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Intellectual Property Bulletin - Fall 2016


 

Mean Girls v. The Right of Publicity: Lessons Learned From the Lohan and Gravano Lawsuits

By Nicholas A. Plassaras and Jennifer Stanley

On September 1, 2016, a New York appellate court ended two closely watched right of publicity lawsuits brought by Lindsay Lohan and Karen Gravano against Take Two Interactive Software Inc. (publisher of Grand Theft Auto) and developer Rockstar Games. Lohan — star of Mean Girls and the 1998 remake of The Parent Trap — and Gravano — a star on VH1’s reality television show Mob Wives — alleged that the Grand Theft Auto V: San Andreas video game featured the celebrities’ likenesses without their permission in violation of their right of publicity.

These lawsuits represent the latest in a series of recent, highly publicized cases highlighting the tension between a person’s right of publicity — the right to control the use of one’s name, image, or likeness — and the First Amendment’s speech protections. The Lohan and Gravano lawsuits offer a cautionary tale on the importance of jurisdiction and highlight the complex nature of right of publicity jurisprudence here in the U.S.

The Lohan and Gravano Lawsuits

In 2014 through separate lawsuits, Lohan and Gravano sued Take-Two Interactive and Rockstar over their blockbuster hit, Grand Theft Auto V (GTA V). The video game takes place in the fictional city of “Los Santos” — a city based on modern-day Los Angeles — in the fictional state of “San Andreas” (i.e., California). Players control various characters throughout the game as they explore Los Santos, interact with its inhabitants, and embark on approximately 80 main story missions and dozens of optional side quests. Like its predecessors, GTA V is famous for its satirical portrayal of the real world. From (in)famous landmarks to dueling radio political pundits, sprawling fast food chains to relentless paparazzi, the Grand Theft Auto series has always gone to great lengths to feature (and poke fun at) several aspects of modern society. GTA V is no exception.

Against this backdrop, Lindsay Lohan sued the makers of GTA V, claiming that one of GTA V’s characters, “Lacey Jonas,” misappropriated Lohan’s likeness in violation of New York’s right of publicity statute. Lohan alleged that the GTA V character copied Lohan’s “bikini, shoulder-length blonde hair, jewelry, cell phone, and ‘signature peace sign’ pose” without her permission. Lohan also claimed that GTA V’s references to Lohan’s role in the movie Mean Girls, the West Hollywood hotel where she once lived, and how she deals with paparazzi were all misappropriated aspects of her likeness.

Karen Gravano initiated a similar lawsuit earlier in 2014. Relying on the same statue as Lohan, Gravano alleged that GTA V’s “Antonia Bottino” character copied both Gravano’s likeness and life story without her permission. Gravano’s father, Sammy “The Bull” Gravano, was an underboss in the Gambino crime family who testified against his former mob boss in exchange for a reduced jail sentence. Gravano relocated to the Southwest and eventually starred on VH1’s Mob Wives television show. GTA V’s Antonia Bottino is also the daughter of a mob-boss-turned-informant, who meets the player in San Andreas as she is being chased by the Gambetti crime syndicate in retaliation for her father’s plea bargain. The player later learns that Bottino’s father doesn’t want her to appear on Wise Bitches, an in-game parody of Mob Wives.

Last month, a New York appeals court disposed of both cases simultaneously. In a terse opinion, the court held that both lawsuits failed because GTA V did not feature Lohan’s or Gravano’s name, portrait, picture, or voice as required by New York Civil Rights Law Section 51. The court emphasized that, even if the GTA V characters were close approximations of Lohan and Gravano, GTA V never featured the celebrities’ pictures, names, or acting talent in GTA V or in advertising materials for the game. In rejecting the “close enough” approach asserted by Lohan and Gravano, the court also noted that video games did not fall under the statutory definitions of “trade” or “advertising” and, thus, could not trigger liability under Section 51. Rather, the court concluded, GTA V was closer to a work of fiction and satire and therefore entitled to First Amendment protection under the U.S. Supreme Court’s decision in Brown v. Entertainment Merchants Association (striking down California’s 2005 ban on the sale of violent video games to children without parental supervision).

It is unclear whether Lohan or Gravano will appeal to New York’s highest court.

The Right Of Publicity: A Diverse Landscape

The Lohan and Gravano lawsuits would have come out very differently had they been heard in another jurisdiction. The right of publicity generally stems from the right to privacy, which is predominantly a creature of state law. Although courts agree that the right of publicity is constrained to some extent by the First Amendment, the extent of that constraint currently depends almost entirely on where the right of publicity claim is asserted.

This has important and often frustrating practical consequences for content creators. In an era where content is disseminated over the internet in all 50 states, in-house legal teams are faced with navigating a complicated patchwork of right of publicity laws. Without clear guidance, content creators are sometimes left puzzled about what they are allowed to say or create. Lohan/Gravano underscores how important it is to consider jurisdiction when asserting or defending against a right of publicity lawsuit.

Generally, the law governing a right of publicity suit will depend on where the plaintiff is “domiciled,” which is not necessarily where the plaintiff lives at the time the lawsuit is brought. If the plaintiff is domiciled abroad, it’s important to check whether the country of domicile even recognizes a right of publicity. Many foreign countries, such as the U.K., do not. If the plaintiff is domiciled in the U.S., the laws of the domiciliary state will typically control. But some states, like Washington and Indiana, allow right of publicity suits to be brought regardless of where the plaintiff is domiciled.

State right of publicity laws vary immensely. Some states, like New York, have narrow right of publicity laws that only protect the use of a person’s name, portrait, picture or voice, and only in the context of trade or advertising. California, by contrast, protects the use of a person’s general likeness in addition to their name, portrait, picture or voice in any manner including, but not limited to, advertising. See Cal. Civ. Code § 3344. Some states only provide a statutory right of publicity; others also provide a separate common law right. While many states only recognize a right of publicity during an individual’s lifetime, several extend the right beyond death. But even the states that recognize a posthumous right of publicity impose different restrictions and time limitations on those causes of action — e.g., California: 70 years after death; Nevada: 50 years after death; Indiana: 100 years after death.

Courts are similarly divided, especially when it comes to striking a balance between the First Amendment and protecting the right of publicity. The U.S. Court of Appeals for the Second Circuit, for example, errs on the side of protecting speech. In Rogers v. Grimaldi, the Second Circuit considered whether the interest in protecting a celebrity’s image outweighed a filmmaker’s freedom of expression. It held that the use of a mark or a person’s likeness in a fictional work was protected by the First Amendment so long as (1) It had some artistic relevance to the work; and (2) It was not a disguised advertisement. The Rogers test has since been adopted by several courts and continues to represent one of the most speech-protective tests applied in the right of publicity context.

Other courts take a very different approach. The U.S. Court of Appeals for the Ninth Circuit, for example, applies a transformativeness test. In In re NCAA Student-Athlete Name & Likeness Licensing Litigation, the Ninth Circuit considered whether student athletes could prevent Electronic Arts (EA) from using their height, weight, skin color, play position and jersey numbers, but not their names in EA’s NCAA Football video game. The court held that the First Amendment did not protect EA’s use of the athletes’ likenesses because the use was not “transformative” — i.e., it did not add enough creative elements to the athletes’ likenesses to change the use into more than a mere reproduction. California courts apply a slightly modified version of this test. In Noriega v. Activision/Blizzard, Inc., No. BC551747 (Cal. Super. Ct. Oct. 27, 2014), for example, a superior court held that the First Amendment protected Activision/Blizzard’s use of Manuel Noriega’s likeness in Call of Duty: Black Ops II because the game as a whole, not the use itself, was transformative.

But the Ninth Circuit’s approach is not internally consistent. In In re NCAA Student, the Ninth Circuit expressly declined to adopt the Second Circuit’s speech-protective Rogers test. But the very same day it decided In re NCAA Student, the Ninth Circuit applied Rogers in Brown v. Electronic Arts, Inc., concluding that the First Amendment barred trademark infringement claims brought against EA over its Madden NFL game. Implicit in the court’s opinion was the principle that the right of publicity was somehow less constitutionally constrained than trademark rights. But earlier this year, the Ninth Circuit appears to have reversed course. In Sarver v. Chartier, it concluded that the First Amendment protected the makers of the Academy Award-winning film The Hurt Locker from claims that the underlying story and events, which were based on Sarver’s life story without his permission, violated Sarver’s right of publicity.

Meanwhile, the U.S. Court of Appeals for the Eighth Circuit ignores whether the use or work is transformative and instead focuses on a case-by-case balancing test. In C.B.C. Distribution & Marketing., Inc. v. Major League Baseball Advanced Media, L.P., the court held that use of names and statistics of baseball players for fantasy baseball products was entitled to First Amendment protection, and that protection trumped the players’ otherwise-valid right of publicity claims because that information was firmly rooted in the public domain. But in Dryer v. National Football League, the court instead relied on a combination of copyright preemption and First Amendment principles to conclude that video footage used by the NFL did not violate the right of publicity of football players. The U.S. Court of Appeals of the Tenth Circuit uses a similar ad hoc balancing test. See Cardtoons, L.C. v. Major League Baseball Players Assoc.

Some state courts apply their own tests. The Missouri Supreme Court, for example, applies a “predominant use” or “predominant purpose” test. In Doe v. TCI Cablevision, it concluded that a comic book villain based on the name of a famous hockey player was not protected by the First Amendment because the name was used predominantly for monetary, not expressive, purposes. Interestingly, the use here — athlete to super villain — may have been sufficiently transformative under California’s tests.

While these examples are by no means exhaustive, they illustrate just how differently courts approach the tension between free speech and the right of publicity. Earlier this year, the U.S. Supreme Court had an opportunity to weigh in but declined to do so in Electronic Arts Inc. v. Davis. Like In re NCAA Student, Davis involved EA’s unlicensed use of certain football players’ likenesses in one of its video games. By denying EA’s certiorari petition, the Supreme Court effectively upheld the Ninth Circuit’s holding that EA’s use was significant enough to infringe the players’ right of publicity. See Davis v. Elec. Arts, Inc. While the Court offered no explanation for its decision, some suspect it refused to review Davis because In re NCAA Student, the precedent upon which Davis was based, was never appealed. But given the lack of uniformity between the federal and state courts, the issue is ripe for the Supreme Court’s consideration.

Takeaways and Implications

In the absence of Supreme Court guidance, understanding how to navigate the legal landscape is more important than ever. As illustrated by Lohan/Gravano, the success of a right of publicity claim depends largely on where it is asserted. Content creators need not shy away from their ideas in the face of this uncertainty. Rather, they should familiarize themselves with the right of publicity laws in high-risk jurisdictions so that creative teams and decision makers can make informed choices on how best to proceed.

While it’s impossible to divine how the law will evolve in this area, we have some potential clues. The Ninth Circuit’s decision in Sarver may suggest a move away from the oft-criticized transformativeness test in favor of a more speech-protective approach like the Rogers test. Given the right case without the procedural complications of Davis, the Supreme Court may yet weigh in on the appropriate balance between the right of publicity and freedom of speech. Alternatively, Congress may decide to create a federal right of publicity cause of action much like it did with trade secrets earlier this year with the Defend Trade Secrets Act of 2016. But with courts so divided and one of our nation’s most fundamental rights at stake, change is almost inevitable.


 

Transfer Payments for Offshored Patents Can Invite IRS Scrutiny and Hinder Patent Damages Claims

By Vikram Iyengar, Ph.D. and Charlene M. Morrow

Introduction

Tax inversions and the offshoring of intellectual property by U.S. companies grew from an arcane tax law subject to a popular election year issue this autumn. This was partly due to a new IRS program emphasizing the enforcement of existing transfer pricing rules, which are particularly relevant for companies that offshore patents and other IP to foreign corporate entities. Transfer pricing is a significant area of scrutiny for the IRS because transfer payments impact the foreign income of American companies and the amount of tax the U.S. can collect. The IRS emphasis on transfer pricing enforcement is likely to remain after Election Day 2016. Therefore, well-thought-out strategies by tax and IP attorneys for determining transfer payments between U.S. companies and foreign subsidiaries can protect the overall value of the IP assets to the corporate family as well as enable an entity in the corporate family to recover for the damages caused by infringement of offshored patents.

Background

Since the 1990s, American companies have been merging with entities in lower-tax countries and offshoring their IP in exchange for transfer payments to reduce taxes. U.S. corporations have tripled the profits they earn in foreign tax havens by using transfer payments to maximize expenses in the U.S. and maximize income overseas. In response, however, the IRS recently announced its new emphasis on transfer pricing enforcement to address tax avoidance.

In addition, recent Federal Circuit case law has found transfer pricing agreements do not sufficiently reflect the value of the IP transferred. This case law has resulted in dramatically reduced damages for infringement of offshored patents. In Warsaw Orthopedic, Inc. v. Nuvasive, Inc. (Warsaw I), the court held that an offshore patent holder may not obtain the lost profits of a U.S. subsidiary as damages for infringement. This decision was reaffirmed after remand on other grounds in the 2016 case Warsaw Orthopedic, Inc. v. Nuvasive, Inc. (Warsaw II). In Warsaw I, the court also held that while the patentee was entitled to a reasonable royalty for the value of its patents, transfer payments made pursuant to a transfer pricing agreement from a U.S. subsidiary could not be used as a starting place for analyzing the reasonable royalty for the patented technology because the transfer payments did not result from arm’s-length negotiations.

Transfer Pricing and Patent Damages

Transfer pricing is the price charged by a company to an offshore subsidiary for intangible property such as patents. See 26 U.S.C. § 482 (allocating income attributed to the transfer of intangible assets between companies). Transfer pricing is a significant area of scrutiny for the IRS because transfer payments impact the foreign income of American companies and the amount of tax the U.S. can collect. To minimize inter-company price manipulation, transfer pricing rules apply an arm’s-length standard, requiring IP transactions between subsidiaries be consistent with comparable transactions between unrelated parties. See Treas. Reg. § 1.482-1(a) – (b) (describing the purpose and scope of the arm’s-length standard). Therefore, tax inversions invite increased IRS scrutiny of IP transactions because of the complexity of determining arm’s-length pricing between related offshore entities.

In a tax inversion, an American company merges with a smaller company in a lower-tax country. Tax inversions drew public attention in 2016, when Pfizer proposed a merger with Allergan to invert to Ireland. Biotechnology and pharmaceutical companies have found that transferring their patents to subsidiaries in lower-tax jurisdictions in exchange for transfer payments can result in profits being taxed at lower rates. However, in addition to increased IRS scrutiny of such patent transfers, the Federal Circuit’s 2015 Warsaw I decision could hinder claims for patent damages by a company that has effected a tax inversion, such that its IP is held offshore.

Courts recognize two measures of patent damages: lost profits and reasonable royalties. Warsaw I quoting 35 U.S.C. § 284 (providing for “damages adequate to compensate for infringement, but in no event less than a reasonable royalty”). A patentee may recover lost profits when it can prove that it would have earned those profits in the absence of infringement. See Rite-Hite Corp. v. Kelley Co. (en banc). A reasonable royalty is the alternative measure of damages where a lost profits award is not appropriate or does not fully account for the harm to the patent holder of the infringement. A reasonable royalty, on the other hand, compensates the patentee for the value of what was appropriated (the patented technology). See Warsaw I. This remedy “derives from a hypothetical [arm’s-length] negotiation between the patentee and the infringer….” See ResQNet.com, Inc. v. Lansa, Inc.

In an early setback to claims for damages related to infringement of offshored IP, with their 2004 decision in Poly-America, L.P. v. GSE Lining Technology, Inc., the Federal Circuit held that a patent holder may not claim the lost profits of a related U.S. company as its own damages. Poly-America sued GSE for infringement of two patents licensed to Poly-America’s sister company, Poly-Flex, which was located in the U.S. GSE conceded infringement, and a jury awarded damages. On appeal, however, the Federal Circuit reversed the district court’s damages finding, holding that Poly-America could not claim the lost profits of Poly-Flex because Poly-America did not sell a product embodying the claimed invention, even though it collaborated in such a product’s manufacture and sale by Poly-Flex. Although Poly-America was located in the U.S., the Federal Circuit decision would also apply to a foreign patent holder suing for lost profits of a related U.S. company.

Four years later, in Mars, Inc. v. Coin Acceptors, Inc., amended by Mars, Inc. v. Coin Acceptors, Inc. (2009), a patent infringement action related to vending machine technology, the Federal Circuit held that because the plaintiff transferred its entire interest in the asserted patents to its subsidiary in the U.K., the plaintiff was not entitled to recover lost profits and, in fact, lacked standing to sue. On remand, the district court found that the plaintiff could cure standing by transferring ownership of the patents back from its UK subsidiary but the plaintiff was only awarded reasonable royalties of $25 million. Consent Final Judgment After Return of Mandate, Mars, Inc. v. Coin Acceptors, Inc., No. 2:90-CV-00049, No. 428 (D.N.J. Apr. 17, 2009).

The Federal Circuit’s Damages Analysis in Warsaw

In 2008, the medical device company Warsaw Orthopedic along with its related company Medtronic Sofamor Danek USA, Inc. (MSD), both located in the U.S., sued Nuvasive for infringement of two patents assigned to Warsaw. Warsaw did not practice the patented technology. Instead, it licensed the technology to its related companies, Medtronic Puerto Rico Operations Co. (M Proc) of Puerto Rico and Medtronic Sofamor Danek Deggendorf, GmBH (Deggendorf) of Germany, which respectively manufactured and sold the patented products to MSD.Deggendorf and M Proc each paid separate royalties to Warsaw on their product sales. Warsaw manufactured non-patented surgical rods and screws (“fixations”) for MSD, which packaged them with the patented products into medical kits. At trial, Warsaw attempted to obtain lost profits damages on three sources of income: (1) revenue from the sale of fixations to MSD; (2) royalty payments from M Proc and Deggendorf; and (3) “transfer payments” from MSD to Warsaw to account for the fair market value of property exchanges and implied licenses for various patented technologies between the companies. The district court found that Nuvasive infringed Warsaw’s patents and awarded lost profits and a reasonable royalty.

On appeal, the Federal Circuit rejected each of Warsaw’s claims for lost profits. The court first noted that a patentee may recover lost profits for convoyed sales (when a non-patented component is sold with a patented product) only if the non-patented component is functionally related to the patented product: “Being sold together merely for ‘convenience or business advantage’ is not enough.” The court found that Warsaw failed to prove the functional relationship necessary for lost profits on convoyed sales of its fixations because including fixations with the patented product was merely for convenience. Therefore, the court rejected the claim of lost profits from sales of the non-patented fixations.

Second, the court noted that under Poly-America, a patentee may not claim the lost profits of a related company as its own damages. “To be entitled to lost profits… the lost profits must come from the lost sales of a product or service the patentee itself was selling.” Although Warsaw contended that it was making the sales, and that Deggendorf and M Proc were merely its agents, the evidence did not support this characterization. Therefore, the impact of infringement on Deggendorf’s and M Proc’s sales was not recoverable as lost profits. The court, however, did not indicate whether Warsaw could have collected lost profits if it had shown that Deggendorf and M Proc were acting as its agents.

Third, the court noted that Warsaw received transfer payments from MSD to reflect the fair market value of property exchanges, management fees and implied licenses regarding other patents. These payments from MSD amounted to 95% of MSD’s profits from the sale of the patented products. Regardless, the court found that the decline in the transfer payments was not recoverable as lost profits because Warsaw did not distinguish what percentage of the transfer payments was attributable to the patented technology, as opposed to unrelated transactions. Neither did the transfer pricing agreements distinguish transfer payments on a technology or product basis.

Although the court rejected Warsaw’s claims for lost profits, it recognized that Warsaw was at least entitled to a reasonable royalty sufficient to compensate it for the value of the infringed patents under 35 U.S.C. § 284: “the court shall award the claimant damages adequate to compensate for infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” The court noted that evidence of royalty agreements entered into at arm’s-length can be evidence of the value of a patent. But the Court held that royalties and transfer payments paid by related companies are not probative as to a patent’s value because such payments do not result from arm’s-length negotiations. In Warsaw I, citing Allen Archery, Inc. v. Browning Manufacturing Co., the court rejected agreements between related parties as establishing a royalty rate because the transactions were not arm’s-length. Therefore, the transfer payments from MSD and royalties from Deggendorf and M Proc could not be used as a starting place for calculating the percentage of profits attributable to practice of the patented invention.

Takeaways for Patent Owners and Exclusive Licensees

Tax and IP attorneys advising clients on the offshoring of IP in exchange for transfer payments should consider the following:

  • Where the IP offshored is central to the value of a product line and is likely to be enforced against competitors, offshoring it can negatively impact the overall value of the asset to the corporate family. Unless the offshore entity is actually involved in product development, the transfer of the asset is likely to prevent any entity in the corporate family from being able to fully recover for the damages caused by patent infringement.
  • Given that offshoring IP is usually part of a larger corporate transaction, where transfer pricing is set for a business or part of a business, recognize that the transfer pricing agreement that does not break out the value of specific IP assets is likely not going to be considered by a court in setting damages using a reasonable royalty framework. An agreement that does break out the value of specific IP assets could come into evidence if it is in line with industry valuations. If it is not in line with industry valuations, it may be excluded as not reflecting an arm’s-length negotiation.
  • The litigation alternatives to admission of the transfer pricing agreement are either to set separate payments in the transfer pricing agreement for the patented aspects of a product versus non-patented features, or to resign oneself to the admission of arguably non-comparable licenses from other sources. In the absence of evidence of valuation for the specific patent assets, courts will consider evidence of comparable licenses.

 

Quick Updates

Is Demanding License Fees for a Free Image Against the Law?

By Kathleen Lu and Jennifer Stanley

Carol Highsmith is a nationally known photographer who famously donated photographs to the Library of Congress for free use by the public. When her nonprofit received a letter from two media licensing companies she had never heard of, she was shocked to see that it demanded payment to “License Compliance Services/Picscout Inc.” and alleged that her foundation was infringing the copyright in one of those photographs. Upon investigation, she discovered that Getty Images, the stock photo company, had more than 18,000 of her photographs on its website, purporting to license them for a fee. Another company, Alamy, had done the same with over 800 of her photographs. Moreover, License Compliance Services and Picscout appeared to be wholly owned subsidiaries of Getty Images that made money by alleging infringement of and demanding payment for images, including Ms. Highsmith’s. So Highsmith sued.

She and her foundation allege that Getty, Alamy, License Compliance Services and Picscout all: 1) violated 17 U.S.C. § 1202, the Digital Millennium Copyright Act’s provision forbidding intentionally removing, altering or falsifying copyright management information, by not correctly attributing the images to her and adding their own credits and watermarks; 2) engaged in false advertising and unfair competition under the Lanham Act, by suggesting they were Ms. Highsmith’s agents and acting with her consent or otherwise had a business relationship with her; and 3) violated New York General Business Law § 349, which forbids deceptive trade practices.

The defendants in the Highsmith case have moved to dismiss, arguing that Highsmith placed her works into the public domain and therefore has no rights to assert. Highsmith has countered that she merely intended to create a “Creative Commons” type license, with access through the Library of Congress. That motion is pending, but even if the defendants are successful, Getty’s practices are likely to come under further scrutiny. Shortly after Highsmith filed suit, Zuma Press, an independent press agency, also sued Getty, alleging that Getty was licensing more than 47,000 images that Zuma had exclusive rights to license.

As the Highsmith suit shows, claims of infringement should not be taken at face value. Some claimants may not have exclusive rights to the works they claim or might even be claiming rights in public domain materials. Investigation could also reveal that the claimed work is not registered with the Copyright Office or that a user directed the use, thus limiting the remedies available to the claimant. Anyone who receives a demand of payment for claimed “infringement” would be wise to investigate the claim carefully before paying up.

Federal Circuit Turning the Tide in Section 101 Analysis?

By Christopher P. King

After a long series of cases in which the courts struck down patents for lack of eligible subject matter in the wake of Alice Corp. v. CLS Bank International, it appears that the pendulum may be swinging back in the direction of subject matter eligibility. The United States Court of Appeals for the Federal Circuit has ruled more favorably for patentees in several recent cases, such as Enfish, LLC v. Microsoft Corporation (claims to database-related software were directed to improving the functioning of the computer and hence were not directed to an abstract idea) and Bascom Global Internet Services, Inc. v. AT&T Mobility LLC (“[A]n inventive concept can be found in the non-conventional and non-generic arrangement of known, conventional pieces”). Now an additional case — McRO v. Bandai Namco Games America Inc. — has similarly ruled in favor of eligibility, focusing on the centrality of preemption.

The issue of subject matter eligibility under 35 U.S.C. § 101 has in recent years rapidly evolved from an often academic question to a critical inquiry for patent applicants in many fields, such as software and the biological sciences. Subject matter eligibility is a threshold question — independent from other inquiries such as whether the invention claimed in the patent application is novel and non-obvious with respect to prior art — that addresses whether the subject matter in the claimed invention is of a type that should even be considered for patentability.

Concern about preemption had been a central, underlying rationale of the Court’s analysis in influential § 101 cases, such as Gottschalk v. Benson (denying patenting of “the basic tools of scientific and technological work”) and Alice Corp. v. CLS Bank (expressing concern for tying up future use of “building blocks of human ingenuity” and stating that “we have described the concern that drives this exclusionary principle as one of pre-emption”). However, the courts and the U.S. Patent and Trademark Office (USPTO) have often paid little heed to the principle of preemption. (See, e.g., the Patent Office’s Memorandum of May 4, 2016, stating that “[i]f applicant argues that the claim is specific and does not preempt all applications of the exception, an appropriate response would be to explain that preemption is not a standalone test for eligibility. Questions of preemption are inherent in and resolved by the two-part framework from Alice Corp. and Mayo.” As a result of such USPTO guidance, patent examiners often simply shrugged off applicant arguments that technologically specific claims posed no danger of preemption, replying that such arguments were not determinative and were inherently addressed by the two-step Mayo Collaborative Services v. Prometheus Laboratories analysis.)

In McRO (decided September 13, 2016), the Federal Circuit confirmed that preemption is a key factor when assessing the eligibility of an invention for patent protection under 35 U.S.C. § 101. The claims at issue in McRO dealt with 3-D facial animation in computer software. In reaching its decision that the claims were patent eligible, the Federal Circuit focused on the centrality of preemption, construing the claims as being limited to rules that evaluated sub-sequences of sequential phonemes, which “could not be satisfied by rules that only evaluate individual phonemes.” Accordingly, the court held that “[b]y incorporating the specific features of the rules as claim limitations, claim 1 is limited to a specific process for automatically animating characters using particular information and techniques and does not preempt approaches that use rules of a different structure or different techniques,” and accordingly concluded that claim 1 was not even directed to an abstract idea under step 1 of the two-part Mayo framework. The court also reiterated other maxims helpful to patent applicants and patentees — but often disputed by examiners — such as that the application of rules, or of mathematics, by a computer is not per se ineligible for patenting, and that “processes that automate tasks that humans are capable of performing are patent eligible if properly claimed.”

McRO should provide another arrow in the quiver of patent applicants or patentees seeking to establish subject matter eligibility — namely, by demonstrating a lack of preemption of a properly framed inventive concept.

Purging Deadwood at the Trademark Register: Three Possible Mechanisms

By Mark Jansen and Paul Famiglietti

The U.S. Patent and Trademark Office (USPTO) is assessing the possibility of introducing three new mechanisms to clean up the Trademark Register in an effort to purge it of “deadwood.” The practical effect of these potential changes is that trademark owners may soon face additional administrative burdens to maintain registered trademarks; registrations claiming overly broad goods and/or services and registrations that are no longer in use may be subjected to additional scrutiny and could be cancelled in whole or in part.

The first update will be to the standard declaration that an applicant typically signs under penalty of perjury when filing a trademark application. The form, traditionally presented as a block of text, has been revised as a separate series of clauses with check boxes next to each statement, requiring that the signatory check each box before submitting the form. The goal is to keep the form reader friendly, but the USPTO has also updated the language to address use (or intent to use) on every good or service claimed. Applicants will now need to verify that allegations and factual statements made in the application have evidentiary support.

The USPTO is in the process of drafting the second update, which will allow it to randomly audit up to 10% (or thousands) of trademark maintenance filings each year. Declarations are filed between the fifth and sixth year, and the ninth and tenth year, after registration to maintain the registration, and trademark owners must confirm the mark was in use in connection with all of the goods and/or services claimed. But, only one specimen (proving use) is required per class, even if many other goods or services are claimed in the registration. Traditionally, the USPTO can ask for additional proof in its examination, but the new rule would require the trademark owners selected as part of the audit to submit additional evidence that the mark is actually in use in connection with the goods and/or services identified in the registration. Marks determined to not actually be in use in connection with all or some of the goods and/or services identified in the registration would be subject to cancellation.

The third update to the rules remains unsettled, but the impending change will likely consist of expungement and non-use proceedings to facilitate the cancellation of registrations that have not been used or are not in use. Several options are under consideration, including: (1) giving the USPTO director authority to expunge partial or entire registrations if a mark was never used; (2) adding additional grounds for cancellation before the Trademark Trial and Appeal Board (TTAB), namely, the ability to challenge a registration, in whole or in part, three years after registration if a mark was never used; or (3) simplified processes for filing cancellation actions before the TTAB on the basis of abandonment or non-use.

If implemented, the above mechanisms are sure to improve the accuracy of the register, which in turn, may help limit brand owners’ costs in terms of clearance and expand brand owners’ options when it comes to choosing a mark. The expungement proceedings would also shift the burden of proof to registrants, potentially minimizing the cost and hassle of cancelling a mark.

On the other hand, brand owners should prepare for these changes by: (1) carefully reading declarations and making sure they understand the implications of filing intent to use applications; (2) retaining examples of use and keeping a document library in the event of an audit; and (3) recognizing that registrations can be forfeited through non-use, so brand owners are advised to routinely conduct internal audits to avoid the effects of a cancellation action in the U.S. as well as corresponding repercussions abroad (if a registrant’s international applications or registrations are based on U.S. rights).

Ninth Circuit Leaves Open Whether Trade Secret Liability May Be Predicated on an Implied Theory of Confidentiality

By Alexander Ip and Patrick E. Premo

In a recent decision, Direct Technologies, LLC v. Electronic Arts, Inc., the United States Court of Appeals for the Ninth Circuit called into question, but did not definitively resolve, whether trade secret liability could be predicated solely on an implied obligation of confidentiality under California law. The litigation arose in the context of a vendor dispute involving the design and manufacture of promotional USB flash drives. Defendant Electronic Arts (EA) was releasing one of its new video games, The Sims 3, and decided to order USB flash drives as a promotional trinket to be sold with the game. Plaintiff Direct Technologies (DT) was contracted to design and produce a prototype of the flash drive. Without DT’s knowledge, DT’s prototype was sent to a Chinese company that offered to manufacture the USB drives at a discounted rate. After learning that it had lost the project, DT sued in the United States District Court for the Central District of California for copyright infringement and trade secret misappropriation. EA moved for summary judgment on both claims and won.

Upon review, as to the copyright infringement claim, the Ninth Circuit reversed, holding that there was a genuine issue of material fact as to whether DT’s cutaway design for removing the flash device merits copyright protection. With respect to the trade secrets claim, the Ninth Circuit affirmed summary judgment, but on alternative grounds. Originally, the district court held that no reasonable jury could find that Plaintiff took reasonable efforts to maintain the secrecy of its prototype. It was undisputed that there was no written nondisclosure agreement (NDA) in place or any express obligation of confidentiality in the vendor agreement entered into by the parties. In addition, Plaintiff had placed no limitations on what could be done with the prototype flash drive and did not mark or label the prototype as confidential.

Despite expressly acknowledging that the manufacturer “did not do much, if anything, to explicitly protect its prototype design,” the Ninth Circuit in Direct Technologies refused to affirm on that basis. As the Court in Direct Technologies explained, “a confidential relationship may reasonably be implied,” citing an older Ninth Circuit decision, Pachmayr Gun Works, Inc. v. Olin Mathieson Chemical Corp., issued before the California Uniform Trade Secrets Act (CUTSA) had been enacted.

In the end, the Ninth Circuit in Direct Technologies affirmed summary judgment in favor of the defense, but on alternative grounds — namely, that the USB prototype design did not qualify as a trade secret because it did not “[d]erive[] independent economic value from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use.” See Cal. Civ. Code § 3426.1(d)(1); see Altavion, Inc. v. Konica Minolta Sys. Lab. Inc.

In its ruling, the Ninth Circuit declined to address whether the CUTSA statute preempts its pre-CUTSA decision, Pachmayr. The question therefore remains whether a common law implied duty of confidentiality still exists after enactment of CUTSA and whether additional efforts to maintain secrecy of a purported trade secret are required to satisfy the “reasonable efforts” requirement in CUTSA.

This unresolved issue creates practical implications for businesses handling information shared between potential partners. Business principals should be keenly aware that even in the absence of an NDA, courts may determine that a rational jury could find that the requirement that reasonable efforts be made to maintain secrecy of information purported to be trade secret is satisfied through an implied confidential relationship. They should take appropriate steps to ensure clear designations of what is — and what is not — considered confidential by the disclosing party. Drawing this distinction is particularly important with respect to disclosures during exploratory discussions, as parties conduct their diligence on whether they want to enter into a joint venture, partnership, investment or vendor agreement. Without such early and clear understandings, a party will be vulnerable to claims of trade secret misappropriation, which often involves expensive and intrusive discovery and protracted litigation.

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