McDermott - Newsletters - IP Update, Vol. 12, No. 7, July 2009

Addressing the effect of a stipulated dismissal under Rule 41 of the Federal Rules of Civil Procedure (Fed. R. Civ. P.), the U.S. Court of Appeals for the Federal Circuit revived the plaintiff’s case, ruling that the district court had erred in denying the plaintiff’s motion for relief from a previous court order that dismissed the case with prejudice. Garber v. Chicago Mercantile Exchange, Case Nos. 09-1047, -1384 (Fed. Cir., June 26, 2009) (Lourie, J.).

In 2004, Garber filed a patent infringement complaint against the Chicago Mercantile Exchange and the Chicago Board of Trade (collectively, CME). Unable to obtain adequate representation, Garber and CME entered into an agreement to dismiss the lawsuit without prejudice. To that effect, Garber filed a joint stipulated motion and proposed order. In the order dismissing the case without prejudice (first dismissal order), the district court judge modified the language of the proposed order filed by the parties by providing Garber one month to reinstate the case or have it dismissed without prejudice. Soon after the deadline to reinstate the case passed, the district court judge issued an order dismissing the case with prejudice (second dismissal order). Over three years later, Garber filed a motion for relief from the second dismissal order, arguing that a clerical error occurred and pointing out that the first dismissal order warned that the case “may be dismissed without prejudice,” while the second dismissal order dismissed the case with prejudice. The district court denied the motion and Garber appealed.

The dispute on appeal centered on whether the stipulation for dismissal without prejudice entered into by both parties was filed under Rule 41(a)(1) or under 41(a)(2) of the Fed. R. Civ. P. If the action was dismissed under Rule 41(a)(1), the parties agreed that the district court did not have jurisdiction to enter any subsequent order, including the first and second dismissal orders. Under Rule 41(a)(1), a plaintiff may dismiss an action without a court order by filing a stipulation of dismissal signed by all parties. Under Rule 41(a)(2), an action can be dismissed by the plaintiff without agreement of all parties involved only “on terms the court considers proper.” The Federal Circuit agreed with the Garber and concluded that the action was dismissed under Rule 41(a)(1) and that the district court did not have jurisdiction to enter the first and second dismissal orders.

CME argued that while there is no dispute the stipulation was signed by all parties, the stipulation was filed under Rule 41(a)(2) because court action was required to dismiss the case and the court enjoyed some discretion in doing so. Specifically, CME argued that the inclusion of a proposed order and discretionary language within the proposed order transformed the stipulation into a motion under Rule 41(a)(2), which permitted the court to dismiss the action “on terms the court considers proper.” In rejecting this argument, the Federal Circuit noted that Rule 41(a)(2) is reserved for cases in which the plaintiff requests dismissal of an action without agreement from all parties and that such dismissal is permitted on terms the court considers proper. Finding that the stipulation entered in the current case was agreed to by all parties, the Federal Circuit held that the stipulation was properly brought pursuant to Rule 41(a)(1). In light of that finding, the Court held that the stipulation was effective immediately upon filing and the first and second dismissal orders were therefore void. The district’s court denial of Garber’s motion was therefore reversed.

Patents / Preliminary Injunctions / Designs Patents

Preliminary Injunctions in Design Patent Cases
By Kenneth L. Cage

The U.S. Court of Appeals for the Federal Circuit clarified its requirements for a preliminary injunction and, in light of that clarification, determined that the district court was correct in denying a preliminary injunction for infringement of a design patent. Titan Tire Corporation v. Case New Holland Inc., Case No. 08-1078 (Fed. Cir., June, 3, 2009) (Plager, J.).

Titan, the exclusive licensee of a tractor tire design patent owned by co-plaintiff Goodyear Tire & Rubber Company (Goodyear), sought an injunction against Case New Holland (Case) for selling backhoes allegedly having tractor tires covered by the patented design. The district court found that Titan failed to meet the “likely to succeed” on the merits factor required for a preliminary injunction because it did not rebut Case’s challenge to the obviousness of the patent. While finding that the other three preliminary injunction factors—irreparable harm, balance of the hardships and public interest—weighed in favor of granting an injunction, the trial court concluded that Titan’s failure to establish a likelihood of success on the validity issue was sufficient to defeat the motion for a preliminary injunction. Titan appealed.

In affirming the exercise of discretion by the district court, the Federal Circuit stated that a preliminary injunction to prohibit infringement is extraordinary relief within the discretion of the district court. According to Federal Circuit: “[T]he factors the trial court considers when determining whether to grant a preliminary injunction are of longstanding and universal applicability. As the Supreme Court recently reiterated, there are four: ‘[a] plaintiff seeking a preliminary injunction must establish [1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.’”

The Court noted that during preliminary matters the patent enjoys a presumption of validity. Because of that presumption, the infringer has the burden to present a substantial question of invalidity and the patentee has the burden to establish that the invalidity defense lacks substantial merit.

The Federal Circuit went on to clarify the standard of proof imposed on the movant for a preliminary injunction, explaining that when analyzing the likelihood of success factor, the district court, after considering all the evidence available at this early stage of the litigation, must determine whether it is more likely than not that the challenger will be able to prove that the patent is invalid by clear and convincing evidence. The Federal Circuit explained that while the “clear and convincing” standard regarding the challenger’s evidence applies only at trial on the merits and not at the preliminary injunction stage, that burden of proof is a consideration for the district judge to take into account when assessing the challenger’s case at the preliminary injunction stage. However, “clear and convincing” is not the evidentiary burden to be met preliminarily by the challenger. Rather, the evidentiary burden necessary to establish a substantial question of invalidity is a quantum above the “substantial evidence” test but below the “clear and convincing” burden.

Here the defendant presented three primary references that, when coupled with secondary reference, presented substantial obviousness issues. The Federal Circuit noted that the test of design patent obviousness using secondary references was similar to the discarded point of novelty test as explained in Egyptian Goddess (see IP Update, Vol. 10, No. 9) in that each of the secondary references focused on individual features and not the design as a whole. While the district court stated that the application of KSR to design patents was “new and untested ground,” [due to the functionality language of KSR] the Federal circuit stated that “[w]ith or without KSR,” it was not persuaded that the district court abused its discretion is finding that Titan was unlikely to succeed on the merits of the validity issue.

The Federal Circuit found that the district court applied the correct law governing preliminary injunctions because it accurately articulated the “likelihood of success” standard and its analysis demonstrated that the court considered and weighed both parties’ arguments on the issue of obviousness and that Case had presented a substantial question of invalidity that Titan was unlikely to withstand.

Practice Note: Notwithstanding a patent’s presumption of validity when seeking preliminary injunctive relief, the patentee should be prepared to fully rebut any alleged invalidity grounds raised by the challenger to convince the court that the invalidity contention lacks substantial merit.

Patents / Permanent Injunctions

Failure to Conduct eBay Analysis Is Abuse of Discretion
By Peter Siavelis and Rita J. Yoon

The U.S. Court of Appeals for the Federal Circuit held that a district court abused its discretion by failing to consider the eBay factors in connection with a denial of a motion for permanent injunction. Ecolab, Inc. v. FMC Corp., Case Nos. 08-1228, -1252 (Fed. Cir., June 9, 2009) (Gajarsa, J.).

Ecolab, Inc. and FMC Corp. sell chemicals used to sanitize meat, and both companies own patents for meat sanitation methods. Ecolab sued FMC for patent infringement; FMC counterclaimed that Ecolab was the infringing party. A jury found that both parties infringed each other’s patents and awarded damages to both. Ecolab and FMC both moved for a permanent injunction. The district court denied the motions without explanation.

On appeal, the Federal Circuit vacated the district court’s denial of FMC’s motion for a permanent injunction and remanded with instructions that the district court perform the analysis required by the Supreme Court in eBay Inc. v. MercExchange, LLC. In eBay, the Supreme Court set forth the four traditional and equitable factors to consider in determining whether a patentee is entitled to a permanent injunction. The patentee must demonstrate that it has suffered an irreparable injury; remedies available at law, such as monetary damages, are inadequate to compensate for that injury; considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and the public interest would not be disserved by a permanent injunction.

In this case, “the district court failed to consider any of the eBay factors and failed to make any factual findings regarding those factors. That is an abuse of discretion.” Sufficient factual findings are necessary for the Federal Circuit to have a basis for review of the grant or denial of an injunction.

Patents / Standing

A Dismissal For Lack of Standing Should Generally Be Without Prejudice
By Christina A. Ondrick

Addressing yet another standing dispute, the U.S. Court of Appeals for the Federal Circuit overturned a dismissal for lack of standing with prejudice, noting the general rule that a dismissal on that basis should ordinarily be without prejudice. University of Pittsburgh v. Varian Medical Systems, Case. Nos. 2008-1441; -1454 (Fed. Cir., June 9, 2009) (Gajarsa, J.).

Scientists at University of Pittsburgh (Pitt) and Carnegie Mellon University (Carnegie Mellon) collaborated on a device for administering radiation therapy. The universities entered into an agreement governing their intellectual property rights and technology transfer procedures. Per the agreement, Pitt commercialized the invention and applied for patents. The inventors assigned their patent rights to Pitt and two patents issued listing Pitt as the assignee.

Pitt subsequently sued Varian Medical Systems (Varian) for patent infringement. Nearly one and one-half years later, Varian moved for summary judgment contending that Pitt lacked standing to sue because Carnegie Mellon was a co-owner of the patents. Pitt opposed the motion and also sought to join Carnegie Mellon. The district court denied Pitt’s motion to join Carnegie Mellon without an opinion and dismissed the patent infringement lawsuit with prejudice. Pitt appealed.

The Federal Circuit held that the dismissal should have been without prejudice. The Court explained that a dismissal for failure to join a necessary and indispensible party is not an adjudication on the merits and thus the dismissal should be without prejudice. When a party fails to join a co-owner in a patent suit, a court has discretion to dismiss the suit, but the court lacks discretion to do so with prejudice. The law universally disfavors dismissing a case with prejudice based on a standing defect, and there is a strong presumption that any such dismissal is improper.

The Federal Circuit further explained that dismissing the case with prejudice was a harsh sanction not justified under the facts. On this issue the Court explained that a dismissal with prejudice is rarely a proper sanction and it should be reserved for cases in which there is a clear record of delay or contumacious conduct by the plaintiff. Factors relevant to a dismissal with prejudice include the degree of the plaintiff’s personal responsibility for the delay, prejudice to the defendant occasioned by the delay, any history that the plaintiff proceeded in a dilatory manner and the effectiveness of sanctions other than dismissal. The record here did not support a conclusion that Pitt knew it should have joined Carnegie Mellon and refused to do so.

Practice Note: This case is one of a long line of recent standing decisions issued by Federal Circuit and the district courts. Standing challenges are becoming common place in patent litigation, particularly in light of the prevalence of the sales and licensing of intellectual property rights as well as joint development agreements. A thorough ownership analysis is an important component of any pre-filing investigation.

Patents / Obviousness / Predatory Patenting / Biopiracy

Yellow Beans Patent Obvious Under KSR
By Mary Boyle, Ph.D.

Ending the 10-year international reign of terror of the yellow bean patent, the U.S. Court of Appeals for the Federal Circuit upheld a final rejection of claims to yellow beans by the Board of Patent Appeals and Interferences (Board) on the grounds of obviousness. In re POD-NERS, LLC, Case No. 2008-1492 (Fed. Cir., July 10, 2009) (nonprecedential) (per curiam; Prost, J., concurring).

While vacationing in Mexico, Larry Proctor purchased a bag of dry beans which included yellow beans. Back home in Colorado, he planted only the yellow beans and then harvested and replanted over three years. Proctor’s efforts yielded beans with a particular and reproducible yellow color. He was granted a patent, assigned to POD-NERS. Proctor named the bean “Enola,” his wife’s middle name.

POD-NERS sent a letter to all Mexican bean importers demanding that they take a license if they wished to continue selling yellow beans. Export sales by Mexican farmers reportedly dropped 90 percent. These were farmers whose families had grown and sold yellow beans for generations. The International Center for Tropical Agriculture in Colombia filed a request for reexamination. POD-NERS responded by seeking reissue of the patent with 11 more claims. Ultimately, Board held all claims invalid for obviousness. POD-NERS appealed.

The Federal Circuit affirmed. The Court stated that Proctor had done nothing but perform routine, well-established methods in the breeder-grower art. The Court noted that there was no indication that Proctor was trying to achieve the particular yellow color or that he was attempting to do anything more than reproduce the beans he acquired in Mexico or improve them. The Court further reasoned that the yellow color was not claimed to have any “meaningful impact” on the beans’ properties, nor was there evidence of secondary considerations such as long-felt need. The Court relied on printed publications describing well-known bean variants that rendered the Enola bean obvious, if not anticipated. The Court concluded that “[t]o reject the Board’s obviousness ruling here […] would be to deny the Board that very ‘recourse to common sense’” that KSR encourages.

Litigation / Costs

Translation, Interpretation and Joint Discovery Costs
By Amanda E. Koenig

The U.S. Court of Appeals for the Federal Circuit upheld a district court’s award of costs for translation and interpretation services, but vacated and remanded the district court’s award of joint discovery costs for apportionment. In doing so, the Federal Circuit held that settlement agreements that take costs into consideration are subject to the general rule prohibiting double recovery of costs. Ortho-McNeil v. Mylan Labs. Inc., Case No. 08-1600 (Fed. Cir., June 10, 2009) (Dyk, J.).

The plaintiffs, patent-holder Daiichi and licensee Ortho-McNeil, brought a Hatch-Waxman infringement suit against defendant Mylan (the Mylan action), alleging that Mylan infringed Daiichi’s patent. Daiichi/Ortho-McNeil filed a parallel case against Teva Pharmaceuticals USA in a different district court (the Teva action). For Daiichi’s convenience, Daiichi’s witnesses were deposed jointly by Mylan and Teva. Daiichi and Teva settled the Teva action. In the process, Daiichi agreed not to seek to recover its otherwise taxable costs in that case.

Daiichi prevailed in the Mylan action and moved to recover $2.2 million costs for interpretation services and translation services. Daiichi also moved for discovery costs, but did not apportion costs between the Teva and Mylan actions.

With respect to interpretation and translation services, the district court reduced Daiichi's requested costs but did award Daiichi more than $1 million dollars in translation and interpretation costs, based on several factors:

Daiichi was entitled to receive its share of the cost of official trial interpreters.
Daiichi was not entitled to receive costs for Daiichi’s check interpreters because it was not a necessary expense.
Daiichi was entitled to costs incurred for the translation of all of the documents on its trial exhibit list—even if Daiichi did not introduce an exhibit—because the local rules required litigants “to submit certified translations of any document not in the English language to be used as evidence.”
Daiichi was entitled to costs incurred for the translation of documents on its privilege log because Mylan did not assert that the documents were irrelevant to the litigation.

The district court also granted Daiichi’s joint discovery costs without apportioning these costs between Teva and Mylan, reasoning that Mylan had “failed to establish that any of the discovery costs sought … related solely to the Teva litigation and, therefore, were unnecessary to this case.”

Mylan appealed. On appeal, the Federal Circuit affirmed the rulings regarding translation costs but vacated the district court’s ruling regarding joint discovery costs and remanded the case for apportionment of the disputed deposition costs.

Finding no governing Fourth Circuit precedent on whether costs must be apportioned, the Federal Circuit looked to “general principles of law enunciated by our sister circuits” to guide its analysis. First, it found that “[a]s a general rule, it is well established that in multiparty proceedings before a single judge … the district court has discretion to apportion payment of jointly incurred costs among the losing parties or to invoke the default rule that the losing parties are jointly and severally liable for costs.” This general rule, however, “is subject to the usual limitation that the prevailing party may receive only one satisfaction of costs” and “cannot recover more than his total entitlement.” While the Federal Circuit conceded that “[t]he governing rules are less clear … where joint discovery is conducted in multiple cases pending in different districts,” it concluded that the prohibition on double recovery still applied. Finally, the Federal Circuit held that the same rules and limitations apply to settlements. Since the taxable costs in the Teva action had been taken into account in the settlement of the Teva action, “Daiichi cannot now recover more than its total entitlement by obtaining those same costs again from Mylan.”

Practice Note: Although the Federal Circuit was interpreting and applying Fourth Circuit law, its analysis and conclusions were based on general principles articulated by its sister circuits and, therefore, may be more generally applied. When negotiating settlement agreements, parties should be aware that litigation cost provisions in the settlement agreement can limit the recovery of joint costs incurred with another case.

Patents / Obviousness

“Obvious to Try”—U.S. and UK Positions Converge
Contact Paul Devinsky

Post KSR, KSR International Co. v. Teleflex Inc., (see IP Update, Vol. 10, No. 5), the “obvious to try” test has become a hot topic for U.S. patent lawyers. That same test has been recently reviewed by the House of Lords in the United Kingdom (Conor v. Angiotech [2008], UKHL 49), and the principles laid down by the House of Lords have now been applied by the UK High Court in the case of Generics UK Ltd. v. Daiichi ([2008], EWHC 2413), an application that has now been upheld by the Court of Appeal ([2009], EWCA Civ 646).

Pre-KSR, the U.S. and UK appeared to have completely opposite approaches as to how the obvious to try test should be applied when assessing validity. While the pre-KSR Federal Circuit did not embrace this test, the approach of the UK courts favored a more liberal variant of the obvious to try test, i.e., the “worth a try” test.

In Saint-Gobain v. Fusion Provida, the UK position retracted slightly from the “worth a try approach” and held that the mere possible inclusion of something within a research program, on the basis that one would find out more, was not enough to show obviousness.

The House of Lords considered the application of this test and approved the principles set out by Kitchin J in Generics v. Lundbeck (using language similar to the KSR decision): “The question of obviousness must be considered on the facts of each case. The court must consider the weight to be attached to any particular factor in the light of all the relevant circumstances. These may include such matters as the motive to find a solution to the problem the patent addresses, the number and extent of the possible avenues of research, the effort involved in pursuing them and the expectation of success.”

This test has now been applied at the first instance court in Generics v. Daiichi and affirmed by the Court of Appeal. The Daiichi case involved one of a several recent enantiomer patent actions in the UK, where the racemate (ofloxacin) forms part of the prior art. (A racemate is a combination of two or more enantiomers). The patent in suit claimed one of the enantiomers which made up the racemate. It was shown that this particular enantiomer had greater activity on its own than when combined with others in the racemate. The obviousness arguments centered around methods of separation of the racemate into individual enantiomers and which routes the skilled person would try. In the first instance judgment, the court held that the enantiomers of the invention could not be separated relatively easily; on the contrary, their resolution into separate enantiomers involved a research program with a highly uncertain outcome. On that basis, the court held that the person skilled in the art would have instead turned his attention to the development of new molecules. Validity was therefore upheld. Application of the test confirms the UK courts’ retreat from the previous “worth a try” approach in favor of the slightly more stringent obvious to try test.

Trademark / Counterfeits

Removal of UPC Codes May Constitute Trademark Infringement
By Rita W. Siamas

Upholding a preliminary injunction entered against a national drugstore chain, the U.S. Court of Appeals for the Second Circuit recognized that a trademark owner may maintain an action for trademark infringement when a defendant sells an otherwise genuine product that has been tampered with so that its anti-counterfeiting device has been removed. Zino Davidoff SA v. CVS Corporation, Case No. 07-2872 (2d Cir., June 30, 2009) (Leval, J).

Plaintiff Zino Davidoff SA (Davidoff) distributes men’s and women’s fragrance products under the marks COOL WATER and DAVIDOFF COOL WATER through luxury retailers. Defendant CVS is a national drugstore chain. Although Davidoff had declined to distribute its COOL WATER products through CVS (so that CVS is not an authorized retailer), CVS sells COOL WATER products, obtaining them outside of Davidoff’s normal distribution channels. After discovering that CVS was selling so-called counterfeit COOL WATER products, Davidoff sent CVS cease and desist letters and provided CVS with information on how to identify counterfeits based on the product’s unique-product-code (UPC). In response, CVS assured Davidoff that it would conduct an inventory review and remove all counterfeit products and would source only from authorized distributors. After Davidoff learned that CVS was continuing to sell counterfeit COOL WATER products, Davidoff brought an action for trademark infringement, trademark dilution and unfair competition under the Lanham Act.

In the course of a court-ordered inspection into CVS’s inventory, Davidoff learned that in the 16,600 remaining products in CVS’s inventory, the UPC codes on the packages and labels affixed to the bottles had been removed and, in many instances, the packaging had been opened. Thereafter, Davidoff amended its complaint to include claims for relief based upon CVS’s sale of COOL WATER products with the UPC codes removed. CVS then agreed to voluntarily stop selling counterfeit COOL WATER products but not the products with the UPC codes removed. Davidoff moved for a preliminary injunction barring CVS from selling COOL WATER products with the UPC codes removed. The district court granted Davidoff’s motion, finding that removal of the UPC codes impaired Davidoff’s trademark rights and constituted trademark infringement by interfering with Davidoff’s rights as a trademark owner to identify counterfeit products and exercise quality control. CVS appealed.

The Second Circuit affirmed the district court’s grant of a preliminary injunction against CVS on two grounds. First, the Court found that the injunction was justified on the ground that removal of the UPC codes from Davidoff’s COOL WATER products unlawfully interfered with Davidoff’s ability to control the quality of its trademarked products. In its analysis, the Court employed the test from its 1996 decision Warner-Lambert Co. v. Northside Development Corp., which held that, “a trademark holder is entitled to an injunction against one who would subvert its quality control measures upon a showing that (i) the asserted quality control procedures are established, legitimate, substantial, and nonpretextual, (ii) it abides by these procedures, and (iii) sales of products that fail to conform to these procedures will diminish the value of the mark.” Employing the Warner-Lambert test, the Court agreed with the district court that Davidoff had satisfied each of these requirements. First, Davidoff demonstrated adequately that the affixation of the UPC codes was a legitimate procedure for identifying counterfeit products. Second, Davidoff showed that it regularly trains retailers, private investigators and customs officials on how to use the UPC system to identify counterfeits. Finally, Davidoff demonstrated that its marks would be harmed by an increase in sales of counterfeit products, which would occur in the absence of the quality-control procedures.

The Court further found that Davidoff was likely to succeed on its trademark infringement claim based because the COOL WATER products with the UPC codes removed were materially different from Davidoff’s genuine products. While the Court recognized that the unauthorized sale of genuine goods does not generally constitute trademark infringement because such sales may not cause confusion or dilution, the court noted that goods are not genuine if they do not conform to the trademark holder’s quality-control standards or if they differ materially from the product authorized for sale. In finding that CVS’s COOL WATER PRODUCTS with UPC codes removed were materially different, the Court noted that the evidence showed that the UPC removal required tampering in the form of cutting of packaging, application of chemicals to remove the labeling and grinding of bottles. “It is a logical inference that consumers may regard a product whose packaging has been tampered as inferior and perhaps suspicious,” the Court stated, and therefore, “trademarked goods whose luxury packaging is damaged are materially different from those that are intact.” Thus, the Second Circuit concluded that Davidoff was likely to succeed on its trademark infringement claim “not only on the basis of CVS’s interference with Davidoff’s quality control, but because CVS is selling under Davidoff’s [COOL WATER marks] goods that are materially different from Davidoff’s genuine trademarked product.”

Trademark / Fair Use

Contract Ambiguity May Be Defense to Trademark Infringement Claim
By Sara E. Coury

The U.S. Court of Appeals for the Second Circuit, in finding an ambiguity as to what fashion designer Joseph Abboud had conveyed in connection with the sale of certain names and marks, vacated a permanent injunction entered against Joseph Abboud and remanded the matter for further proceedings. JA Apparel Corp. v. Abboud, Case No. 08-3181 (2d Cir., June 10, 2009) (Kearse, J).

Abboud and the plaintiff, JA Apparel Corp. (JA), entered into a purchase and sale agreement pursuant to which Abboud sold his right, title and interest to certain names and trademarks, including Joseph Abboud. Upon learning that Abboud intended use his name in advertisements promoting his new clothing label called “jaz,” JA filed suit alleging breach of contract and trademark infringement. The district court found that the agreement unambiguously conveyed all of Abboud’s rights to use his name for commercial purposes and that Abboud’s use of his name in connection with the “jaz” line constituted trademark infringement. Abboud appealed.

On appeal, the Second Circuit found that the purchase and sale agreement was not unambiguous because the meaning of the word “names” as used in the contract was ambiguous. It could reasonably be interpreted as referring to brand names rather than all of Abboud’s rights to use his name for commercial purposes. Therefore, the parties were entitled to submit extrinsic evidence regarding their intent in entering the agreement on remand.

The Second Circuit further held that the district court erred in finding for the plaintiff on its trademark infringement claims because the court did not properly analyze the fair use factors. A determination of fair use turns on whether a given use was other than as a mark, in a descriptive sense and in good faith. The district court found that Abboud’s use had a descriptive component but that Abboud had failed to establish the “good faith” and “other than as a mark” elements. The Second Circuit held that the district court’s finding of a lack of good faith was in error because it was based on two erroneous conclusions: the agreement unambiguously conveyed all rights to use the name Joseph Abboud for commercial purposes to the plaintiff, and despite Abboud’s lack of intent to confuse, consumers would be confused. A finding of lack of good faith must be based on the user’s intent to confuse, not actual confusion. In addition, the Second Circuit found that in order to properly evaluate whether Abboud’s use was “other than as a mark,” the district court should have undertaken an individualized consideration of each of the proposed advertisements introduced as evidence.

Trademark / Infringement

Interlocutory Order Recalling Potentially Infringing Products Requires Extra Burden of Proof
By Elisabeth (Bess) Malis

The U.S. Court of Appeals for the Ninth Circuit affirmed the issuance of a preliminary injunction that halted the defendant’s sale of a dietary supplement bearing the plaintiff’s trademark, but vacated the district court order since it also ordered product recall and restitution. The Ninth Circuit found that the record did not establish that the infringing product caused a substantial risk of danger to the public. Marlyn Nutraceuticals, Inc. v. Mucos Pharma GMbH & Co., Case No. 08-15101 (9th Cir., July 2, 2009) (Thomas, J.).

Mucos Pharma GMbH & Co. (Mucos) developed and trademarked the dietary supplement Wobenzym. Marlyn Nutraceuticals, Inc. (Marlyn) exclusively distributed and sold the product in the United States. The parties entered into an agreement whereby Marlyn would have the right to exclusively manufacture and sell Wobenzym in the United States if Mucos ceased producing the product. In 2006, Marlyn believed Mucos had ceased producing Wobenzym because the product delivered in fulfillment of Marlyn’s purchase orders contained a different amount of active ingredients than as listed on the label. In 2007, Marlyn began to manufacture and sell Wobenzym in the United States under the same product label. Mucos filed an action for trademark infringement and requested a preliminary injunction to stop Marlyn from selling the product under the Wobenzym mark. Mucos argued that Marlyn’s formula differed from Mucos’s formula, causing consumer confusion and infringement. The district court granted Mucos’s request for a preliminary injunction and ordered Marlyn to halt its sales of the product, recall the product it had already sold and provide restitution to consumers who had purchased Marlyn’s Wobenzym. Marlyn appealed.

The Ninth Circuit affirmed the district court’s decision to issue a preliminary injunction against Marlyn, yet vacated the injunction because of its scope. Adopting Third Circuit precedent, the Court held that a party seeking product recall through a preliminary injunction must satisfy the traditional preliminary injunction test, as well as establishing three additional factors: that the defendant’s infringement was willful or intentional, that the risk of confusion to the public and injury to the trademark owner is greater than the defendant’s burden accompanying a product recall and that the defendant’s infringing activity caused substantial risk of danger to the public. While the district court did not analyze all three additional factors, it based its recall order in part on substantial risk of danger to the public, finding that Marlyn’s product created a public health hazard if it remained on the market. Finding no evidence in the record to support the existence of a public health risk, the Ninth Circuit vacated the district court’s recall and restitution order, remanding the issue for further consideration.

The Ninth Circuit rejected Marlyn’s defense that Mucos ceased production of Wobenzym, finding that the changes in the product formula were insignificant and that “trademark owners are permitted to make small changes to their products without abandoning their marks.”

Trademark / Injunction / Contempt

Promoter Must Pay for Enjoined Drifting Under the Boardwalk
Contact Paul Devinsky

The U.S. Court of Appeals for the Third Circuit recently upheld a contempt ruling against a promoter and his family who violated an injunction by continuing to promote doo-wop group The Drifters after he was found to have no rights to the Drifters name and enjoined from using it. Marshak v. Treadwell et al., Case No. 08-1771 (3d Cir., July 2, 2009) (Fuentes, J.).

The Drifters were a popular Motown group that started performing in the 1950s best known for songs such as “Under the Boardwalk” and “Some Kind of Wonderful.” Managed first by music executive George Treadwell and, after he passed away, his wife Faye Treadwell, the Drifters persisted as an entity for nearly two decades. During that time the Treadwells hired and paid the individual performers as employees, replacing them frequently. Consequently, the membership of the group was constantly in flux.

By 1970, the Drifters had largely stopped performing in the United States. Seeing an opportunity, rock magazine editor Larry Marshak reunited some of the former group members who had been replaced over the years by the Treadwells for a series of reunion concerts. The concerts were successful. Marshak signed the former members and marketed them as “The Drifters” for the next three decades.

Marshak’s promotion of The Drifters spurred numerous legal battles between himself and former manager Faye Treadwell. After a series of lawsuits spanning many years, it was finally concluded that Marshak had no rights in The Drifters trademark because he had procured the registration through fraud and that Treadwell still retained rights in The Drifters trademark. In 1999, on the heels of this conclusion, a district court issued an injunction to bar Marshak from promoting The Drifters.

The Drifters group assembled by Marshak did not disappear. Instead, Marshak enlisted various family members and business associates to continue promoting the group in his place. In 2006, Treadwell sought a contempt order, claiming the injunction was enforceable against parties other than Marshak—specifically, the companies and employees associated with Marshak who continued to market The Drifters after the issuance of the injunction in 1999. The district court agreed and issued the contempt order against Marshak, but awarded Treadwell only attorneys’ fees, not compensatory damages for Marshak’s years of use of The Drifters trademark.

Both parties appealed the contempt ruling. Marshak challenged the underlying ruling, while Treadwell sought greater damages to compensate her for the years of unauthorized use. The Third Circuit upheld the district court’s order, finding no clear error and “ample support for the District Court’s contempt findings” against Marshak and his associates. Moreover, it held that attorneys’ fees were an insufficient remedy for Marshak’s violation and that Treadwell was entitled to a greater damages award, finding that, “Marshak and his associates were sanctioned for violating the court’s injunction, but were permitted by the court to keep whatever profits they gained as a result of their disregard for [the District Court’s] injunction. This, we believe, was an abuse of discretion.” Accordingly, the Third Circuit remanded the matter for an order of accounting.

Trademark / Prosecution

The Shinnecock Indian Nation Is an “Institution” Under § 1052(a)
Contact Paul Devinsky

The U.S. Court of Appeals for the Federal Circuit recently affirmed the Trademark Trial and Appeal Board’s (the Board) decision wherein it affirmed the U.S. Patent and Trademark Office’s (USPTO) refusal to register two trademarks on the basis that they falsely suggested a connection with the non-sponsoring Shinnecock Indian Nation. In re Shinnecock Smoke Shop, Case No. 09-1100 (Fed. Cir., July 1, 2009) (Clevenger, J.)

Jonathan Smith (applicant), a member of the Shinnecock Indian nation and sole proprietor of Shinnecock Smoke Shop, sought to register the marks SHINNECOCK BRAND FULL FLAVOR and SHINNECOCK BRAND LIGHTS for cigarettes. Citing 15 U.S.C. §1052(a), the examining attorney refused to register the proposed marks on the basis that the marks falsely suggested a connection with a non-sponsoring entity. Smith unsuccessfully appealed the refusal to the Board and then to the Federal Circuit.

Smith did not contest that the marks falsely suggested a connection with the Shinnecock Indian Nation. Instead, he challenged the Board’s determination that the Shinnecock Indian Nation was a “person” or “institution” under § 1052(a). The Federal Circuit disagreed, finding that the Shinnecock Indian Nation was an “institution.” The Court noted that its construction was in accord with both Board precedent and the ordinary meaning of the term.

Smith also argued that that the USPTO’s refusal to register the marks, when it had registered “supposedly similar marks also involving Indian tribe names to non-Indians, shows a pattern of racial discrimination,” in violation of the Due Process and Equal Protection Clauses of the Fifth Amendment.

The Court found Smith’s allegations meritless, holding that there no was due process violation because he was provided a full opportunity to prosecute his applications and to the appeal the USPTO’s final rejections to the Board. Further, Smith’s allegations regarding similar marks were irrelevant because each application must be considered on its own merits, regardless of whether the USPTO erred with respect to other third-party applications. The Federal Circuit similarly found no equal protection violation because the Board and the USPTO had legitimate, nondiscriminatory reasons for denying registrations, noting that the most Smith could establish was that the USPTO should have rejected other applications to register marks. Moreover, Smith’s argument was based on the unsupported assumption that the other successful applicants were non-Indians and that this is the reason why their marks were registered. The Court agreed with the Board, stating that “[i]t is entirely reasonable to assume that these registrations were issued not because the applicants therein were non-Indians, but because the elements of the Section 2(a) refusal were not or could not be proven by the Office.”

China / Trademark

The Supreme People’s Court Set Limits on Recognition of Well-Known Trademark
By Jia Yau

China’s Supreme People’s Court (the Supreme Court) has now promulgated an Interpretation on Hearing Civil Dispute with Respect to a Well-Known Trademark (the Interpretation) effective as of May 1, 2009. The Interpretation states that judicial recognition of well-known trademarks will be strictly examined and cross-category protection of well-known trademarks must be analyzed as to whether category expansion is appropriate. In other words, even famous marks may not be automatically expanded into full-category protection. Going forward, foreign trademark holders may find it more difficult to challenge the use of similar trademarks on dissimilar goods or services in China.

Courts should only recognize trade marks as “well-known” or “famous” when absolutely necessary.
In China, obtaining well-known trademark status in a court case confers on a trademark owner broad areas of legitimacy—vastly helping the proprietor of the mark market its products to customers and differentiate itself from its competitors. The Supreme Court Interpretation stems from a concern that a large number of companies will flood the courts attempting to claim this coveted status.

Under the Interpretation, competent courts will only examine whether a claimed mark is well-known when “absolutely necessary” to adjudicate a dispute. In general, an “absolutely necessary” circumstance occurs only when the well-known status of a trademark is the only way to determine infringement. Thus, the Interpretation will restrict a trademark proprietor from even attempting to gain well-known trademark status for its mark except in limited situations.

Only a limited number of courts will have jurisdiction regarding recognition of well-known trademark status.
The Interpretation also imposes procedural regulations requiring judges to examine evidence supporting well-known trademarks status. For example, prior to the promulgation of the Interpretation, the Supreme Court issued a notice limiting jurisdiction of civil cases involving examination of well-known trademarks to only the intermediate courts of a limited number of cities. Also, the Supreme Court will supervise these courts by requiring, whenever there is an exercise of such jurisdiction, and that the court must immediately report it to and record the decision at the Supreme Court once the court has granted well-known trademark status to a mark. The Interpretation specifically points out that courts must follow the strict procedural requirements of the notice.

Cross-category protection of trademarks should not be expanded when necessary.
Under the Interpretation, granting cross-category protection for well-known trademarks in connection with dissimilar goods or services is to be carefully examined. In other words, even famous marks are not automatically entitled to expanded or full-category protection. Under the Interpretation, only where there is a substantial relationship between the well-known trademark and the offending trademark—in which the distinctiveness or reputation of the well-known trademark is being diluted or damaged—should cross-category protection be afforded.

According to the Interpretation, when the rightful owner of a registered well-known trademark requests that a court prohibit another party from using its trademark on dissimilar goods or service, the court must consider the following factors: the distinctiveness of the well-known trademark, the relevance between the goods or service of the parties, and the extent to which the relevant public purchasing or using the dissimilar goods or services would be aware of the well-known trademark.

Clearly the Interpretation significantly tightens the rules in connection with cross-category protection.

For cross-category protection, the plaintiff’s trademark must be recognized as well-known before the date the defendant uses the trademark in an offending manner.
According to the Interpretation, the courts may only grant a plaintiff’s request to enjoin a defendant’s use of trademark on dissimilar goods or services if the plaintiff’s trademark was recognized as well-known prior to the defendant’s use of the offending trademark.

In other words, if the trademark owner had filed and registered its trademark and later, another party files for use of the trademark in an offending manner, the mark owner can only enforce its trademark and stop the new entrant from using the trademark on dissimilar goods or services if the mark owner attained well-known status before the date the defendant files for its offending trademark. Hence, even where a plaintiff properly filed and registered its mark before the defendant, if the plaintiff did not acquire well-known status before the defendant filed, the plaintiff cannot request cross-category enforcement of its trademark.

Practice Note: This development may affect certain overseas companies which have established good reputations in their local markets for their products or services but have not yet established a well-known status in China. In this scenario, others in China may try to take advantage of this fact and file to register an “offending” trademark, thereby usurping valuable foreign trademarks.

As recognition of a mark as a well-known trademark is a precondition to seek cross-category protection, with the increasing strict threshold for well-known trademark status and limits on the scope of protection by Chinese courts, foreign trademark holders may find it increasingly more difficult to challenge offending trademarks in China. Therefore, it is advisable for foreign companies that own valuable famous marks to periodically review their global trademark portfolios with a view toward taking steps to pre-emptively foreclose others from registering offending trademarks on dissimilar goods or services.

Patents / Compulsory License

German Federal Court of Justice Takes a Stand in Orange Book Standard
By Sophie Wolber

The antitrust division of the Federal Court of Justice in Germany delivered a landmark judgment in the Orange Book Standard proceeding dealing with the use of the so called “compulsory license objection under anti-trust law.” This long-expected judgment resolves a substantial legal debate in patent infringement proceedings. In re Orange Book Standard, KZR 39/06, (Bundesgerichtshof—BGH, May 6, 2009).

As is typical in Orange Book Standard proceedings, the plaintiff, Philips, sued the defendant for unlawfully using a patent related to the so-called “orange book standard” for recordable and rewritable compact disks (CDR and CDRW). Since the patent in question is a basic or essential patent that all producers of standard CDR and CDRW have to use, Philips enjoyed a market-dominating position. Philips had already granted licenses to various manufacturers on the basis of a standard license agreement. The defendant argued that the license fees demanded of it by Philips were exaggerated and discriminating, as Philips offered more favorable conditions to other companies. The defendant therefore argued that Philips abused its market-dominating position.

The licensing practices of a market-dominating patent holder are subject to the prohibition on discriminatory treatment under section 19, 20 of the German Act Against Restraint of Competition and article 82 of the EC Treaty. The Federal Court of Justice stated that in principle a “compulsory license objection under anti-trust law” can successfully be raised provided that the patent user complies with certain prerequisites.

First, the party seeking the license must demonstrate that the party has unsuccessfully tried to obtain a license on reasonable licensing terms by making the patent holder a binding and unconditional offer to conclude a license agreement. Second, the patent holder must have refused to grant such license without substantive reason and therewith abused its dominant position. The Court further stated that in case the party seeking to obtain the license uses the patent prior to the acceptance of the offer by the patent holder, it must act like a true licensee and pay “reasonable” license fees on a regular basis or deposit the appropriate amount with a court or other authority and waive the right to take back the deposited amount. In case the party seeking the license cannot ascertain the amount of the license fee or if the license fee asked for by the patent holder is too high, the party seeking the license must leave the amount of the fee to the equitable discretion of the patent holder. However, the Federal Court held that in this case the deposited amount must “in any event be adequate.”

In the dispute in question, the Court agreed that Philips was in a market-dominating position under section 20 of the German Act Against Restraint of Competition and that the grant of licenses under the patent in suit constitutes an independent product market which is controlled by Phillips patent. Thus, in principle, the defendant would be entitled to take advantage of the compulsory license provision. However, since the defendant had not paid or deposited any license fee as required by the Court and consequently did not act like a true licensee, it was ordered to stop using the patent and to pay damages.

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IP Update, Vol. 12, No. 7, July 2009

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