies, (2) the inaccuracies must be material, and (3) the applicant must have the required scienter of intentional or purposeful concealment.

    There was no intent to conceal here:

    This is not a case where Rapper A attended a Rapper B concert, heard a delightful song, stole the composition, and fraudulently registered it with the Copyright Office—far from it. There is no dispute by any party that Appellants authored and created Hustlin’, and there is no dispute that they continue to receive the writers’ share of royalties from their musical composition. Furthermore, Appellees never proffered any argument or theory as to why Appellants would attempt to deceive the Copyright Office, when they are, in fact, the undisputed authors.

    As indicated by the absence of any sort of motive for deception, the errors made in each of the registrations were done in good faith. As portions of the ownership interest were acquired by record companies, those companies—incorrectly, but in good faith—filed for a new registration to protect their newly acquired interests presumably under the assumption that no previous registration had been filed.

    The failure of the first registration to correctly assert a published work on the basis of promotional phonorecords provided to disc jockeys—as opposed to an unpublished work that was still awaiting album publication—lacks any sort of deceptive intent, especially since there is nothing to indicate that the registration would not have been approved as a published work. Furthermore, nothing of substance could be gained by listing the incorrect creation date of 2006 instead of 2005 on the latter two registrations. Considering that the album publication occurred in 2006, it seems that an understandable—albeit incorrect—definition of publication persisted in the second and third registration.

    The appeals court’s reasoning is impeccable, other than the statutory word choice “knowledge” is a far cry from “intentional concealment.” That is demonstrated by the appeals court’s somewhat glib re-writing of a Copyright Office regulation:

    And while “[a]s a general rule only one copyright registration can be made for the same version of a particular work,” specific exceptions are recognized by a federal regulation. 37 C.F.R. § 202.3(b)(11). In addition to these three exceptions contained in a federal regulation, logic would dictate that Original Appalachian and St. Luke’s would support at least one more—a good faith, redundant registration for a published work.

    I hope this is the correct legal standard. I do believe that the now-inevitable collateral attack on a copyright registration before even reaching infringment is wasteful, time-consuming and makes registration a trap for the unwary. There are some questions on the application for which the Copyright Office won’t even provide guidance, like whether a website is “published.” Expecting a copyright applicant to get it absolutely perfect on the law and the facts every time is unworkable. But I’m not too optimistic; the court clearly read an element, scienter, into the statute that just isn’t there.

    There are also a couple of bonus issues in the opinion. One problem is that the Register’s opinion is incomplete. During the registration process, a copyright examiner may identify a problem and contact the applicant to get it corrected. But of course, by the time we get to an infringement proceeding the error is unrecoverable. There were several errors in the registrations in this case that may have been correctable had the applicants been given the opportunity:

    The Copyright Office responded [in its § 411(c) response] that it “would have refused to issue a registration for an unpublished work” had it known of the publication/distribution information for the first registration. However, the Copyright Office’s response does not indicate whether it would have permitted the first registration as a published work.[fn4] Additionally, the Copyright Office advised that it “would have refused [the second] registration” had it known of the incorrect creation date. Lastly, the Copyright Office stated that it “would have refused [the third] registration” had it known of the incorrect creation date or the prior registration for a published work.…

    [fn4] Absent from the Copyright Office’s response is any indication as to whether any of the inaccuracies from the three registrations would have been returned to the applicant for remediation, and whether that remediation would have caused the Copyright Office to subsequently accept the registrations during the application period. Although not dispositive of the issue of materiality, this context is relevant.

    See U.S. Copyright Office, Compendium of Copyright Practices (3d ed. 2014) (“Compendium (Third)”).

    The Copyright Office does not generally question facts alleged in an application “unless they are implausible or conflict with information provided elsewhere.” Compendium (Third) § 1904.2. While this explains the Copyright Office’s failure to identify the inaccuracies regarding publication and creation date, it does not explain why the Office failed to contemporaneously detect that the same song by the same authors had previously been granted registration(s).

    The Copyright Office’s response itself notes that examiners often perform reviews and correspond with filers to correct inaccuracies such as those present in the Hustlin’ registrations, see Resp. of the Register of Copyrights, App. Doc. 383, at 4-5, including incorrect years of creation, see Compendium (Third) § 611.4, previous registrations, see Compendium (Third) § 621, and whether works have been published, see Compendium (Third) § 1904.3.

    In instances of these same errors, the Copyright Office “provides the applicant an opportunity to correct the error or verify the facts.” Resp. of the Register of Copyrights, App. Doc. 383, at 5; see also Compendium (Third) § 605.6 (providing applicants 20 days for email responses or 45 days for postal mail responses).

    (Emphasis in original.)

    There was also an interesting procedural holding in this case. The appeals court relates that neither party contested the plaintiff’s ownership or validity of the registration until the court raised it sua sponte. The court of appeals held the district court acted improperly in doing so:

    While the Supreme Court has declined to address whether “district courts may or should enforce [the registration precondition] sua sponte,” it did determine that “a copyright holder’s failure to comply with § 411(a)’s registration requirement [does not] deprive[] a federal court of jurisdiction to adjudicate his copyright infringement claim.” Logically, if failure to register does not eliminate subject matter jurisdiction, an improper registration would not either. Thus, the district court had jurisdiction.

    In any event, the district court’s review of validity was clearly not an issue of subject matter jurisdiction, but rather the determination of an affirmative defense. Cf. Original Appalachian, 684 F.2d at 821, 827-28 (“While the burden of persuasion as to the validity of the copyright rests with the plaintiff in an infringement action, once he produces a copyright certificate he establishes a prima facie case of validity of his copyright and the burden of production shifts to the defendant to introduce evidence of invalidity.”) (internal citations omitted); see also Bateman v. Mnemonics, Inc., 79 F.3d 1532, 1541 (11th Cir. 1996) (“Once the plaintiff produces a certificate of copyright, the burden shifts to the defendant to demonstrate why the claim of copyright is invalid.”). Correspondingly, failure to plead an affirmative defense typically results in waiver of that defense. See Latimer v. Roaring Toyz, Inc., 601 F.3d 1224, 1239-40 (11th Cir. 2010). Courts “generally lack the ability to raise an affirmative defense sua sponte” with minor exceptions that are not relevant to copyright infringement actions. See id. at 1240 (finding that the district court erred by raising a “fair use” defense sua sponte in a copyright infringement action). Here, the district court—and not the defense—raised the issue of registration validity, and thus it erred in the manner of its review.

    (Brackets in original.) It may be a stretch to say that invalidity of a registration is an affirmative defense (one of the cases refer to a shifting burden of production, not burden of persuasion, and it isn’t one of the many, many defenses listed in the Copyright Act), but it is for sure not jurisdictional, Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154, 164-65 (2010), which the court is obliged to consider. But it’s an interesting thought.

    A lot of meat in this opinion, all good from an IRL perspective. Here’s hoping it sticks.

    Roberts v. Gordy, No. 16-12284 (11th Cir. Dec. 15, 2017).

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  • A Thing of Beauty

    I don’t think I have ever been so excited about an exhibit in a case before. It’s one that makes the heart of a person who writes about trademark ownership sing. Just look at it:

    Unique Casting v Duncan Pawn ticket

    Yes, it is a pawn ticket. I have looked at many documents claiming to be a trademark assignment and this one surpasses all my hopes and dreams. If you can’t read it, it shows that on January 4, 2010, in exchange for $9,999.99, Edwin Rene Arenas granted Brass Balls Pawn & Jewelry

    a security interest in the following items: name ‘UNIQUE CASTING’ to be trademarked under G&S IC 015, US 022 039 wearable garments & G&S IC 035, US 100 101 102 employment services in the nature of talent casting in the fields of music, video and films.

    The story behind the pawn ticket, is, of course, a complicated one. The petitioner in this cancellation is Unique Casting Partners LLC, a business that does talent casting, and the registrant/defendant is Kathleen Duncan. She owned Brass Balls Pawn & Jewelry, the company on the pawn ticket. Both parties claim rights to the UNIQUE CASTING mark through the same person, the aforementioned pledgor and non-party Edwin Rene Arenas.

    But the business goes back before him. The original Unique Casting was a Florida company, Unique Castings, Inc. (UCI), which did business as UNIQUE CASTING from the 1980’s through 2000. Arenas, who had worked for UCI as a camera operator, formed Ed Arenas Island Casting, Inc. and purchased UCI in 2000, including the mark. By 2004 he had some sort of business relationship with Duncan and in 2010 he borrowed $10,000 from Duncan, hence the pawn ticket.

    On January 29, 2010, Arenas and Duncan filed the trademark application for UNIQUE CASTING, the application saying that both were “DBA Unique Casting” but also with Duncan saying that she was a North Carolina corporation and Arenas saying he was a Florida corporation. Their statuses were clarified by an Examiner’s Amendment to state they were individuals of US citizenship.

    Meanwhile, Arenas’ business was struggling and he asked George Grafas for help. Grafas formed petitioner Unique Casting Partners LLC, of which Arenas became an executive. The LLC entered into a promissory note with Grafas to pay Grafas $150,000 over time. Arenas personally guaranteed the loan, so if Grafas was not paid he would become the owner of Ed Arenas Island Casting and its trademarks. And as night follows day, Arenas defaulted and the petitioner, Unique Casting Partners LLC, ended up with the company and the trademark.1

    Arenas also never paid back the $10,000, so Duncan claimed that she owned the trademark. On April 3, 2012, Duncan recorded a “change of name,” which were meeting minutes purportedly kicking Arenas out of the company and transferring ownership to herself solely. (Seriously, check out the link. Another thing of beauty.)

    Duncan disabled the LLC’s Facebook pages by filing trademark complaints so frequently that the LLC ultimately removed “Unique” from its name and filed the petition to cancel.

    Grafas testified that Duncan never ran any kind of casting business:

    No, it doesn’t make any sense at all. This is ridiculous, and it’s false. It’s entirely false. First of all, he [Arenas] was never working for her. He didn’t have a relationship with her. She didn’t have any minutes of any meeting. This was just fabricated, and this is what she wrote on the documents and sent to the USPTO. But she, you know, Ed did not work for her. He never worked for her. He never worked with her …

    I’m saying ever. I don’t think that he had ever – she’s not a casting director. She never was a casting director. She has never casted anything before in her life. Ever. She has never worked as a casting director. She has never generated a single penny, a dollar as being paid as a casting director ….

    I asked her if she wanted the $10,000 that was lent to her in order for me to pay for whatever it was that she paid for the trademark. I told her to send me a copy of the check, and I’ll reimburse her for it, and she can transfer the trademark to me. She didn’t want to transfer the trademark with me. She wanted to be co-owner. She wanted to be on the trademark and wanted to have a business relationship with me in order for her to do film and TV work. And she felt that she was obliged to stay on it … It’s just that she was wanting to coerce me in order to work with her to help her set up her office and to cast out of there ….

    Duncan didn’t claim to have offered any casting services directly. Rather, she relied on her predecessors-in-interest’s use of the mark when she filed the Statement of Use, claiming a first use date in 1985.2

    So how does it come out?

    Whether we assess Respondent’s claimed ownership of the mark in the Registration at the time she filed the Statement of Use on behalf of both herself and Mr. Arenas, or at the time she recorded the “meeting minutes” with the Assignment Branch which resulted in Mr. Arenas being deleted as an identified owner of the Registration in Office records, the conclusion is the same – Respondent did not own and does not own the mark.

    But it isn’t because Duncan was or was not using the mark, or a matter of whether another entity was her related company. Rather, it boiled down to pure chain of title. Recall at the very beginning of our story that Ed Arenas Island Casting – not Arenas personally – purchased the business from UCI. There was no evidence that the mark was ever assigned to Arenas and so the security interest he granted via pawn ticket was for property he did not own.

    And consider the pawn ticket. The security interest was granted to Brass Balls Pawn & Jewelry. Although solely owned by Duncan, it is a separate juristic person. If anyone owned the mark because of the pawn ticket, it would have been Brass Balls.

    Nor was the change of name/assignment via meeting minutes anything of the sort:

    The minutes are not an assignment of anything, much less a service mark assignment including associated goodwill. Neither UCNC [Unique Casting North Carolina] nor Respondent had any ownership interest in either the mark or the Registration for the reasons already stated, and therefore they had nothing to “assign” or in connection with which to effect a “change of name.” Moreover, there is no evidence whatsoever that Mr. Arenas was ever UCNC’s employee or that UCNC had any authority or power over Mr. Arenas, while there is evidence to the contrary, and therefore UCNC had no basis upon which to limit or terminate Mr. Arenas’s trademark rights, any more than it could limit or terminate a complete stranger’s trademark rights.3

    The petition to cancel the registration was granted.

    Unique Casting Partners LLC v. Duncan, Cancellation No. 92056074 (TTAB Nov. 6, 2017).
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    1. I’m a bit confused. The promissory note was to Grafas, so when Arenas defaulted the assets would be owned by Grafas, not his entity. So I’m not sure how the TTAB reached the conclusion that the successor in this chain of title was the LLC, not Grafas. But it doesn’t matter. ↩
    2. The sharp reader will have noticed that the Statement of Use was signed only by Duncan, but where a trademark is jointly owned it has to be signed by the joint owners. That didn’t escape the Board’s notice either. ↩
    3. The Board had a couple of clunkers in its theory why Duncan doesn’t own the mark too, though. The Board noted that Duncan claimed that the services offered under the mark were provided by UCNC and therefore “Respondent herself is not the source of any casting services.” Nothing in the opinion suggests that UCNC had any juristic existence separate from Duncan, so if it provided services (but there was no evidence it did), then presumably it was Duncan dba UCNC that would have been providing the services.

      The second clunker is the statement “Indeed, in order for a service mark assignment or grant of a security interest to be valid, the assignment or grant must include the goodwill associated with the mark. Here, neither the pawn ticket nor any other evidence suggests, much less proves, that any goodwill was transferred to Respondent or Brass Balls Pawn & Jewelry, and therefore any assignment was in gross, or ‘naked,’ and as a result invalid.” A couple of problems here – indeed any assignment must include the goodwill, but it is overstating the requirement to say (if this is indeed what was meant) that the writing has to reflect it. If one perfects a security interest and then acts as a true trademark owner by operating a business oneself or by licensing the mark out, or the acquiror subsequently sells the asset to someone who can use it, I daresay this security interest would have worked just fine. ↩

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  • The Devil Is In the Definitions

    Plaintiff Janssen Biotech had a fundamental structural problem with an agreement. The document was called an “Employee Secrecy Agreement,” but in addition to imposing duties of confidentiality on its employees the agreement also served as an employee invention assignment agreement, as is commonly, if not universally, done.

    Janssen’s structural problem was in the definition of the parties to the agreement. Here is the definition:

    If you can’t read it, the agreement defines COMPANY as “CENTOCOR and JOHNSON & JOHNSON and any of their … subsidiaries, divisions and affiliates ….” Plaintiff Janssen Biotech was a successor to Centocor.

    This is a very expansive definition, good if you are obliging your employees to confidentiality. But for the patent assignment, it wasn’t such a great definition:

    In the patent assignment provision, the employee is “assign[ing] and agree[ing] to assign my entire right, title and interest … to the COMPANY” all the employee’s inventions.

    Defendant Celltrion claimed that the employee-inventors of the patent-in-suit had assigned their patent rights to “more than 200 other companies, including Johnson and Johnson (“J & J”) and its subsidiaries and affiliates.” Of course, if that was the correct interpretation of the assignment, then J & J and all the subsidiaries and affiliates would have to be joined as plaintiffs. However, the court reached the view advocated by Janssen, that the patent rights were assigned only to the inventors’ employer, Centocor.

    New Jersey law applied to the construction of the agreement. Under New Jersey law,

    A contract is not clear and is instead ambiguous if its terms are susceptible to at least two reasonable alternative interpretations, or when it contains conflicting terms. If the contract is ambiguous, the court must give the contracting parties practical construction of the contract controlling weight in determining a contract’s interpretation.

    To determine whether a contract is ambiguous, and to discover the intention of the parties, courts may consider evidence outside the text of the contract. Such extrinsic evidence includes the circumstances leading up to the formation of the contract, custom, usage, and the interpretation placed on the disputed provision by the parties’ conduct.

    To decide whether a contract is ambiguous, we do not simply determine whether, from our point of view, the language is clear. Rather, we hear the proffer of the parties and determine if there are objective indicia that, from the linguistic reference point of the parties, the terms of the contract are susceptible of different meanings. Before making a finding concerning the existence or absence of ambiguity, we consider the contract language, the meanings suggested by counsel, and the extrinsic evidence offered in support of each interpretation. Extrinsic evidence may include the structure of the contract, the bargaining history, and the conduct the parties that reflects their understanding of the contract’s meaning.

    (Internal quotations, citations, ellipses and brackets omitted.)

    The court had no problem reaching the conclusion that the term COMPANY was ambiguous. With respect to “any subsidiaries,” “any” sometimes means “all” or “every,” for example, “any attempt the flout the law will be punished.” Or it might mean one or more unspecified things or people, to be specified later. Here, it probably meant the latter. But that didn’t fully solve the problem – the assignment was to “Centocor and Johnson & Johnson.”

    But construing COMPANY to mean both Jenssen and J & J conflicted with other parts of the agreement. The next sentence out the outset of the agreement was “Affiliates of the COMPANY are any corporation, entity or organization at least 50% owned by the COMPANY, by Johnson & Johnson or by any subsidiary of Johnson & Johnson.” The use of COMPANY here suggested J & J wasn’t to be considered “COMPANY.” Also, the assignment of the inventions was “during [his] employment with the COMPANY.” The inventors weren’t employed by both companies, only Centocor, suggesting again in this context that COMPANY meant only Centocor.

    The court therefore found the agreement ambiguous and moved on to extrinsic evidence. Janssen, J & J, and the other J & J companies understood that the rights were assigned only to the employing company. J & J’s patent database listed only the employer as the patent owner. The agreement required that employees disclose new inventions to COMPANY and these inventors disclosed their inventions to Centocor only. The subject agreement here had later been revised to make it clear the patent assignment was to the employing company. No other J & J subsidiary ever claimed to have rights in the patent-in-suit.

    On the other hand, in at least eleven other cases J & J and/or other companies in the J & J family relied on the more expansive view of COMPANY. These were cases where a non-employing J & J family member joined the employing company in enforcing the confidentiality provisions of the agreement.

    Generally a term will have consistent meaning throughout a document. However,

    the presumption of consistent usage readily yields to context, and a statutory [or contractual] term—even one defined in the statute [or contract]—may take on distinct characters from association with distinct statutory [or contractual] objects calling for different implementation strategies.

    This rule of interpretation therefore wasn’t enough to persuade the court when balanced against the words of the agreement and the extrinsic evidence. Further, none of the eleven cases were brought by Janssen, so Janssen had not taken an inconsistent position. So the court concluded that Centocor was the only assignee and the court therefore had jurisdiction over the patent infringement suit.

    There was, though, one failing argument. After the suit was filed, Jenssen and J & J entered into an agreement stating that Janssen was the sole owner of the patent and that neither J & J nor any of its operating companies owned any interest in the patent. But it doesn’t work that way:

    The Federal Circuit has never held that co-owners of a patent are not required to be joined as plaintiffs if they disclaim their interest in the patent. Janssen relies primarily on IpVenture, Inc. v. Prostar Computer, Inc., 503 F.3d 1324 (Fed. Cir. 2007). IP Venture involved the question of whether a contract was an assignment of a patent or an agreement to assign it. The Federal Circuit held that the contract was an agreement to assign. The court further found that this interpretation was “reinforced” by a statement made by the purported assignee that it never had any legal or equitable rights to the patent at issue. Therefore, the court in IP Venture essentially considered the disclaimer as extrinsic evidence supporting its interpretation of the agreement at issue. IP Venture does not provide an alternative basis for finding that Janssen has standing to bring this cases because the Agreements assigned the ‘083 Patent to its predecessor Centocor alone.

    I’m not sure that every court would reach the conclusion that Janssen was the sole owner of the patent – maybe about the “any” part, but not necessarily that Centocor and J & J weren’t joint owners of the patent. New Jersey seems to me to have a very generous view on the use of extrinsic evidence, and that saved Janssen’s bacon here. Needless to say, it’s better to have clean agreements to start. I often say that the mischief will be in the definitions.

    Janssen Biotech, Inc. v. Celltrion Healthcare Co., No. 17-11008-MLW (D. Mass. Oct. 31, 2017)
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  • Never Trust Your Client

    If you are registering for or filing something in your client’s name, never take their word on the details of the legal entity. First off, many times your client won’t know the state of incorporation, thinking it’s the state in which they are doing business rather than Delware, or vice versa. Or, as was the case in Nichols v. Club for Growth Action, the company doesn’t exist at all.

    Roger Nichols and “Three Eagles Music, a division of Roger Nichols Music, Inc.,” sued Club for Growth Action, a conservative Super PAC, for copyright infringement for the unlicensed use of the song “Times of Your Life” first performed in 1975 (not mentioned in the case, as a jingle for Kodak film). Cue Paul Anka:

    The complaint stated that Three Eagles Music (“TEM”) was an Oregon corporation, but it never was. Club for Growth Action therefore moved for summary judgment on the basis that TEM lacks standing. In response, Nichols updated the State of Oregon corporation information for Roger Nichols Music, Inc. to state that TEM is an assumed business name for RNMI. Nichols then filed a motion for leave to amend the complaint to correct the error.

    Leave to amend the complaint should be freely given where justice so requires, so the court allowed the motion. But TEM has a lot of possible hurdles still to overcome:

    Although the allegations in the complaint are sufficient to withstand a motion to dismiss and permit a motion to amend, a number of legal questions remain to be addressed at summary judgment. These questions include, but are not limited to: (1) whether the transfer of the copyrights to TEM [in 1978] was legally sound because TEM was not an incorporated division of RNMI; (2) whether TEM has always been the assumed business name of RNMI; (3) how an assumed business name is determined; and (4) whether a corporation can sue under an assumed business name.

    Club for Growth Action also had a motion for summary judgment pending because the undisputed facts were that TEM was an unincorporated division of RNMI which cannot own property. But the court wasn’t willing to go there … yet:

    To grant summary judgment, the Court must find that there is no dispute of material fact. While Club for Growth may ultimately succeed at summary judgment if TEM is not the legal owner of either relevant copyright, the record is not clear or complete at this stage. Both parties attempt to make complicated arguments about the legal status of Roger Nichols’ corporation, but at this early stage in discovery, factual gaps still exist and it is not possible to decide. The undisputed record indicates that TEM was never a separate incorporated division of RNMI. It also contains signed certificates of assignment indicating that the copyrights for the lyrics and musical composition of Times of Your Life were transferred to TEM. Plaintiffs argue that the undisputed facts also show that TEM is the assumed business name of RNMI and official notice of that fact was filed in July 2017. Club for Growth argues that the undisputed facts show that TEM is, and was at the time the copyrights were assigned, an unincorporated division of RNMI and, therefore, the assignments were not proper, TEM does not own the copyrights, and TEM lacks capacity to sue for infringement. More than the current record is needed.

    Courts are hesitant to allow an outside infringer to challenge the timing or technicalities of the copyright transfer, when an adequate writing cures an earlier insufficient transfer. Such might be the case here if the original transfer to TEM were insufficient because it was an unincorporated division of RNMI and could not hold its own assets, but a later writing, such as the notice of assumed business name, could cure an insufficient transfer. Because the record is insufficient to reach or decide this combined factual and legal question, Club for Growth’s motion for summary judgment will be denied without prejudice.

    Some very interesting questions: how an assumed business name is determined, whether a corporation can sue under an assumed business name, and whether the later-filed notice of assumed business name will correct the problem. I have no idea what will happen here, but I am curious to find out.

    A Kodak commercial made a few years after the original, unfortunately without Paul Anka.

    Nichols v. Club for Growth Action, No. 16-220 (RMC) (D.D.C. Oct. 25, 2017).
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