POST-LICENSE USE OF TRADEMARK IS COUNTERFEITING

A former trademark licensee’s continued use of a trademark after termination of the license constitutes trademark counterfeiting. That is the holding in a recent District of Indiana default judgment case, Century 21 v. Destiny Real Estate. The court explained:

If an unrelated entity had created an identical trademark and provided authorized goods or services (or the kind provided by the owner of the mark) under that mark, there would be no question that there was counterfeiting. The Court can conceive of no reason why an ex-franchisee should escape liability for counterfeiting simply because that person had access to a franchisor’s original marks because of the former relationship and therefore did not need to reproduce an identical or substantially similar mark.

Other courts have come to differing conclusions on this issues, in various contexts. In a 1997 case, the 6th Circuit held that a franchisee’s holdover use of a trademark was not counterfeiting. The 9th Circuit held that the licensee’s holdover was counterfeiting in a 2005 case involving continuing use of the Idaho potato certification mark.

The significance is that pursuant to 15 U.S.C. § 1117(b), if he is found to be a counterfeiter, the former licensee can be liable for statutory damages(up to $2 million in cases of willful counterfeiting), and will be liable for three times profits or damages, whichever amount is greater, together with a reasonable attorney’s fee unless the court finds “extenuating circumstances.” If he is merely an infringer, statutory damages are not available and treble damages and attorneys’ fees are less certain to be awarded. They may be awarded “subject to the principles of equity.”

The Century 21 court’s damage, injunction and individual liability analyses also are noteworthy. Century 21 sought its actual damages plus treble damages. The court held that such an amount would be quadruple, rather than treble damages, one multiple too many. The court further reduced the award to two times damages, on the ground that the liquidated damages provided for in the license agreement and awarded by the Court coincided with the actual damages, and therefore to awarded treble damages in addition would again result in quadruple recovery.

On a cheerful note for trademark owners, the Court granted a permanent injunction, finding that “the injury especially justifying injunctive relief is the loss of control over and harm to its valuable name and trademark, in which it has invested substantial effort and money over time to develop goodwill.” If that is going to suffice under Ebay, trademark owners may not need to be as concerned that injunctions against infringers will be harder to come by.

The court declined to impose liability on Destiny Real Estate’s principal. After surveying the law on individual liability for corporate trademark infringement, the Court found that Century 21’s allegations that the individual was President of the company and authorized or approved of the misconduct were not sufficient bases to hold the individual liable for the corporation’s infringement.
 

COPYRIGHT - DAMAGES BETTER, INJUNCTIONS WORSE

Copyright litigants would be wise to focus early on available infringement remedies in light of recent decisions. Following the Supreme Court decision in Ebay v. MercExchange and the Second Circuit Decision in the Salinger v. Colting case, litigants need to plan that they will need to prove irreparable injury to get an injunction, the presumption of irreparable harm is no longer available. That could make injunctions tougher to get in some cases. At the same time, litigants should plan that pre-judgment interest, dating back to the beginning of the infringement, is available based on the Third Circuit's recent decision in the Haughey case. Pre-judgment interest could significantly increase damages in certain cases.  So it might be harder to make 'em stop, but you might make 'em pay more.
 

PATENT LITIGATION GETS EVEN HARDER FOR PATENTEES

Although indisputably correct, the Federal Circuit ruling earlier this year that patentees could not rely on the “25% rule” in calculating damages can only serve to increase billings for experts and litigators, and raise costs for patentees. The 25% rule was an accepted “rule of thumb” that a reasonable patent license fee would typically be 25% of the profits earned from sales of the infringing product. In situations where damages were difficult to quantify, and comparable license fee figures were not available, patentees would use the 25% rule as a basis for their money demand. So long as courts accepted that, patentees could sometimes avoid the extremely difficult, if not actually impossible task of quantifying damage when good data was not available.

The Federal Circuit in Uniloc v. Microsoft exposed the absence of sufficient statistical foundation for the 25% percent rule in most situations. Moreover, the court explained that even if the rule had statistical validity, courts should not make damage awards based on results in other circumstances. The court’s message to patentees is that they will not be permitted to cut corners on their damage proof; to prove damages patentees are going to have to do the often extremely hard work.

That, of course, will lead to more hours billed by experts and litigators. Experts to dig for more data and create defendable formulae. Litigators to argue over whether the experts have done it successfully. Although intellectually correct, rejection of the 25% rule further increases the expense of patent litigation and further cements its inaccessibility to many individuals and small businesses.
 

No Secrets in IP Litigation

One of the things that seems to surprise and offend many IP litigants is the invasiveness of discovery under the Federal Rules of Civil Procedure. Parties often are surprised to learn how much they must disclose about their business in discovery. Understandably, they are offended when their adversary is given the opportunity to inspect sensitive business information, particularly product development and financial information.

Agreed upon protective orders often provide a measure of comfort by limiting the number of people who will have access to the disclosed information, but they are a double edged sword. Once a protective order is in place, one can almost guarantee that arguments that disclosure of possibly relevant evidence should not occur because of the secrecy of the material will fail.

A recent opinion that illustrates the point comes from a patent case in the Northern District of Illinois, Jab Distributors v. London Luxury. Jab sought discovery of London Luxury’s sales and financial information pertaining to the allegedly infringing product. London Luxury opposed production of such information generated prior to the time Jab began marking its product with the patent number, on the ground that such information was irrelevant because London Luxury could not recover damages prior to marking, and on ground that disclosure to a competitor would be harmful.

The court required production. It found that the profitability of the infringing product pre-marking would inform the calculation of a reasonable license fee (a measure of damages), and also relevant to the alleged obviousness of the patent. The Court rejected London Luxury’s argument that disclosure would be inappropriate because the information in question was the subject of a confidentiality agreement with a third party, and held that the protective order, which included an “attorneys eyes only” provision, provided adequate safeguards against disclosure of sensitive information to a competitor. The court noted that London Luxury offered only attorney argument and failed to submit sworn declarations or affidavits explaining the need for secrecy.

The take-away here is that parties involved in litigation should be aware of the presumptive expansiveness of federal court discovery, and that they will be fighting a steep uphill battles to keep even sensitive competitive information from their adversaries. If there is information that should not be disclosed, parties should first determine whether a suitable protective order can provide adequate protection. If so, more often than not courts are receptive to those. If not, parties should prepare early to resist disclosure and provide the best possible admissible evidence of the need for secrecy, but be aware that the odds are against them.
 

IP Counsel Must Communicate With Marketing and Manufacturing Personnel - Redux

Following up on my April 4, 2010 post concerning false patent marking, the Federal Circuit ruled last week in the Pequignot v. Solo Cup case.  Here is my take away.

1. Marking a product with an expired patent number is false marking.  Solo Cup argued that because the public could look up the patent, marking with an expired number was not misleading.  The Court explained that it is not so simple to determine when a patent expires and so it could be misleading.

2. Marking a product with a legend that says something like "this product may be protected by one or more patents" is not false marking, but neither is it adequate marking under 35 U.S.C. 287, so that does not seem like a very effective strategy.

3. To be actionable, false marking must be intentional. The marking must be for the purpose of deceiving the public.

4. Proof that a marking is false and that the marker knew of its falsity, creates a rebuttable presumption of intent to deceive.

5. The accused can rebut the presumption by proving, by a preponderance of the evidence, that he did not consciously desire that the public be deceived.  One way to do that would be to prove that the accused relied on reasonable advice of counsel. Merely asserting that one had no such intent will not be sufficient. 

On a related note, on remand the district court in the Forest Group case awarded damages in the amount of the highest price for which the 38 falsely marked stilts at issue in that case sold ($180, prices ranged from $103-$180).  The total award was only $6,840, but if courts are going to award what amounts to gross revenues on products sold for $500 or less, penalties for false marking could be severe.

Think Before You Sue For Infringement of Marketing Materials

Copyright can be a effective tool for preventing competitors from copying a business’ marketing materials. Before asserting a copyright infringement claim, however, one should thoroughly understand the limits of what can be achieved in litigation, and the possible costs. Each year, when preparing the update for Substantial Similarity in Copyright Law, I am struck by the number of cases involving catalogs or brochures that seem to waste resources that could be better invested in improving the product or promoting it more effectively.

Damages caused by the copying of marketing materials are difficult to prove. Businesses typically generate their profits from sales of the products and services promoted, not from the marketing materials themselves. Tying any particular product sales, or lost sales, to such materials is often difficult. Whether one may recover attorneys' fees is a matter of the court's discretion, and by no means a certainty. That often leaves statutory damages as the only means of recovery. Statutory damages are limited to $150,000 even in the case of willful infringement ($30,000 in cases where deliberate copying cannot be proved). That may seem like a significant sum, but when one factors in the cost of legal services, and the cost of company employee time and effort, the result may be only a Pyrrhic victory.

In most cases, the defendant challenges the plaintiff’s copyright, alleging that the material lacks sufficient originality to be copyrightable, or was itself copied from other materials. Such a challenge can immediately put the copyright owner on the defensive, and require efforts from those involved in creating the materials to prove originality, disruptions the plaintiff may not have considered at the outset.

Some of the questions one should ask before bringing a claim for copyright infringement of marketing materials, in addition to the likelihood of success and the likely cost are: How much of the motivation for bringing the suit is real damage, as opposed to insult? Who can better withstand the cost and disruption of litigation? And, is it worth it if the recovery is less than the cost of litigation?