Property, intangible

a blog about ownership of intellectual property rights and its licensing

  • A Rare Section 117 Win

    We have a rare win under Copyright Act § 117(a), a section of the Copyright Act that allows someone to copy or adapt a computer program under very narrow circumstances. Invocation of the section has been largely unsuccessful because it only applies where one is the owner of a copy of the program. However, most transactions involving software are characterized as a license, so the defense generally fails this threshold requirement. See, e.g., Vernor v. Autodesk, Inc., 621 F.3d 1102, 1111 (9th Cir. 2010); MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928, 939 (9th Cir. 2010); DSC Commc’ns Corp. v. Pulse Commc’ns, Inc., 170 F.3d 1354, 1362 (Fed. Cir. 1999).

    Defendant Micro Systems Engineering, Inc. (MSEI) manufactures medical devices and wanted to automate parts of its production. It solicited bids for a Test Handling System (THS). The project was going to be in two phases, where the first phase was to automate some product testing stations. It solicited bids for the first phase and plaintiff Universal Instruments Corp. won the bid. The project involved hardware and two software components, the software on the test station and server software with which the station software communicated.

    Two years later Micro Systems solicited bids for the next phase, which was awarded to co-defendant Missouri Tooling & Automation (MTA). Micro Systems gave the station and server source code to MTA, as it was obliged to do under the phase 2 contract. MTA made minor changes to the server code during its work on phase 2, with testimony that it was nevertheless “pretty much identical” to the Universal version of the code.

    Universal sued Micro Systems and MTA for copyright infringement and, after a trial, the district court granted Micro Systems’ motion for judgment as a matter of law. The decision was appealed to the Second Circuit.

    The Equipment Purchase Agreement between Universal and Micro Systems said this:

    [i]f [Universal] uses any Pre-Existing Intellectual Property in connection with this Agreement, [Universal] hereby grants MSEI, MSEI’s subcontractors, or suppliers, a non-exclusive, royalty-free, worldwide, perpetual license, to use, reproduce, display, of the Pre-Existing Intellectual Property for MSEI’s internal use only.

    (The court didn’t explain why this code was “Pre-Existing Intellectual Property,” but apparently it was.) In a Final Acceptance Letter, Universal agreed

    to provide the THS server code as is with the understanding that MSEI assumes the risk of invalidating the warranty in the event a change made by MSEI to the source code causes damage to any of the THS line hardware.

    The court first held that the license grant in the Equipment Purchase Agreement made Micro Systems’ use of the code non-infringing; MTA was a “supplier” and the use was “internal.” Universal took a stab at a theory that “internal” meant “on premises.” For all of you writing software licenses for “internal use,” take note:

    [Micro System’s] argument is premised on a physical internal-external dichotomy, whereby a supplier’s “use, reproduc[tion], [or] display” of Universal’s intellectual property on MSEI’s premises would be permitted, while the same use or reproduction off site would violate the license. But this cannot be the parties’ intent, because by its terms the license is “worldwide” in scope and extends to MSEI’s suppliers and subcontractors. A license cannot simultaneously be worldwide and limited to the physical confines of the licensee’s premises. The more natural understanding of “internal use” in this context is that the pre-existing intellectual property could be used by or for MSEI’s existing business — not for resale or for the use or benefit of others. In the context of computer software, the on-premises, off-premises distinction makes even less sense, given the nature of software and source code.

    The court next considered the argument that the use of the software was a non-infringing use under Section 117 of the Copyright Act. That section says:

    (a) Making of Additional Copy or Adaptation by Owner of Copy. Notwithstanding the provisions of section 106, it is not an infringement for the owner of a copy of a computer program to make or authorize the making of another copy or adaptation of that computer program provided:

    (1) that such a new copy or adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner ….

    The first question was whether Micro Systems was “the owner of a copy of a computer program,” which is where the defense fails most of the time. In the Second Circuit, formal title is not required and instead “the courts should inquire into whether the party exercised sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy for purposes of § 117(a).” Krause v. Titleserv, Inc., 402 F.3d 119, 123 (2d Cir. 2005). Here,

    MSEI paid Universal over $1 million for the combined hardware and software solution. Universal customized the software to serve MSEI’s precise needs. Universal expressly “provided” a copy of the server software to MSEI with the sole condition that “MSEI assume[d] the risk of invalidating the warranty in the event a change made by MSEI to the source code cause[d] damage to any of the THS line hardware.” Universal granted MSEI and its suppliers broad rights to the server source code — a perpetual, worldwide license to use, reproduce, and display the software for MSEI’s internal use. Although the terms of the EPA expired on December 31, 2012, MSEI’s rights to the software “continue perpetually and do not terminate upon completion of the services.” Nothing in the arrangement between MSEI and Universal indicates that MSEI was in any way restricted from discarding or disposing of the software as it wished. For all of these reasons, MSEI was an owner of the station and server source code under § 117(a).

    The modifications made to the server code satisfied the second requirement, “created as an essential step in the utilization of the computer program in conjunction with a machine.” Controlling precedent in the Second Circuit allows modification where they are for “correcting bugs, performing routine tasks necessary to keep the programs up-to-date and to maintain their usefulness to [defendant], incorporating the programs into a new system implemented by defendant, and adding new capabilities to help make the programs more responsive to the needs of [defendant’s] business … adaptation of the copy of the[ ] software so that it would continue to function on the defendants’ new computer system [and] … the addition of new features, which were not strictly necessary to keep the programs functioning, but were designed to improve their functionality in serving the business for which they were created,” were all essential steps as long as they do not “harm the interests of the copyright proprietor.” That was the case here:

    The modifications that were made were undertaken “to help improve efficiency of the line,” and to enable the server software to “support … communicating with all of the [new] stations.” The modifications were, therefore, “designed to improve [the server source code’s] functionality in serving the business for which [it was] created.”

    Universal claims that MSEI’s provision of the source code to MTA — “a competitor” of MSEI — is exactly the sort of harm we indicated in Titleserv might present “[a] different scenario.” We disagree that this is the sort of harm envisioned by § 117(a). By its terms, § 117(a) permits the owner of a copy “to make or authorize the making … of another adaptation.” And, as we held above, Universal expressly authorized MSEI and its suppliers and subcontractors to use and reproduce the software at issue. True, alterations that “somehow interfere[ ] with [a copyright owner’s] access to, or ability to exploit, the copyrighted work” might render modifications non-essential under § 117(a), but where the copyright owner “enjoy[s] no less opportunity after … changes, than before, to use, market, or otherwise reap the fruits of the copyrighted programs that he created,” the changes may properly be considered essential under § 117(a).

    MSEI’s use did not inhibit Universal’s ability to market or sell its server software to others, nor did it divulge sensitive Universal information or enrich MSEI or MTA at the expense of Universal. MSEI made and authorized the making of minor modifications, narrowly tailored to adapting the server software for the use for which it was designed — orchestration of the test handing stations to ensure the quality of MSEI’s implantable medical devices.

    Accordingly, we hold that a reasonable jury could only find that the modifications made by MSEI were essential as they allowed the existing server software to interact with additional systems in the manner intended when the source code was developed for MSEI.

    Universal Inst. Corp. v. Micro Sys. Eng., Inc., No. 3:13-cv-831 (GLS/DEP) (N.D.N.Y. Aug. 8, 2017).
    Universal Inst. Corp. v. Micro Sys. Eng., Inc., No. 17-2748-cv (2d. Cir. May 8, 2019).

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  • Patent Infringement Versus Breach of Contract

    Something that license drafters need to think through is how a license grant works, as a permission, not a prohibition. If there is conduct that a licensor wants to prohibit, then it has to ensure that it addresses that need in the agreement. The licensor also needs to think through what remedies will be available depending on the character of the wrongdoing.

    I have two cases to report that demonstrate how license grant language didn’t do all the lifting that the patentee thought it should. First up is AU New Haven, LLC v. YKK Corp. YKK is a famous zipper company and AU New Haven developed a patented method for creating a water-resistant zipper. YKK had an exclusive patent license for a particular field of use:

    YKK was therefore licensed to the patent “except for zippers placed in finished goods in the high end outerwear, marine, military and luggage (excluding sports bags and cosmetic bags) markets.”

    The plaintiffs came to believe that YKK was selling zippers into the unlicensed market and ultmately sued YKK for breach of contract. YKK moved for summary judgment on the claim, arguing that the license gave it permission to sell into non-excluded markets but the license didn’t operate to prohibit it from sale into the excluded markets. The court’s view? “Defendants’ construction of the agreement is correct.”

    The language of the ELA is unambiguous; it provides the licensees the right to use the intellectual property. It does not contain a negative covenant requiring that the licensees not compete in the excluded markets. The clause reads in full as follows:

    [Plaintiff] hereby grants to the Company an exclusive, worldwide right to manufacture, use, sell, offer for sale and otherwise use and practice the invention … except for zippers placed in finished goods in the high end outerwear, marine, military and luggage (excluding sports and cosmetic bags) markets (collectively hereafter “Zippers”).

    In this provision, the licensors grant the licensee a license to use the intellectual property. The grant defines the scope of the license: the licensee can sell the patented zipper worldwide with the exception of zippers in finished goods in the specified markets. The “except for” clause in this text is part of the definition of the scope of permitted use. That is the clear, natural construction of this language. There is no verb in the sentence other than the “grant,” which makes it plain that the “except for” clause is an exclusion from the preceding grant. If the “except for” clause were to be read as a covenant [not to sell], as Plaintiffs argue, there would need to be an additional verb in this provision.

    There would also need to be an additional subject. Because the quoted language from the contract contains a grant by the licensors, but does not require any action by the licensee. As described above, the licensee (the “Company”) passively accepts the right. There is no provision of the license that expressly requires “the Company” not to sell in the excluded markets.

    (Emphasis in original.)

    The plaintiff wasn’t without any remedy though:

    The Court’s finding that the contract provides a license only, and that it does not give rise to a negative covenant does not mean that Plaintiffs cannot take action against Defendants for selling zippers in a way that exceeded the scope of their license—the absurd result that Plaintiffs claim. Instead, it simply means that they must do so under patent law, rather than through a breach of contract claim.

    Second, we have a situation where the scope of the license was exceeded but other terms in the agreement foreclosed the infringement claim. Defendant St. Lawrence Communications LLC (SLC) had previously sued LG Electronics Inc. for infringement of a patent covering a speech coding standard. They settled and entered into a Patent License Agreement that gave LG a license for use of the patent for the AMR-WB standard. SLC’s successor-in-interest later sued LG for patent infringement for its products that implemented a different standard, EVS. LG then sued SLC for breach of the Patent License Agreement, arguing that the covenant not to sue in the agreement barred the patent infringement claim even though the license grant wasn’t for the EVS standard.

    Section 2 of the Patent License Agreement was titled “Grant of Licenses; Mutual Releases; Dismissal and Costs.” Section 2.1 said

    If you can’t read it, it says

    Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee and its Affiliates, a limited, non-transferable, fully paid-up and non-exclusive license during the Term, within the Territory to use, make have made in accordance with Section 3.3, import, distribute, offer for sale, Sell, Sale (Sold), develop, advertise, support, update, maintain or otherwise dispose of Licensed Products, under the Licensed Patents, for the purpose of encoding and/or decoding data in accordance with the AMR-WB Standard. The license granted herein specifically excludes any rights under the Licensed Patents to practice any standard other than the AMR-WB Standard.

    Section 2.8 was titled “Covenant” and said

    Licensor, on behalf of itself, its subsidiaries, and their successors and assigns, hereby covenants not to sue Licensee, its Afflilates, their successors and assigns, direct or indirect customers, users, licensees, service providers, distributors, retailers, or direct and indirect suppliers for infringement of any patents owned or controlled or licenseable by Licensor during the Term of this Agreement (“Covenant Patents”) solely with respect to LG Products for the life of such patents.

    “LG Products” were defined as

    any service or product (including any technology or component within such product) commercially available to an End-User as of the Effective Date and any upgrades, enhancements and natural evolutions thereof now or hereafter made, have made, manufactured, used, sold, offered for sale, leased, purchased, licensed, imported, have imported, exported, have exported, supplied, distributed and/or otherwise disposed of by or on behalf of [LG] and/or its Affiliates.

    (Emphasis by the court.)

    SLC moved for summary judgment that the covenant not to sue did not preclude the patent infringement suit. But while LG was licensed only for products that implemented the AMR-WB standard, the covenant not to sue stated that LG would not be sued for any “upgrades, enhancements and natural evolutions” to those products. SLC argued that applying the covenant to prevent the suit against LG for patent infringement would render the license grant in Section 2.1 meaningless, but the court disagreed:

    Not so. A covenant not to sue is not the same as a license. As SLC acknowledges in its reply brief, a license and a covenant not to sue may have different scopes, although appearing in the same contract. LG’s preferred reading of the Covenant does not, as SLC argues, expand the scope of the license. Rather, it provides LG with litigation peace. The license remains limited to the AMR-WB standard by the clear terms of Section 2.1. This action, however, does not depend on the scope of the patent license in Section 2.1. Rather, it is a simple breach of contract action for breach of an entirely different provision — the Covenant.

    AU New Haven, L.L.C. v. YKK Corp., No. 1:15-cv-3411-GHW-SN (S.D.N.Y. Mar. 31, 2019).

    LG Elecs. Inc. v. St. Lawrence Comms., LLC, No. 18cv11082(DLC) (S.D.N.Y. April 15, 2019).

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  • Were the Assignments Valid?

    Sometimes a case sends you back to the basics. This was one of those cases for me.

    Copyright infringement claims against Dollar General appear to be the driving force behind a sequence of assignments of the copyrights for some toys. The relevant chain of title for the copyrights was Acquawood => Focus Brand Limited => Banzai International Limited => plaintiff Swift Harvest. The three assignments were largely the same, except that the last one included a license-back to Banzai. The assignment expressly included assignment of claims against Dollar General.

    Dollar General challenged Swift Harvest’s standing to bring the infringement claims. Dollar General argued that the assignments were without consideration, and therefore invalid. The court agreed (all internal citations removed):

    Under California law, a contract is valid if there is mutual assent between the parties and valid consideration. A written instrument is presumptive evidence of consideration. The presumption is rebuttable .…

    Because the assignment agreements have been executed in written contracts, there is presumptive evidence of consideration. In order to rebut this presumption, Dollar General must produce evidence showing that the contracts lack consideration. Dollar General argues that the contracts on their face lack consideration because Banzai assigned its intellectual property rights in the Subject Works to Swift Harvest in exchange for nothing in return. The agreement contains a license-back provision which grants to Banzai a license to use the transferred intellectual property of the Subject Works. Yet, this right was one that Banzai already had prior to entering the agreement.…
     
    Swift Harvest argues that the contract contains consideration because Banzai, in granting its intellectual property rights to Swift Harvest, is relieved from “the burden of prosecuting claims regarding those rights and assets.” Although this argument has some surface appeal, the Court concludes upon further consideration of the assignment agreement as written, that the right to forbear from prosecuting its intellectual property rights is illusory and confers no benefit upon Banzai that it did not already have. Banzai, as the presumed owner of intellectual property rights has no affirmative obligation to prosecute its rights or to enforce its rights against infringers. Nor does the assignment agreement contain any language requiring Swift Harvest to do so. Had it contained such language or required Swift Harvest to share with Banzai the fruits of any such enforcement, then Banzai would be given the benefit of having the intellectual property rights of the Subject Works protected at Swift Harvest’s expense and the agreement would have been supported with consideration.
     
    As the agreement is written, however, Banzai assigned away its intellectual property rights for nothing in exchange.
     
    Because the various assignment agreements are not supported by consideration, and Swift Harvest has no other basis for its ownership of the intellectual property of the Subject Works, Swift Harvest cannot claim ownership of the intellectual property rights on the basis of which it has sued Dollar General. As such, Swift Harvest’s claims as to all Subject Works fail as a matter of law.

    That all sounds ok. But wait a minute – can one not gift a copyright? I’m pretty sure you can. “Although copyright transfers are often made by contract, they need not be. An assignment or exclusive license of copyrights is treated like a conveyance of property, which may be achieved by gift or sale. See M. Nimmer & D. Nimmer, 3 Nimmer on Copyright § 10.02[B] [5], at 10–25 (1994).” Johnson v. Jones, 885 F. Supp. 1008, 1013 (E.D. Mich. 1995). “Title may be transferred by gift. M. Nimmer, The Law of Copyright § 8.12[B] (1984 ed.).” Walt Disney Prods. v. Basmajian, 600 F. Supp. 439, 442 (S.D.N.Y. 1984).

    The Restatement of Contracts set out the the requirements for an irrevocable transfer without consideration:

    (1) Unless a contrary intention is manifested, a gratuitous assignment is irrevocable if

    (a) the assignment is in a writing either signed or under seal that is delivered by the assignor; or
    (b) the assignment is accompanied by delivery of a writing of a type customarily accepted as a symbol or as evidence of the right assigned.

    Restatement (Second) of Contracts, § 338. In California (the governing law of the agreements in this case), gifts are irrevocable. Cal. Civ. Code §§ 1146-48.

    The Copyright Act describes the attributes of the writing needed to transfer ownership and is written broadly enough that it encompasses gifts:

    (a) 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.

    17 U.S.C. § 204.

    The sequence of assignments to Swift Harvest meet the legal standard for transfer by gift and the requirements of the Copyright Act – they were in writing signed by the assignor. No consideration was required.

    Swift Harvest USA, LLC v. Dollar General Corp., No. 17-8644 DMG (GJSx) (Dec. 28 2018).

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  • Answer to “Today’s ‘Who Owns the Trademark’ Quiz”

    I asked who owns the RESTORADERM trademark? When I read the facts in the Third Circuit opinion I thought it was a no-brainer. But apparently I was wrong, because the district court came out one way and the appeals court the other.

    Sköld won in the trial court. Galderma moved for summary judgment on ownership and the district court held that there was a question of fact. As described by the appeals court:

    The District Court disagreed and concluded that, despite the language in the 2002 Agreement with respect to trademark ownership, the 2004 Agreement voided any ownership rights that Galderma had in the mark. The Court also considered a provision in the 2004 Agreement stating, “Sk[ö]ld shall sell, transfer and deliver to CollaGenex … all goodwill, if any, relating to the [Restoraderm Intellectual Property].” Whether that provision encompassed, and thus again transferred, the Restoraderm mark to CollaGenex was something the District Court decided should await further fact-finding.

    A jury then found that Sköld owned the trademark, as well as deciding the other claims. Both parties appealed.

    The appeals court held:

    Ownership of the Restoraderm mark is the dispositive issue in this case, and, on this record, it is a matter of contract interpretation subject to plenary review. At the end of the day, we conclude that Galderma is the rightful owner. The 2002 Agreement unambiguously provided for transfer of the mark to Galderma’s predecessor in interest, CollaGenex. Upon registration of the mark, that ownership became vested and was confirmed for all the world to see. Even assuming that the 2004 Agreement completely superseded the 2002 Agreement, it did nothing to disturb those vested rights. The ownership issue should not have gone to the jury.

    The intent of the parties that CollaGenex would own the trademark was clear from the letter of intent, and the 2002 contract was not ambiguous. “[W]hen the 2002 Agreement said the Restoraderm mark would ‘be the exclusive property of CollaGenex during the Term [of the agreement] and thereafter[,]; it demonstrated clearly the parties’ intent that the mark was to remain CollaGenex’s property, regardless of any termination of the agreement.” (Emphasis in original.) Further, “the 2002 Agreement unambiguously stipulated that, in the event of any termination, vested rights would survive. … The survival provision reinforces that the transfer provision is not susceptible to another reasonable interpretation.”

    As to the 2004 agreement, it just didn’t cover trademarks: “it cannot fairly be interpreted as recovering ownership of the Restoraderm trademark for Sköld. Not a word is said about such a significant step…. [R]ather than voiding CollaGenex’s ownership of the mark by implication, the parties intended to and did confirm that CollaGenex owned the Restoraderm mark. Galderma later succeeded to those vested rights.”

    Sköld v. Galderma Labs. L.P., No. 17-3148, 17-3231 (3rd Cir. Feb. 26, 2019).

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  • Today’s “Who Owns the Trademark” Quiz

    The opening sentence: “This case proves once again that people will fight for a catchy name.” My kind of case.

    Plaintiff Thomas Sköld coined the name “Restoraderm” for a proprietary skin care formulation. (When the court uses the word “coined,” you know it has grasped the difference between a word and a trademark.)  In 2001 Sköld and a company called CollaGenex signed a letter of intent and in 2002 they signed a contract titled “Co-Operation, Development and Licensing Agreement.” The LOI said “[a]ll trade marks associated with the drug delivery system; the proposed intellectual property; products deriving therefrom and products marketed or to be marketed by CollaGenex and/or any commercial partner of CollaGenex anywhere in the world shall be applied for and registered in the name of CollaGenex and be the exclusive property of CollaGenex.” The contract carried through with “[a]ll trade marks applied for or registered (including ‘Restoraderm’) shall be in the sole name of CollaGenex and be the exclusive property of CollaGenex during the Term and thereafter[.]” It also said, “[a]ny termination under this Agreement … shall not affect in any manner vested rights of either party arising out of this Agreement prior to termination.” CollaGenex registered the RESTORADERM trademark.

    In 2004 the parties replaced the 2002 agreement with a new one. In the new agreement, Sköld transferred “Restoraderm Intellectual Property” and related goodwill to CollaGenex. “Restoraderm Intellectual Property” was defined to include patent rights and associated know-how but didn’t mention trademarks. There had been a provision addressing trademark rights in an earlier draft, but the provision was removed before the agreement was finalized. Sköld admitted at his deposition that the removal was “probably” because CollaGenex already owned the Restoraderm trademark.

    In 2008, defendant Galderma Laboratories L.P. bought CollaGenex. It did some market studies which suggested using the RESTORADERM trademark, but to use it for a product with a different technology. Galderma did just that. In November 2009, Galderma terminated the 2004 agreement. Sköld sent Galderma a list of assets for the company to return to him, including the trademark. Galderma responded that it was the owner of the trademark and that Sköld could not use the name in his communication on the technology. Sköld sued Galderma for trademark infringement, etc.

    Who owns the RESTORADERM mark?

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  • The First Amendment and Collective Marks

    The government has been trying to seize the MONGOLS trademark for over ten years. You can read my previous posts about it here, here, here and here. 

    The Mongol Nation, an unincorporated association, owned or owns several registrations for a trademark, service marks and collective membership marks for the word mark MONGOLS, the riding figure, and the Mongol patch:


    In current events, the Mongol Nation was convicted by a jury of racketeering and conspiracy to racketeer. The jury returned a special verdict form finding that the rights appurtenant to the trademarks and some items of personal property bearing the marks should be forfeited.

    The government moved for a preliminary order of forfeiture. According to the court, the government had a clear agenda:

    [W]hat does the United States accomplish by seizing control of the intellectual property rights associated with a motorcycle club’s associative symbols? The Government’s own prior admissions shed light on the objectives underlying more than ten years of their efforts: The collective membership marks are “potent emblem[s]” used to “generate fear among the general public,” and the Government has sought orders to prevent use of “the trademark to create an atmosphere of fear through public display.” The Government has stated publicly that it has sought to “stop [a] gang member and literally take [a] jacket right off his back.”

    In an effort to avoid implicating the First Amendment, the government argued that issuing the order didn’t mean that it would take members’ jackets right off their backs, but rather that its goal was merely to prevent the Mongol Nation from suing other entities. The court wasn’t buying it; possible outcomes from issuing a forfeiture order included the transfer of the marks to a third party, legal retaliation against members for their use of the marks and (hilarious, in my view) the Mongol Nation paying royalties to the government.

    The court concluded that “the forced transfer of the collective membership marks to the United States violates the First Amendment.” I’ll leave it to others to give you the tl;dr on the First Amendment analysis, but I have a couple of thoughts on the opinion.

    First, some of the registrations were for goods and services, which the court also characterized as “collective membership marks”:

    The Government sought forfeiture of any and all legal and equitable rights of any kind or nature associated with or appurtenant to three collective membership marks:
    1. The Collective Membership Mark consisting of the word “Mongols” (the “Word Mark”) [citing registrations for two service marks and a collective membership mark]:
    2. The Collective Membership Mark consisting of the drawn image of a Genghis Khan-type character with sunglasses and a ponytail, riding a motorcycle, with the letters “M.C.” appearing below the motorcycle (the “Center Patch Image”) [citing registrations for a goods mark and a collective membership mark]:
    3. The Collective Membership Mark consisting of both the Word Mark and the Center Patch Image (the “Combined Mark”) [citing a registration for a collective membership mark]: …

    Nevertheless, the court’s opinion appears to be premised on the fact that collective membership marks implicate the First Amendment in a way that ordinary trademarks do not:

    Before addressing the First Amendment challenges, it is important to understand the nature of the intangible property the Government seeks to forfeit. A collective membership mark is unique in that it is a type of trademark merely used to identify membership in a particular collective group or organization, cooperative, or association. Collective membership marks are unique in that they are used solely for the purpose of identifying the person displaying the mark as a member of a collective, not to distinguish the source or origin of particular goods or services. Neither the collective nor its members use the collective membership mark to identify and distinguish goods or services; rather, the sole function of such a mark is to indicate that the person displaying the mark is a member of the organized collective group.

    …

    Here, the collective membership marks at issue indicate “membership in an association dedicated to motorcycle riding appreciation,” see U.S. Reg. No. 4,730,806, and the Government admits they are used “to indicate that the user of the mark is a member of a particular organization.” Motorcycle riding is, of course, an activity enjoyed by a large number of law-abiding citizens and does not indicate support of the commission of crimes. The collective membership marks do not have the same underlying purpose of a traditional trademark, which is used to distinguish goods or services in commerce.

    The requested preliminary order of forfeiture of the Mongol Nation’s collective membership marks violates the First Amendment.

    The court’s focus on the fact that these were collective membership marks would, in theory, make room for the government to distinguish collective membership marks from other kinds of marks, say a service mark for a brothel. However, I don’t think the court was wrong to lump the goods and service marks in with the collective membership marks—the service mark registrations, for “association services, namely, promoting the interests of persons interested in the recreation of riding motorcycles goods,” are virtually indistinguishable from the collective membership registrations, and the registration for the goods, jackets and T-shirts, is for goods commonly used to display one’s affiliation with the organization. Any mark, no matter how it is formally categorized, may implicate First Amendment concerns. So while the decision could perhaps suggest that collective membership marks get different treatment from other kinds of marks, I don’t believe that the distinction is all that important.

    Second, the opinion offers some “observations” that the forfeiture would be a “forced transfer of this property in gross.” The court notes that a trademark cannot be transferred without its goodwill and concluded this means the marks cannot be forfeited. The court cited Marshak v. Green, 746 F.2d 927, 929 (2d Cir. 1984) which held that a trademark for the name of a band was not subject to attachment and sale. The Mongol Nation court noted that in Marshak the mark was used for “entertainment services [] unique to the performers and … if another group advertised themselves as Vito and the Salutations, the public could be confused into thinking that they were about to watch the group identified by the registered trade name.” The Mongol Nation court held the same applied here too:

    [T]he collective membership marks would be forcibly transferred to the United States in gross because the goodwill associated with the marks cannot be transferred. What the Mongol Nation collective membership marks represent is membership in the Mongol Nation motorcycle club, which will continue to exist after this case…. [T]he Mongol Nation marks’ goodwill is inextricably intertwined with identification with and membership in the Mongol Nation motorcycle club. It may not be legally possible to maintain continuity or prevent confusion in the public when the Mongol Nation will continue to exist after forfeiture.

    I’m not convinced. Trademarks are involuntarily transferred all the time. It is the subsequent owner of the mark who typically suffers the risk of loss, that is, if the acquiror fails to use the newly acquired mark in the same way that it was previously used, then it it can’t claim the benefit of the prior use and instead will be starting to build goodwill in the new use. A smart shopper for the MONGOLS trademark might realize that it couldn’t carry on the use of the mark in continuity with the prior use, but that should only affect the sales price, not prohibit transferability altogether. Holding that some marks can’t be transferred, particularly when the court blurred the line between collective membership registrations and trademark and service mark registrations, seems to me like a bad idea, creating uncertainty in the efficient operation of the marketplace.

    United States v. Mongol Nation, No. CR 13-0106 (C.D. Cal. Feb. 28, 2019).

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  • Who Is Not a Beneficial Owner of Copyright

    Six years into the case, we’re on to the third decision on ownership in the case of Roberts v. Gordy and have yet to reach the question of infringement. In the first opinion, the district court held that, although there were three registrations for the infringed work, none was effective and so the court dismissed the case. The decision was reversed by the Court of Appeals for the Eleventh Circuit, which held that the the district court applied the wrong standard for scienter in deciding whether a registration is invalid. The statute refers to “knowledge” of inaccuracy, but the appeals court held that the standard is whether there was “intentional or purposeful concealment of relevant information.” There was no intent to conceal here, so the case was remanded.

    With that, we have crossed the first threshold: the plaintiffs have met the requirement that it have a copyright registration. But we’re only getting started.

    There are three plaintiffs, William L. Roberts II, performing as Rick Ross, Jermain Jackson and Andrew Harr. Jackson and Harr are producers known as The Runners. The three claimed to be the authors and copyright owners of Hustlin’

    and that a work Party Rock Anthem by LMFAO infringed the copyright in Hustlin’:

    “Party Rock Anthem” copies, interpolates the lyrics, underlying music and beat of “Hustlin’” and prominently features the highly recognizable “Everyday I’m hustlin’ …” phrase by featuring at key points in “Party Rock Anthem,” the phrase “Everyday I’m shufflin’…” “Party Rock Anthem” thus contains a qualitatively distinct, important and original portion of “Hustlin’.” The use of Hustlin’ in “Party Rock Anthem” is readily apparent, despite the slight change from “Everyday I’m hustlin’ …” to “Everyday I’m shufflin’ …” and constitutes, inter alia, the creation of an unauthorized derivative work.

    I’ll comment that the opinion is nuanced and well-considered. I’ll only briefly summarize the points the court covered, but reading the full opinion is well worth it.

    Roberts and The Runners had somewhat different rationales for why they owned the copyright in Hustlin’, both of them arguing both legal and beneficial ownership. Before getting there though, the trial court had to decide whether the appeals court had already reviewed the question of ownership, versus just having opined on the validity of the registration. Despite some loose language in the appeals court opinion, the district court held that ownership still had to be decided.

    With respect to Roberts’ ownership, Roberts assigned his copyright to an entity he owned, 3 Blunts. However, 3 Blunts had been administratively dissolved before the assignment. Roberts claimed that the assignment was therefore ineffective and he remained the owner of the copyright. Based largely on interpretation of state law, the court held that the assignment was effective, so Roberts did not have standing for the copyright claim as a legal owner.

    The Runners’ legal ownership claim could not be decided on summary judgment, with work-made-for-hire and assignment theories surviving.

    The beneficial ownership theory is where it gets interesting. The plaintiffs argued that if they weren’t legal owners, they were nevertheless beneficial owners of the copyright, which is also a type of interest that gives one standing. The court explained:

    “The paradigmatic—and only—example of an approved ‘beneficial owner’ suit is set forth in the legislative history of the Copyright Act, which describes the term ‘beneficial owner’ as ‘includ[ing], for example, an author who had parted with legal title to the copyright in exchange for percentage royalties based on sales or license fees.’” Indeed, in John Wiley, the Second Circuit explained that it had never extended beneficial ownership “beyond the circumstance of an author transferring exclusive rights in exchange for royalty payments.” So too the Eleventh Circuit has only ever found “beneficial ownership” under this precise scenario: an author who parts with legal title to the copyright in exchange for royalties.

    The plaintiffs didn’t receive royalty payments directly, but rather the royalty payments went to entities they owned. They claimed this income interest was the type of beneficial ownership the statute also included:

    Plaintiffs urge this Court to apply a much more expansive definition of beneficial ownership. They argue that they can demonstrate beneficial ownership in the Hustlin’ copyright merely by showing that “they are authors of the work who maintain a financial interest in, and continue to benefit from, the commercial use of the work.” According to Plaintiffs, even though they personally do not receive any royalty payments from Hustlin’, they are still beneficial owners because “[b]eneficial owners include authors who receive royalty payments for a creative work either directly or through companies owned and controlled by them, and who have a continuing present right to make decisions about the commercial use and exploitation of the work.”

    Plaintiffs’ novel legal argument has no basis in law. …

    None of the cases Plaintiffs cite held that a plaintiff could sue for infringement as beneficial owner without demonstrating that they assigned their legal interest in the copyright in exchange for the right to receive royalties, and that they, in fact, received such royalties themselves.

    Second, basic tenets of corporate law prohibit Plaintiffs from essentially treating their LLCs as shams. “Unless otherwise provided in the articles of organization or the operating agreement, property acquired with limited liability company funds is limited liability company property.” Here, the Hustlin’ copyright is owned by Plaintiffs’ companies. Allowing Plaintiffs to call themselves “owners” of the copyright when the copyright is company property would ignore the corporate distinction.

    Third, even if “control” over a copyright’s exploitation were a factor in determining beneficial ownership—and it is not—none of the agreements among TNF, 3 Blunts, Roberts, Harr, or Jackson state that Plaintiffs retained “any right to authorize or create derivative works of Hustlin’“. To the contrary, that exclusive right belongs to the entities to which it was assigned.…

    Fourth, … [a]ccepting Plaintiffs’ argument that individuals with “a current economic interest in the commercial exploitation of” a copyright may sue for infringement would ignore the legislative requirement that only an “owner” can sue and greatly expand the number of individuals who may sue for infringement. As discussed, nothing in the law supports this result. Accordingly, the Court holds that a beneficial owner is a legal owner who has parted with legal title to an exclusive right under a copyright in exchange for the right to receive royalties based on the commercial exploitation of that right.

    I haven’t yet seen a case where a court agreed that a beneficial owner was anything but what the court described here, an author who exchanged their legal title for the right to receive royalties. It may exist, I just haven’t seen a theory yet that worked.

    Musicians commonly own loan out companies, which serve as the legal entity through which the musician’s services are contracted. I assume it is done for tax purposes, but my impression is that the impact on copyright ownership hasn’t been thoroughly considered (particularly when it comes to termination). It is also common in the music industry to pay a share of royalties even where the recipient is not a copyright author. Both of these practices were used to try to misdirect the court here, but the court did an excellent job of sorting through it.

    Roberts v. Gordy, No. 13-24700-CIV-WILLIAMS (S.D. Fla. Jan 4, 2019).

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  • The Things You Don’t Think Of

    We have a story of three firearm and ammunition companies. The parties in the case are DoubleTap Defense, LLC (DTD), a company that had an application to register the trademark DOUBLETAP for pistols, and Hornady Manufacturing Co., owner of several TAP-formative registrations for ammunition. The third company, not a party, is Double Tap Ammunition (DTA), an ammunition manufacturer that uses the unregistered trademark DOUBLETAP. DTD and DTA are not related to each other.

    In 2011, Hornady sued DTA for trademark infringement. Also in 2011 Horandy opposed the DTD application and in 2012 Hornady sued DTD. DTD ended the suit by assigning the DOUBLETAP trademark to Hornady and in return Hornady licensed the DOUBLETAP mark back to DTD. DTD then expressly abandoned its DOUBLETAP trademark application.

    In 2013 Hornady lost its lawsuit against DTA, with the court holding that there was no likelihood of confusion between TAP and DOUBLETAP. The decision was affirmed by the Court of Appeals for the 10th Circuit.

    On June 9, 2014, DTA sent DTD a cease and desist letter alleging DTD’s use of the DOUBLETAP mark infringed DTA’s unregistered trademark in DOUBLETAP. DTD ceased its sale of the DOUBLETAP pistol and sent the letter to Hornady, demanding that Hornaby honor its duty in the license agreement to indemnify DTD for “liability related to trademark infringement claims for its use of the marks as contemplated by this agreement.” Hornady refused so DTD sued.

    Hornby claimed that it was excused from its requirement to indemnify because DTD had breached this provision of the agreement:

    If you can’t see the image, it says:

    2.1 Assignment. Licensee [DTD] hereby assigns to Licensor [Hornady] all right, title, and interest in and to the DOUBLETAP Marks, and any and all rights associated with the DOUBLETAP Marks, including, without limitation, any and all common law trademark rights, any and all trademark actual use applications, trademark registrations, and any other rights associated with the DOUBLETAP Marks, including the goodwill embodied with the DOUBLETAP Marks, any and all stylized and typed versions of the DOUBLETAP Marks, the right to obtain trademark registrations related thereto, and the right to sue for infringements and past infringements thereof. To the extent the Licensee [DTD] does not own all right, title, and interest in and to the DOUBLETAP Marks, Licensee [DTD] shall cause all other parties claiming an interest in the DOUBLETAP Marks, including, without limitation, DoubleTap Defense, [sic] LLC, in which entity Licensee represents and warrants that it has a controlling interest, to assign all such interests [to] Licensor.

    (Emphasis added.) Hornady claimed that the words “Licensee shall cause all other parties claiming an interest in the DOUBLETAP Marks … to assign all such interests to Licensor” meant that DTD was supposed to somehow cause the assignment of DTA’s trademark rights.

    I’ll interject that, if I had reviewed the agreement, it never would have occurred to me that it could be read to suggest that the assignment provision applied to the marks of unrelated parties. Sure, it doesn’t say it doesn’t, but who would’ve thought?

    Luckily, the court didn’t read the agreement the way that Hornady hoped. The court held that DTA’s assignment just wasn’t something DTD could do:

    Upon execution of the Licensing Agreement, DTD became a mere non-exclusive licensee with respect to the DOUBLETAP marks and could not have taken legal action to cause DTA to involuntarily relinquish its rights in the DOUBLETAP Marks to Hornady. The Licensing Agreement clearly contemplated that Hornady, not DTD, would be the party enforcing ownership, even as to past infringements.

    Section 6.1 also supports the conclusion that section 2.1 was not intended to include DTA. Section 6.1, titled “Licensor’s Ownership Rights,” states:

    6.1 Licensee [DTD] acknowledges Licensor’s [Hornady’s] exclusive right, title, and interest in and to the Marks in the firearms and ammunition industry, including, without limitation, the DOUBLETAP Marks, and the right to license the rights set forth in this Agreement; provided, however, that the Parties acknowledge the existence of third-party trademarks that potentially infringe on the Marks, and that Licensor [Hornady] is currently engaged in litigation to resolve such use and ownership issues.

    It is not reasonable to interpret the Licensing Agreement as unambiguously requiring DTD to cause DTA to assign its rights in the DOUBLETAP Marks to Hornady when the Licensing Agreement acknowledges that Hornady was “currently engaged in litigation to resolve such use and ownership issues” related to the potential infringement on the Marks.

    The language of section 7 of the License Agreement further demonstrates that section 2.1 does not unambiguously encompass “all other parties” including DTA. Section 7 states, in part, as follows:

    SECTION 7. INDEMNIFICATION. EACH PARTY SHALL INDEMNIFY, DEFEND, PROTECT, AND HOLD HARMLESS THE OTHER PARTY … FROM AND AGAINST ALL CLAIMS, DEMANDS, LAWSUITS, DAMAGES, LIABILITIES, JUDGMENTS, COSTS, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES) ARISING FROM OR RELATING TO A PARTY’S BREACH OF THIS AGREEMENT; … OR, WITH RESPECT TO LICENSEE [DTD[, LIABILITY RELATED TO TRADEMARK INFRINGEMENT CLAIMS FOR ITS USE OF THE MARKS AS CONTEMPLATED BY THIS AGREEMENT.

    If section 2.1 required DTD to cause all other parties to assign their rights to Hornady there would be no reason for Hornady to agree to indemnify DTD for “LIABILITY RELATED TO TRADEMARK INFRINGEMENT CLAIMS” because there could be no such liability.

    I think this was a Hail Mary by Hornady, but I will have this case in mind when negotiating future agreements.

    DoubleTap Defense, LLC v. Hornady Mfg. Co., No. 8:18CV492 (D. Neb. Feb. 11, 2019).
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  • The Sexy World of Trademarks in Bankruptcy

    I know there are few legal topics sexier than bankruptcy, but we’ve now reached the pinnacle of sexiness – bankruptcy AND trademark. I mean, how much more fulfilled will my life get?!

    Pending before the Supreme Court and set for hearing on February 20 is Mission Product Holdings, Inc. v. Tempnology, LLC. I wrote about the case when it was decided and then forgot about it. But to my surprise, the Supreme Court has granted certiorari. A group of bankruptcy professors and the International Trademark Association filed briefs supporting the grant of certiorari, expressly disagreeing with the court of appeals’ decision in the case.

    In general, a bankruptcy trustee (or debtor-in-possession) can “reject” executory contracts, which gives the bankrupt estate more latitude in its recovery or in maximizing the value of the estate for creditors. If a contract is rejected, the rejection is treated as if the bankrupt party breached the contract immediately before the petition for bankruptcy was filed. The debtor also cannot be forced to perform its contractual obligations, like delivering goods. But what if the contract, say a license, offers some benefit to the non-bankrupt party that doesn’t require performance by the bankrupt licensor?

    There is a special statutory section that provides that copyright and patent licensees have the option of continuing to use the licensed right. But there is no special provision for trademarks. This wasn’t an oversight; Congress said

    [T]he bill does not address the rejection of executory trademark, trade name or service mark licenses by debtor-licensors.… In particular, trademark, trade name and service mark licensing relationships depend to a large extent on control of the quality of the products or services sold by the licensee. Since these matters could not be addressed without more extensive study, it was determined to postpone congressional action in this area to allow the development of equitable treatment of this situation by bankruptcy courts.

    S. Rep. No. 100-505, at 5 (1988).

    Mission Products was a patent and trademark licensee of Tempnology, LLC. Tempnology filed for bankruptcy, the bankruptcy court terminated the trademark license, and the First Circuit affirmed. This was contrary to the outcome of a similar case in the 7th Circuit, Sunbeam Prod., Inc. v. Chicago Am. Mfg., LLC, 686 F.3d 372 (7th Cir. 2012) (Easterbrook, J.), thus creating a circuit split.

    The question presented is “Whether, notwithstanding a trustee’s rejection of a trademark ‘license agreement,’ that license agreement remains enforceable against the estate.”

    There were six amici briefs filed: four in favor of Mission Products (the United States, a group of Law Professors, the International Trademark Association (INTA), and the New York Intellectual Property Law Association (NYIPLA)) and two in support of neither party (the American Intellectual Property Law Association (AIPLA) and the Intellectual Property Owners Association (IPO)). No one filed a brief in favor of Tempnology, that is, no one agreed with the First Circuit that the license should have terminated.

    The case is really a statutory interpretation question, but with policy undertones. The policy argument is that the uncertainty of contracting with a trademark licensor, and the transactional costs of trying to contract around the possibility of a bankruptcy, outweigh the interest in relieving the bankrupt licensor of the licensing burden.

    The United States, INTA, NYIPLA, and the Law Professors hue to the 7th Circuit’s Sunbeam view. The IPO and the AIPLA agreed with Sunbeam in principle, but added more. The IPO agreed with the dissent in Tempnology, advocating for a presumption that the licensee may continue to use the licensed mark, but giving the bankruptcy cout discretion to craft a resolution given the equities of the case. The AIPLA agreed with the reasoning in Sunbeam, but also elaborated on avenues available to a licensor under non-bankruptcy law that might allow a licensor to nevertheless relieve itself of the burdens of the contract.

    I had the privilege of participating in the drafting of the AIPLA brief. It required both bankruptcy and trademark lawyers, who all gave a significant amount of time on short notice during the holiday season. It was an honor to be a part of such dedication to our profession.

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  • Unauthorized Registration As Material Breach

    I just ran across this older opinion upon seeing a more recent opinion in the case on attorneys’ fees. The situation was interesting enough to make me go back and find the earlier decision.

    Defendant Otkrytoe Aktsionernoe Obshchestvo “Spartak” is a Belarusian company specializing in the production of chocolate. Spartak entered into a non-exclusive supply agreement with plaintiff Desly in 2001, which in 2006 became exclusive for a 25 year term.

    The 2006 agreement said this about ownership of the trademarks:

    Any and all trademarks and trade names, which [Spartak] uses in connection with the rights granted hereunder, are and remain the exclusive property of [Spartak]. Nothing contained in this Agreement shall be deemed to give [Desly] any right, title or interest in any trademark or trade name of [Spartak] relating to the Products. Subject to notice from Owner [Spartak] in writing, which modifies or cancels such authorization, during the term of this Agreement, [Desly] may use the trademarks and trade names specified by [Spartak] in writing for normal advertising and promotion of Products.

    The agreement also had this:

    [Desly] acknowledges and agrees that the Products and all copies thereof constitutes valuable trade secrets or proprietary and confidential information of [Spartak]; that title thereto is and shall remain in [Spartak]; and that all applicable copyrights, trade secrets, patents and other intellectual property rights in the Products and all other items licensed hereunder are and shall remain in [Spartak]. All other aspects of the Products and all other items licensed hereunder including Remains [sic] the sole and exclusive property of [Spartak] and shall not be sold, revealed, disclosed or otherwise communicated, directly or indirectly, by [Desly] to any person, company or institution whatsoever, other than for purpose set forth herein. It is expressly understood and agreed that no title to, or ownership of, [Spartak’s] intellectual property rights, or any part thereof, is hereby transferred to [Desly].

    Needless to say, in 2009 Desly registered the Spartak trademarks. Spartak discovered the registrations in 2012 when it filed its own applications that were refused as likely to be confused with the Desly registrations. Spartak thereupon terminated the distribution agreement. Desly responded to Spartak’s letter saying that the applications were submitted “in a scope of good business practice routinely conducted by [Desly] in order to protect intellectual property being used in connection with goods being distributed on territories where [Desly] holds exclusive distribution rights” and proposed a “discussion” regarding the “possible transfer of rights [to Spartak] to the intellectual property currently owned by Desly.” Spartak instead found a new distributor, so Desly sued both Spartak and the new distributor for trademark infringement and other assorted claims.

    I think this is a no-brainer that Desly had no right to register the trademarks and its registrations were invalid, since the owner of the trademarks had not filed the applications. What I found more interesting about the case, though, was whether registering Spartak’s marks was a valid basis for termination of the agreement.

    The termination provision of the agreement said this:

    This Agreement may be terminated immediately by [Spartak] under any of the following conditions:

    (a) if [Desly] shall be declared insolvent or bankrupt;
    (b) if a petition [is] filed in any court to declare one of the parties bankrupt or for a reorganization under the Bankruptcy law or any similar statute and such petition is not dismissed in ninety (90) days or if a Trustee in Bankruptcy or a Receiver or similar entity is appointed for one of the parties;
    (c) if [Spartak] terminates any provisions of this Agreement for any other reason than stated in the Agreement, [Spartak] has to compensate [Desly] for loss of profit equal to gross profit from previous year.

    This section says nothing about termination for breach, but it turns out that was ok. This section describes occasions on which Spartak “may” terminate the agreement, but “unless a contract provision for termination for breach is in terms exclusive, it is a cumulative remedy and does not bar the ordinary remedy of termination for a breach which is material, or which goes to the root of the matter or essence of the contract.”

    And “it is a well-settled principle of contract law that, where a party materially breaches an agreement, the non-breaching party is entitled to terminate the breached contract and sue for the entire loss the breach caused.” So, it boils down to whether these unauthorized applications were a material breach. Yes, in this court’s view:

    What is inescapable is that Desly’s improper trademark registrations constituted a material breach justifying Spartak’s termination of the agreement granting Desly distribution rights in the United States. The central purpose of the contract, it is beyond dispute, was to make Desly Spartak’s exclusive United States distributor of its products for sale, principally, to Eastern European immigrant consumers already familiar with Spartak, and, not only did not authorize Desly to do anything else with its products, mark and logo, but explicitly provided for the retention of rights to its mark and logo. Thus, by appropriating Spartak’s trademark rights and continuing to distribute product under a mark it had unlawfully registered, though still bearing the distinctive dress and logo that these products bore – which would be recognizable to preexisting consumers – Desly had breached the essential purpose of the distribution agreement. The contract breach by plaintiffs could not have been more material; illicitly arrogating the Spartak mark and logo to itself, Desly severed from Spartak the essential tools for establishing its brand in this country, which was, of course, the key purpose of the exclusive agreement. Such a breach, as a matter of law, entitled Spartak to terminate the agreement.

    No fees for Spartak though; there was a back story that made Desly’s actions more understandable.

    Desly Int’l Corp. v. Otkrytoe Aktsionernoe Obshchestvo “Spartak”, No. 13-CV-2303(ENV)(LB) (E.D.N.Y. Aug. 29, 2016).

    Desly Int’l Corp. v. Otkrytoe Aktsionernoe Obshchestvo “Spartak”, No. 13-CV-2303(ENV)(LB) (E.D.N.Y. Dec. 7, 2018).

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