Deregulation is the New Buzzword in Washington — Except in the Tech Industry
The past year has been a volatile one, from trade wars to the government shutdown to a stock market dive. One constant that U.S. businesses have become accustomed to, however, is deregulation across a wide variety of industries — except for technology. As innovation in that sector continues at a rapid pace, regulators will continue to address consumer protection concerns. In addition, technology companies will continue facing more aggressive enforcement as well as increasingly complex regulation at both the federal and state levels.
In this article, we look at digital advertising disclosures, data privacy and internet-driven products — three areas in which regulatory oversight of tech companies has dramatically increased — and discuss what the industry is likely to face in the coming year.
The Influencer Economy
One area in which regulators and enforcement agencies have targeted the entire digital advertising ecosystem — including advertising agencies, publishers, game companies, technology networks, traditional brands and even individual talent — is influencer advertising disclosures.
Advertisers have expanded their partnerships with influencers in recent years, and analysts estimate that spending on influencer marketing could reach $10 billion by 2022. Social media and content platforms have also invested heavily in this sector. (Facebook, for example, launched a search engine in June 2018 called Brand Collabs Manager to enable brands and content creators to search for partners with similar audiences.)
The Federal Trade Commission is the primary federal agency that regulates endorsements and testimonials. The FTC has authority under Section 5 of the Federal Trade Commission Act to prevent “unfair” or “deceptive” business practices, which includes online advertising and sponsorships. As early as 2009, the FTC issued updated guidelines for endorsements and testimonials specifically to ensure that disclosures are properly made in social and digital channels. The FTC stressed the importance of ensuring that consumers understand they are being advertised to in new online channels, as opposed to watching a celebrity on television, where a consumer readily understands they are being pitched a product.
In 2015, the FTC weighed in further on native advertising disclosures to push for disclosures that would delineate the blurred lines between editorial and advertising in digital and social channels. In the Native Advertising Guidelines, it distinguished between traditional product integration you may see in games or television and similar placements online, stressing that “deceptive door openers” such as headlines and content that appear editorial in nature are inherently deceptive and lead to consumers interacting with advertising that they otherwise may not have chosen to consume. During the same period, the FTC has also brought numerous enforcement cases against agencies such as Deutsch LA and major advertisers such as Lord & Taylor, as well as influencer networks and content and game studios, for failing to ensure sponsored posts on social media and in editorial were adequately disclosed.
In the past two years, the FTC has significantly expanded its enforcement efforts. It has continued to pursue cases against advertisers and brands, and issued further concrete guidance in its Endorsement Guides as well. For example, it reached a settlement agreement with Creaxion in fall 2018 for paying athletes to promote a client’s mosquito repellent. Creaxion reviewed and monitored promotional posts in advance, but did not require that the athletes disclose they were paid for their endorsements.
Since 2017, the FTC has also been enforcing sponsorship guidelines directly against influencers and content creators. In April 2017, the FTC sent over 90 warning letters to influencers and marketers related to disclosures of sponsored content or promotions on social media. That September, the FTC brought its first complaint directly against two influencers for falsely claiming that their reviews on social media were independent, and for failing to disclose their positions as owners and officers of the company they promoted, CSGO Lotto. The FTC has made it clear that all participants in the digital ecosystem are responsible for ensuring that advertising is clearly and conspicuously labeled.
We now see other agencies weighing in as well, most notably the U.S. Securities and Exchange Commission. In 2018, the SEC reached a settlement with professional boxer Floyd Mayweather Jr. and music producer Khaled Khaled (known as DJ Khaled). The SEC alleged that each individual promoted initial coin offerings on social media without disclosing that they received payments for their endorsements. Mayweather and Khaled paid over $300,000 and $100,000 respectively in connection with the settlement agreement.
Beyond expanded enforcement efforts by the FTC and SEC, influencers, media companies and brands also face — and will continue to face — increased pressure for self-regulation as well as scrutiny from the National Advertising Division, a division of the Better Business Bureau, on what constitutes sponsored content that requires disclosure. In one 2016 example, NAD investigated a partnership between People Magazine and the online shopping platform Joyus, and found that listing sponsored products and linking to sponsored content in People’s “Stuff We Love” section was advertising rather than editorial content. NAD recommended that the magazine implement changes to include adequate disclosures on this sponsored content. In another example, NAD recently investigated a shopping guide on skincare products that included monetized affiliate links. NAD ultimately found that the shopping guide was not advertising and was therefore outside its jurisdiction, because the editors created content independently without any input from their marketing team or the listed retailers and brands. However, NAD left open the possibility that editorial content with affiliate links could be considered advertising under other circumstances.
Overall, as the influencer economy continues to evolve, regulators will have to grapple with new issues to ensure consumers are protected adequately in the online marketplace. One such example is how regulators will treat CGI influencers such as Shudu Gram and Miquela Sousa . Also, whether such influencer marketing is deceptive on its face or whether the reasonable consumer now simply expects to be advertised to in this manner, similar to a television commercial.
The next area in which technology companies have experienced greater regulation at both the federal and state levels since 2016 — and will continue to need to make a top priority — is data privacy. Monetization and leverage of large consumer data repositories has become integral to corporate growth strategies across technology and other industries. Some analysts have called big data the “new oil.”
Last fall, enforcement agencies reached record-breaking settlements related to data breaches. For example, Anthem agreed to pay $16 million for claims under the Health Insurance Portability and Accountability Act. The data breach underlying those claims resulted in over 78 million records compromised. In addition, a multi-state settlement agreement related to a failure to disclose a data breach required a $148 million payment. And the New York attorney general reached a $5 million settlement agreement for claims under the Children’s Online Privacy Protection Act, the largest fine to date under that statute.
Technology companies also faced several highly publicized investigations into their data privacy practices by Congress and enforcement agencies in the past year. These actions have even taken place at the municipal level. The city attorney of Los Angeles, for instance, recently sued the Weather Channel for failing to disclose that location data collected through the company’s mobile app may be used for commercial purposes like targeted marketing.
This past year, California passed a sweeping privacy law that adds significant disclosure and other compliance obligations for any company that collects consumer data. This law will come into effect in 2020 and will further increase regulatory exposure. Similar to the GDPR in Europe, California’s new law broadly defines personal data to cover almost any information related to an identifiable individual, expands notice obligations for companies that collect user data and creates new rights for users to request access or deletion of their data. In addition, companies may face greater liability in private suits based on statutory damages under the new law.
In response to the increasing complexity of the regulatory landscape, major technology companies have begun to lobby for a federal privacy law. 2019 and 2020 will be key years for the development of further U.S. privacy regulations, and in determining how much control consumers will have over the ownership and right to manage their own personal data.
To handle both consumer expectations over the management of their data and increased regulatory scrutiny, technology companies will need to continue to adapt to this new environment. In addition, ‘privacy by design’ may become less of a catch phrase and more of a term requiring deeper integration by U.S. tech-enabled businesses. And with the rise of smart cities, states and cities themselves will have to understand how they are collecting or enabling the collection of data on their residents.
As data privacy issues have drawn greater attention, regulators have increased scrutiny of connected devices. The market for internet of things devices has grown rapidly in the past two years, and analysts predict that it could grow to $520 billion by 2021. IoT devices pose unique security risks. They can collect sensitive data (e.g., security cameras) or be used for purposes that could pose a safety risk in the event of a breach (e.g., an automated vehicle or a traffic light). The FTC has pursued actions against device markers as early as its 2013 settlement agreement with TRENDnet, and published guidance on best practices for IoT device makers in a 2015 report, including security-by-design and transparency about data collected.
Until recently, the FTC advocated a “wait and see” approach to the IoT ecosystem. That said, since 2017, it has reached significant settlement agreements with IoT device makers, and new legislation at the state and federal level is targeting IoT devices. Furthermore, IoT device makers have faced enforcement actions related to data collection practices, and additional inquiries from lawmakers. A major TV manufacturer paid $2.2 million as part of settlement with the FTC and the State of New Jersey in 2017 based on claims that software pre-installed on “smart” televisions collected viewing data about 11 million users without their knowledge. In 2018, electronic toymaker VTech settled FTC claims under COPPA that a mobile app connected to its toys collected personal information from children without their parents’ consent. And this past summer, several U.S. senators sent letters to device manufacturers and the FTC requesting that regulators investigate the business practices of makers of IoT devices with passive listening features.
IoT device makers must also comply with new guidance and legislation governing connected devices. For example, in September 2018, California passed the first law governing IoT devices. It requires that IoT device makers implement “reasonable security features” that are appropriate to the type of device and the nature of the data it processes. There are also sector-specific regulations and laws on the horizon for IoT device makers. For example, the Senate is considering a bill governing autonomous vehicles, the AV START Act, which will increase federal oversight of the testing and deployment of autonomous vehicles.
What to Expect this Year
U.S. businesses will continue to use data and technology as a means of creating efficiency and innovation in the marketplace. In fact, many of the largest technology companies are accelerating this process, expanding into new cities and hiring at a rapid pace. In certain areas of the tech sector — including digital advertising, connected devices and digital health — innovation is still in its early stages, but we will continue to see growing adoption of their products and services by both companies and consumers.
Although regulators are in catch-up mode, they are looking with an eye to the future, for example, by considering the imposition of trade restrictions on certain technologies, including artificial intelligence. The federal government will certainly continue to focus on the tech industry — both from a consumer protection perspective as well a fair trade perspective in regard to competition from China and others — but tech companies should also expect much more by way of state and local regulations in 2019, with California at the forefront.
Key IP Takeaways from the United States-Mexico-Canada Agreement
On September 30, 2018, the United States, Mexico and Canada reached a trade agreement to supersede the North American Free Trade Agreement. The aptly named United States-Mexico-Canada Agreement includes intellectual property provisions covering patents, trademarks, copyright, trade secrets and domain names. USMCA Chapter 20, which contains the intellectual property-related portion of the agreement, is based in part on the abandoned Trans-Pacific Partnership, maintains some NAFTA provisions and includes entirely new ones. Although the agreement awaits ratification in all three countries, the general consensus among intellectual property owners that is it is an improvement over prior trade agreements.
Longer Terms of Protection
One of the most notable aspects of the USMCA intellectual property provisions are longer terms of protection. Under the USMCA, patent holders are entitled to term adjustments when a patent registration is delayed due to circumstances outside the applicant’s control, triggered when the patent issues more than three years after an examination request is filed, or more than five years after the application was initially filed. This has been the law in the United States for decades but is new to Canada, which has four and a half years to implement it.
The protection term specifically for biologics — pharmaceuticals synthesized from biological sources — has also been extended. Under the USMCA, the term is 10 years, versus five years under the TPP and eight years in Canada (the United States currently provides 12 years of protection). Biologics were not covered at all under NAFTA, nor are they specifically covered by Mexican law.
Similarly, the USMCA extends the required copyright term in Canada to match the existing U.S. term — the life of the author plus 70 years — up from life of the author plus 50 years. In Mexico, the copyright term is already longer — the life of the author plus 100 years.
Enhanced Enforcement Mechanisms
In addition to longer terms of protection, the USMCA provides for enhanced intellectual property enforcement mechanisms. Taking a page from the Digital Millennium Copyright Act in the United States, the USMCA implements a notice and takedown procedure requiring Internet Service Providers to remove infringing content from their platforms in order to avoid copyright infringement liability. Canada may be exempt from this provision due to certain legislative intricacies. As a result, Canadian ISPs may only be required to notify users of infringement allegations (and will not be required to remove infringing content). Mexico, though, will need to create such a system. The TPP contemplated a similar provision, but NAFTA does not contain any similar provisions.
Further, the USMCA addresses technological protection measures intended to protect copyright content, listing certain types of activities that circumvent such measures, but are nevertheless deemed lawful. The TPP included a similar list, but the USMCA is more narrowly tailored.
In counterfeiting actions, the USMCA requires signatories to impose predetermined damages. (The United States already has statutory damages for counterfeit cases of $1,000 to 200,000 per mark, and up to 10 times that for willful counterfeit use, and provides for stronger rights for taking action at the borders against counterfeit trademark or pirated copyright goods. For example, border officials are authorized to use their own judgment to identify counterfeits (no court order is required) and may unilaterally seize or destroy such counterfeits.)
Trademark and Patent Provisions
The USMCA contains a number of provisions related to trademark protection, most of which are consistent with U.S. law. Canada was already implementing such changes with the new Canadian Trademarks Act that will likely come into force in early 2019. These include: (1) ratifying the Madrid Protocol; (2) adopting a classification system consistent with the Nice system and (3) permitting registration of scent marks. One outstanding requirement that Canada will still need to address is allowing the registration of collective marks (marks used by an association to certify membership or compliance with certain criteria). Mexico has already complied with these requirements.
As with trademarks, the USMCA imposes patent requirements that are already largely consistent with the existing laws in the United States and Canada. For example, the parties must either accede to the international patent agreement known as the Patent Law Treaty, to which the United States is already a member, or adopt procedures consistent with the “objectives” of the Patent Law Treaty. Canada has already amended its domestic laws to comply with the Patent Law Treaty, and those changes are predicted to come into effect in early 2019, but Mexico will have to amend its domestic law to comply with this provision.
Trade Secrets, Domain Names and a Committee on IP Rights
Trade secret protection under the USMCA is similar to NAFTA, and requires that signatories have laws in place to protect trade secrets modeled after Uniform Trademark Secrets Act in the United States. Term limits on trade secret protection are prohibited, as are restrictions discouraging or impeding the voluntary licensing or transfer of trade secrets. Unlike NAFTA and the TPP, the USMCA addresses how trade secrets are handled in litigation, requiring parties to allow submissions under seal to prevent disclosure.
Domain names are likewise covered by the USMCA, which requires the signatories to maintain an online database of domain name registrant contact information, and a domain name dispute mechanism modeled after the Uniform Dispute Resolution Policy, which the United States and Canada already have. The TPP text contained similar provisions, but NAFTA did not.
Finally, in addition to the requirements enumerated in the agreement, the USMCA establishes a Committee on IP Rights, which will be comprised of government officials from each country and tasked with “identify[ing] appropriate opportunities to increase cooperation between the Parties on trade-related intellectual property rights protection and enforcement.” Neither NAFTA nor the TPP included a similar provision.
Given that the agreement must pass through each party’s ratification procedures, it could be many months or even years before it is in force. Once the USMCA takes effect, it requires that the countries re-evaluate the agreement every six years, and it also contains a 16-year sunset clause, requiring the parties’ agreement to extend.
A Strategic Look at Champerty and Third-Party Litigation Financing
Third-party litigation financing is a topic of increasing interest. The practice has become more common, and federal courts as well as the U.S. Patent Trial and Appeal Board are responding to ensure that the real parties in interest are participating in intellectual property disputes. In addition, a proposal is pending before the Advisory Committee on Rules of Civil Procedure that would revise the Federal Rules of Civil Procedure to require disclosure of third-party funding arrangements affecting all federal patent, copyright and trademark actions. Furthermore, a recent decision by the U.S. Court of Appeals for the Federal Circuit, in Worlds v. Bungie, has tasked the PTAB with conducting an analysis of the real-party-in interest issue where evidence is presented by a patent owner to sufficiently put the issue into dispute.
This article addresses the limits placed on litigation financing by some states via the operation of the champerty doctrine. The law varies substantially from state to state, with some states having strict champerty doctrines and others none at all. That fact may impact venue selection for multi-state or multi-district disputes.
TPLF and the Champerty Doctrine: A Primer
A party, such as a non-practicing entity seeking to embark on a patent assertion campaign, may seek third-party litigation financing to bridge a gap in funding for a claim or as a strategy to hedge against the downside risk of an unsuccessful outcome. TPLF is generally non-recourse, meaning that the funding entity can only collect on the collateral pledged — in this context, a portion of the proceeds of the litigation determined by various factors, such as a percentage of any recovery, a multiple of the deployed funds or the length of the case.
Champerty prohibits outside parties from funding litigation in certain cases to which they are not a party. Its modern application can be traced back to medieval England, where champerty statutes prevented feudal lords from abusing the legal system by encouraging third parties to litigate against their rivals and claiming a share of the property awarded.
By common law or statute, many jurisdictions do not explicitly prohibit champerty or recognize TPLF as such, including Arizona, California, Louisiana, New Jersey and Texas. (See Paul Bond, Making Champerty Work: An Invitation to State Action, a 50-state survey). Other states, such as Alabama, Delaware, Georgia, Minnesota, Mississippi, New York and Pennsylvania, do recognize the doctrine, and explicitly prohibit champertous funding arrangements. In those states, third-party litigation financing arrangements can be found champertous, resulting in the litigation being halted.
Relevant Champerty Statutes and Recent Case Law
It is worth reviewing recent champerty rulings in Delaware and in New York, two of the states with the most fully articulated case law, to analyze how third-party litigation financiers might run afoul of the doctrine.
Under common law, Delaware defines champerty as “an agreement between the owner of a claim and a volunteer that the latter may take the claim and collect it, dividing the proceeds with the owner, if they prevail; the champertor to carry on the suit at his own expense.” Charge Injection Technologies v. E.I. Dupont de Nemours & Company. In a champertous assignment, “an assignee of a cause of action initiates litigation at his or her own risk and expense in consideration of receiving a portion of the proceeds if successful.” However, an agreement cannot be champertous if the assignee has “an interest in the matter in controversy” or “where the assignee has some legal or equitable interest in the subject matter of the litigation independent from the terms of the assignment under which the suit was brought.”
In Charge Injection, CIT’s CEO entered into an agreement with an investment fund to finance their patent infringement action in exchange for any future proceeds from the action. The Delaware Superior Court held that this was not champerty, finding the financier did not encourage or control CIT’s pursuit of the litigation. The court similarly found no champerty in the assignment of a debt to a company that later filed suit to pursue payment in Southeastern Chester County Refuse Authority v. BFI Waste Services of Pennsylvania. Specifically, the plaintiff had an interest “intertwined with the subject matter of the case” and did not acquire the debt simply to pursue litigation: The interest in the litigation pre-dated the assignment. Nor did the court find champerty in Arcoria v. RCC Associates, when a company’s president assigned the company’s lawsuit to himself before pursuing his claim. While no recent cases have found an agreement to be champertous, the doctrine is presumed to be alive and well. In dismissing a case due to a champertous agreement, the court stated in Hall v. State of Delaware that “[i]t is the duty of the court to dismiss a case in which the evidence discloses that the assignment of the cause of action sued upon was tainted with champerty.”
In New York, champerty is prohibited by Judiciary Law § 489 and punishable by fines or even a misdemeanor conviction. However, the statute contains a safe harbor provision for assignments with a purchase price of at least $500,000. Champerty exists if the primary purpose of the purchase is to enable one to bring a suit, but not if the lawsuit is merely incidental. For example, New York’s Supreme Court found no champerty when the plaintiff received TPLF for a claim for the return of stolen art; the financier did not become a party to the suit and only provided financing for the plaintiff to fund his claim. Gowen v. Helly Nahmad Gallery. Certain assignments of mortgage and securities have also been found non-champertous by the courts. In 71 Clinton St. Apts. v. 71 Clinton Inc., the court found that the “plaintiff acquired the assignment for purposes of foreclosure; the law allows for such an acquisition.” Likewise, in Universal Investment Advisory v. Bakrie Telecom the court found an assignment is not champertous where an assignee obtains legal title of securities and the assignor retains beneficial title to their proceeds, though the assignee’s recovery is limited to costs and fees associated with bringing the lawsuit.
However, the New York Court of Appeals found an agreement champertous where a plaintiff acquired securities solely to bring a lawsuit, agreeing to pay $1 million for them if the lawsuit succeeded. Justinian Capital SPC v. WestLB AG. Further, because the plaintiff had not yet paid anything for the assignment, the safe harbor provision did not apply, and the court ruled against the plaintiff.
The Dividing Line Between Cognizable Funding and Champerty
In states where champerty is a consideration, funding agreements may be scrutinized for the extent of control ceded to the funder. There is a distinction between a financier providing acceptable non-recourse funding so a party can cover litigation costs and a third party who impermissibly uses funding to pull the strings and control the litigation.
In states where champerty applies, the assets encumbered by the funding agreement may also be scrutinized. In those states, third-party financiers should avoid initiating, encouraging or controlling litigation in which they have no direct interest.
There is a finer distinction to be made in the case of assignments of debt or securities. It is common practice to acquire a debt strictly for the purposes of receiving the benefit of enforcing it. If a lawsuit is incidental to that enforcement, the assignee of the debt likely has not run afoul of the champerty doctrine. Assignments of debt acquired strictly for the purposes of the lawsuit can be found champertous, particularly where the lawsuit could potentially exceed the return of the debt, where the assignee has not yet paid for the assignment, or where a clear strategy of harassment or burdening a defended with cost can be shown. Such was the case in Justinian, where the plaintiff had yet to make a payment for assigned securities before filing suit over them. If, however, a party is the legitimate assignee of debt or securities, then it has a legal interest in any suit arising out of them — so long as the assignee does not take over control of the litigation, such an assignment is likely non-champertous.
Considerations for Funders
Funders should remember that champerty provides limits on litigation financing in some states. In those states, the inquiry is on the interest the funder has in underlying assets and whether the funding agreement hands control of the action to a non-party. In fact, champerty concerns may lead some funders to prefer matters to be brought in states that do not recognize the doctrine.
Online Publishers Beware: An iPhone Snap May Go Viral, but Unauthorized Commercial Use is Still Not Fair Use
When nuptials are celebrated at Trump National Golf Club in New Jersey, the newlyweds may be in for a surprise when the owner drops by to provide a photo op for the wedding party. Such an act in 2017 yielded a snapshot of President Trump with bride Kristen Piatowski, a photo that went viral. The photo was thereafter widely used commercially without authorization and precipitated a copyright lawsuit, Otto v. Hearst Communications.
When President Trump appeared at this wedding — the kind of happening that is marketed by the Trump enterprise as a possible fringe benefit of the venue — Jonathan Otto was among the guests who captured the event with his data phone. Otto took the snap for personal, not commercial, reasons.
Otto shared his photograph with only one other wedding guest and did not post it to any social media site. He was therefore surprised to find, the day after the wedding, that his photo had been published in TMZ, CNN, The Washington Post, the Daily Mail and Hearst’s Esquire website, among other sites.
The guest to whom Otto had sent the photo had in turn forwarded the photograph to others, and a relative of the bride posted it to her Instagram account, from whence it was apparently lifted by various news sites. Hearst used the photo in connection with an article, “President Trump is the Ultimate Wedding Crasher.”
None of the uses were authorized, and Otto promptly retained a lawyer to register the copyrights in the photo and assert his interests. In the suit he brought against Hearst, the only significant issue as to liability was fair use. On cross motions for summary judgment, Judge Gregory Woods of the Southern District of New York ruled for the plaintiff. “Stealing a copyrighted photograph to illustrate a news article,” Judge Woods wrote, “without adding new understanding or meaning to the work, does not transform its purpose — regardless of whether that photograph was created for commercial or personal use.”
The court engaged in the standard four-factor analysis of fair use.
The first factor considers the nature and character of the use, and commonly focuses on whether the use is transformative. Using a photo for the precise purpose for which it was created is not transformative, the court observed. The fact that Otto created the work for personal use and that Hearst used it for news did not represent a different purpose. The purpose was the same because the photo was used to illustrate and describe the same event as the story. Unlike an early case in which use of a photograph in a news story was held fair use, Nunez v. Caribbean International News Corporation, the Hearst article was not about the photo. In Nunez, a risqué photograph itself was the subject of a controversy concerning a Miss Puerto Rico Universe.
That issue may not, however, be as clear-cut as the court concluded. The Trump-bride photograph may not have been the subject of a controversy. But, it could be argued, the article was not solely about Trump’s crashing of weddings; it was also about his exploitation of presidential photo ops as a marketing ploy for his clubs. On that theory, the photo itself would have been a subject of the article and not merely serve to illustrate Trumpian party crashing.
The second fair use factor considers the nature of the copyrighted work, particularly whether a work is expressive or creative, as opposed to factual or informational. Cases commonly seem to treat photographs as inherently creative works. But here the court — noting that Otto did not pose the subjects nor control the lighting or background, but simply snapped it — deemed the photo to be on the factual end of the spectrum, and held this factor favored Hearst.
Hearst’s attempted defense on the third factor, the amount of substantiality of the portion of the copyrighted work that was used, was plainly an uphill battle since Hearst used the entirety of the photograph. Hearst correctly pointed out that using the entirety of a work can be reasonable when required by a transformative purpose. Because the court held that the defendant’s purpose was not transformative, however, that factor went against defendant.
The final factor — the effect of the use on the potential market for or value of the copyrighted work — also favored the plaintiff. As soon as Otto realized that the photograph had market value, he sought to realize that value. The fact that he did not originally take the photograph with such intent was irrelevant, the court ruled, writing: “The creator of a work should not be precluded from future profits should they lack the marketing prowess to capitalize on their work at the time of creation. . . . Publishing the Photograph without permission essentially destroys the primary market for its use.”
Three of four factors tilted against fair use in the court’s estimation.
“Allowing a news publisher to poach an image from an individual’s social media account for an article that does little more than describe the setting of the image does not promote ‘the Progress of science and useful Arts,’” which is the constitutional purpose of copyright, the court wrote. Hearst’s use was therefore not fair.
Otto’s lesson: It seems surprising so many media outlets would need to be reminded, but the fact that a photo is posted on social media, has gone viral and is an amateurish effort still does not mean that using the photo without permission is risk-free. Copiers beware!
Scout’s Honor: Boy Scouts Rebrand Prompts Trademark Suit by Girl Scouts
A trademark infringement dispute involving unlikely opponents made national headlines last fall when the Girl Scouts of the United States of America (GSUSA) filed suit against the Boy Scouts of America (BSA), following BSA’s decision to start admitting girls and rebrand its leadership program for older kids as “Scouts BSA.” In Girl Scouts of the United States of America v. Boy Scouts of America, filed on November 6, 2018 in the Southern District of New York, GSUSA alleges that BSA’s new branding infringes GSUSA’s trademark rights.
Although the two organizations have never been associated with one another, they have coexisted for more than 100 years. Then, in October 2017, BSA announced that, starting in 2018, it would begin welcoming girls into its ranks for the first time. While some welcomed BSA’s decision as a progressive move, it was also met with controversy, and GSUSA immediately began speaking out against it. In May 2018, BSA announced that it was changing its branding as well, revealing “Scouts BSA” as the new name of the organization’s program for children ages 11-17 and launching a promotional campaign featuring the tagline “Scout Me In.”
In its complaint, GSUSA alleges that BSA’s use of “Scouts BSA,” “scout” “scouts” and “scouting” in connection with leadership development services for girls creates a likelihood of confusion with GSUSA’s trademarks, which include several registered “GIRL SCOUTS” word and design marks, and its common law rights in GIRL SCOUTS and SCOUTS. GSUSA cites numerous promotional materials released by BSA targeted at girls that refer to “Scouts” or “Scouting” and other advertising materials that use phrases such as “New BSA Girl Scouting Program,” “Girl Scouts BSA Troop,” “Boys/Girls Scouts of America” and “Boy and Girl Scouts.” GSUSA also alleges that there have been numerous instances of actual confusion among the public in different states, where parents have mistakenly enrolled their daughters in BSA’s program believing they were signing up for Girl Scouts. Its complaint points to reports that some BSA representatives have even told parents, teachers and people in control of recruitment events that the Boy Scouts and Girl Scouts have merged.
GSUSA is asking the court to enjoin BSA from using the terms SCOUT, SCOUTS, SCOUTING, or SCOUTS BSA on their own without other distinguishing terms appearing before them. GSUSA is also demanding that BSA withdraw, amend or cancel several of its relevant trademark applications and registrations in the United States. It is also asking the court to require BSA to train its local leaders and troops about preventing confusion between the two organizations.
Ultimately, both GSUSA and BSA are looking to keep their membership numbers afloat, find ways to successfully evolve with the times, and protect their respective public images.
This case is an excellent illustration of how trademarks are among a business’s most valuable assets, and how trademark law can be an effective tool in protecting the core interests of a business. It also demonstrates the challenges that businesses with arguably descriptive marks may encounter when trying to stop others from using certain words in their branding.
GSUSA may have an uphill battle here given the arguably descriptive quality of the terms GIRL SCOUTS and SCOUTS (although the terms may have acquired distinctiveness given that GSUSA has used them for so many years). It will be interesting to see how this case develops, and how these two long-running organizations can continue to coexist.
Beating a DTSA Claim Does Not Necessarily Mean Recovery of Attorneys’ Fees
Absent an agreement to the contrary, the dismissal of a statutory cause of action providing for attorneys’ fees to the prevailing party would seem to entitle a defendant to its reasonable fees and costs. In a matter of first impression at the U.S. Court of Appeals level, the Fifth Circuit recently affirmed the denial of a request for attorneys’ fees in a case where the plaintiff dismissed its trade secrets claim under the federal Defend Trade Secrets Act without prejudice.
In Dunster Live v. LoneStar Logos Management Company, Dunster had a contract with the Texas state government to construct and install signs advertising food, lodging and gas stations on Texas highways. Shortly before the contract between Dunster and the state was to expire, members of Dunster left to form their own LLC, LoneStar Logos, and were awarded a new state contract. Dunster sued under the DTSA, claiming that LoneStar’s new members stole its proprietary software and a database before forming the new LLC.
When Dunster moved for a preliminary injunction it was swiftly denied, prompting the company to request a dismissal without prejudice from the district court. Despite LoneStar’s vociferous opposition on the ground that Dunster was engaging in “bad faith” by seeking to avoid an adverse merits ruling and liability for substantial attorneys’ fees, the court nonetheless dismissed the case without prejudice. Upon dismissal, LoneStar and its members sought to recover attorneys’ fees of approximately $600,000. The court denied the request, ruling that a dismissal without prejudice does not render a defendant a “prevailing party.”
Reviewing the district court’s ruling, the Fifth Circuit held that, as with other federal fee statutes, a dismissal without prejudice (no matter how frivolous the claim) does not render the defendant a prevailing party.
In response to the defendants’ argument that such a rule enables plaintiffs to bring frivolous claims and avoid poor results without penalty, the circuit court noted that the defendants did not appeal the actual dismissal without prejudice and did not file a motion for sanctions under Fed. R. Civ. P. 11.
The Fifth Circuit also refused to look to state laws that allowed for attorneys’ fees in similar situations. For example, Oregon law provides that, when a trade secrets plaintiff files a notice of voluntary dismissal, either with or without prejudice, the defendant is generally the prevailing party for purposes of award of attorneys’ fees. Keith Manufacturing Company. v. Butterfield; see also Krafft v. Downey, (remanding for attorneys’ fees even though the plaintiff had voluntarily withdrawn its claims by stipulation). In so doing, the Dunster Live court held that the definition of a prevailing party under a federal statute is a matter of federal law and that “when Congress repeats a term of art like ‘prevailing party’ in a new statute like the DTSA, it ‘knows and adopts the cluster of ideas that were attached to each borrowed word in the body of learning from which it was taken and the meaning its use will convey to the judicial mind unless otherwise instructed.’” The Fifth Circuit thus points out a new distinction between federal and state trade secrets laws.
Although the ramifications of this ruling are yet to be seen, it might embolden trade secret plaintiffs to file their claims only under the DTSA and to dismiss before final judgment to avoid paying attorneys’ fees. The lesson for trade secret defendants is to ensure that, in the event such a situation arises, they not only oppose a motion for a voluntary dismissal without prejudice, but also serve and file a motion for sanctions under Fed. R. Civ. P. 11 — and, if necessary, appeal the dismissal itself if it is granted without prejudice.
Can a Server Be a Regular and Established Place of Business? Examining the SEVEN Networks Decision
Under the patent venue statute, 28 U.S.C. § 1400(b), a patent suit may be brought in a “judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” After the U.S. Supreme Court clarified in TC Heartland v. Kraft Foods Group Brands that “‘reside[nce]’ in § 1400(b) refers only to the State of incorporation” — dramatically limiting venue under the first prong of § 1400(b) — focus has turned to the second prong of the statute, i.e., what it means to have a “regular and established place of business” in a judicial district.
The Federal Circuit Court of Appeals provided some guidance in In re Cray, Inc., when it interpreted the second prong of § 1400(b) as imposing “three general requirements”: “(1) there must be a physical place in the district; (2) it must be a regular and established place of business; and (3) it must be the place of the defendant.” The court clarified that a “virtual place” or “electronic communications” could not be a “physical place” under the statute.
Though straightforward on its face, courts continue to take varying approaches in applying the Cray standard, as demonstrated most recently in SEVEN Networks v. Google. There, the court considered a venue challenge by Google that hinged on a simple question: whether Google servers in leased server racks in a district could be a “regular and established place of business” under § 1400(b). The case specifically concerned “Google Global Cache” (GGC) servers, which, as described by the court, were responsible for serving content requested via YouTube and other Google services. These cache servers improved the user experience and saved bandwidth by directly handling requests for content by local users without making requests to Google’s core data centers. The GGC servers were housed in rented server racks maintained by Internet Service Providers within the district.
The SEVEN Networks court found that the GGC servers were both a “physical place” and a “regular and established place of business” under § 1400(b). Noting that Google was “in the business of delivering information,” the court characterized the GGC servers as a “local data warehouse” akin to a local warehouse operated by a shoe manufacturer that sells products nationwide. It found that the servers were “specifically localized: a physical server occupying a physical space” and noted that the agreements with ISPs gave Google “total control over the GGC server’s physical presence within the ISP.” According to the court, this level of control was characteristic of a physical rather than virtual space. Relying again on the analogy between the servers and a brick and mortar warehouse, the court found that the GGC servers were a place of business involved in Google’s business of transmitting information to users. It thus found venue proper over Google in the Eastern District of Texas.
Google petitioned the Federal Circuit for a writ of mandamus, which the Federal Circuit denied per curiam. In re Google LLC, No. 2018-152, 2018 WL 5536478 (Fed. Cir. Oct. 29, 2018), petition for rehearing en banc filed Nov. 13, 2018. The panel majority declined to issue a writ because: (1) the district court opinion was based on facts specific to Google and did not present a “broad and fundamental legal question” for which mandamus relief would be appropriate; and (2) there was no widespread disagreement on the issue among district courts, because the issue had not had time to “percolate” in the courts below. In a dissenting opinion, Judge Reyna criticized the majority, stating that the district court’s opinion likely “disregard[ed] the admonishments” of the Federal Circuit in Cray through an application of § 1400(b) “even more expansive” than that vacated in Cray.
Given Judge Reyna’s strenuous opposition, the fact that the Federal Circuit did not specifically endorse the district court’s conclusions, and the fact that the majority left open the possibility of further review as the issue continues to “percolate” in district courts, it seems likely that the Federal Circuit will take up the issue again at a later time.