Winter 2006

INTELLECTUAL PROPERTY LAW 2005 YEAR IN REVIEW

By Andres F. Quintana and John M. Houkom

Legal developments concerning intellectual property issues in 2005 were dominated by several landmark and notable decisions. This ECJ Intellectual Property Reporter looks back at some of the most important cases from the U.S. Supreme Court, the U.S. Court of Appeals for the Ninth Circuit and the California appellate courts during the past year.

U.S. SUPREME COURT

In MGM Studios, Inc. v. Grokster, Ltd., --- U.S. ----, 125 S.Ct. 2764 (2005), the U.S. Supreme Court issued a major ruling limiting the ability of companies to rely on a product’s noninfringing uses as a defense to claims of copyright infringement, where the product is  promoted or advertised for use in an infringing manner. The Supreme Court’s unanimous holding overruled a lower court that found that the peer-to-peer filesharing programs distributed by defendants Grokster and StreamCast did not constitute contributory or vicarious copyright infringement. Instead, the Supreme Court found that the purpose of the product must be taken into account, and where the evidence shows an unlawful purpose in the distribution of the product,  non-infringing uses are not a defense to claims of infringement.

In this case, the defendants both distributed peer-to-peer file-sharing programs for use in exchanging music and video files over the Internet. These programs were distributed to the general public in the wake of the closure of a previous filesharing system, Napster, due to Napster’s failure to control copyright infringement taking place on its network. Rather than route the files through their own systems, as Napster had, defendants allowed for remote sharing directly between endusers, essentially removing themselves from the transaction after the software was distributed. The Supreme Court ruled that where the sharing took place was irrelevant in the face of evidence that the defendants had intended their programs to be used to infringe copyrights. Distributing a product for the purpose of promoting its use to infringe copyrights is  infringement, and the distributors are liable for the resulting acts of infringement by others using the product. An actual purpose to cause infringing activity was unmistakable in this case. This ruling, which was a dramatic victory for songwriters, music publishers and motion picture studios, significantly limited the application of the “staple article of commerce doctrine,” which provided a kind of safe harbor for those who distribute products that could be used to infringe copyrights, but also have non-infringing uses. Under Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 442, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984), products that are “capable of commercially significant non-infringing uses” do not open their creators to liability for the infringing use of others without more than the mere knowledge that some of their products are likely to be misused. The Grokster case makes it clear that a product promoted for its infringing uses cannot reap the benefit of this defense.

This ruling, which was a dramatic victory for songwriters,music publishers and motion picture studios, significantly limited the application of the “staple article of commerce doctrine,” which provided a kind of safe harbor for those who distribute products that could be used to infringe copyrights, but also have non-infringing uses. Under Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 442, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984), products that are “capable of commercially significant non-infringing uses” do not open their creators to liability for the infringing use of others without more than the mere knowledge that some of their products are likely to be misused. The Grokster case makes it clear that a product promoted for its infringing uses cannot reap the benefit of this defense.

In Merck KGaA v. Integra LifeSciences I, Ltd., ---- U.S. ---- , 125 S.Ct. 2372 (2005), the U.S. Supreme Court issued a landmark patent decision giving drug companies more leeway to develop new medicines, ruling that compounds patented by rivals do not bar them from starting research on new competing medications. The unanimous ruling set aside a lower court ruling for patent holder Integra  LifeSciences Holdings Corp., which had sued Germany’s Merck KGaA for patent infringement for using several of Integra’s “RGD peptide” patents in the course of identifying promising new drugs. At trial, Merck argued that its use of the patents was protected by 35 U.S.C. §271(e)(1), the so-called “safe harbor” provision of the patent statute, which protects the use of generic patents in work that is “reasonably related” to the development and submission of data to the Food and Drug Administration (FDA). The primary purpose of the law was to bring generic drugs to market sooner. If competitors were precluded from using the patented drugs for research and clinical trials, they could not manufacture generic versions when the patent expired. Following a jury trial, the district court ruled that Merck infringed Integra’s patents and that the safe harbor provision did not immunize Merck against liability.

The U.S. Supreme Court held that the “safe harbor” exemption does not apply only to research on compounds that actually make it to the FDA, but more broadly to compounds that the accused infringer has a “reasonable basis” for believing may work and that, if successful, could be included in an FDA submission. The Supreme Court’s ruling constitutes a major victory for major drug companies since they can now begin drug discovery experiments and research faster, potentially saving millions of dollars in licensing costs associated with startup research.

COPYRIGHT

In addition to the Supreme Court’s Grokster decision, the Ninth Circuit issued several important opinions in copyright law. In Milne ex rel. Coyne v. Stephen Slesinger, Inc., --- F.3d ---- , 2005 WL 3312753, 9th Cir. (Dec. 8, 2005), the Ninth Circuit addressed the question of when copyright licensors may use their statutory termination rights. The heir of the author of several children’s books featuring Christopher Robin, Winnie-the-Pooh and their friends, brought an action against the assignee of license rights to terminate the license of those characters to the original assignee and its transferee, Disney. The Court held that: (1) the author’s original grant of license rights in 1930 was terminated upon execution of a 1983 agreement between the author’s heirs and the assignee that renegotiated parties’ rights in response to a 1978 law allowing their termination; (2) the agreement between the heirs and the assignee was not an “agreement to the contrary,” within the meaning of the termination provision of the 1998 Sonny Bono Copyright Term Extension Act (CTEA), and therefore was binding; and (3) heirs were not entitled to a “moment of freedom” between the period governed by the author’s original grant of license rights and their subsequent agreement with the assignee, because they had already negotiated away those rights. The Court concluded the heir had already used his 1978 termination rights to negotiate a more favorable license agreement in 1983, and therefore could not use the similar provisions of the CTEA, which were limited in scope or not certain, to license agreements entered before 1978.

In Twentieth Century Fox Film Corp. v. Entertainment Distributing, 429 F.3d 869 (9th Cir. 2005), the Ninth Circuit decided whether  certain war memoirs were created as a workfor- hire. Several related companies sued the creator of the television series entitled “Campaigns in Europe” for infringing on the memoirs of General Dwight D. Eisenhower, entitled “Crusade in Europe.” Portions of the memoirs were used as narration for the Campaigns in Europe production, but the defendants claimed that the plaintiffs were not the owners of the copyrights, as they belonged to the author and his heirs. The Court found that plaintiffs held the copyright to the memoirs because the book was produced as a work-for-hire for plaintiffs, that Gen. Eisenhower had produced the book at plaintiffs’ “insistence and expense,” and that defendants had failed to rebut the presumption that “Crusades in Europe” was a work created for hire.

In Kourtis v. Cameron, 419 F.3d 989 (9th Cir. 2005), the copyright owners of a film treatment brought an action against a motion picture producer, alleging copyright infringement and state law claims. The Ninth Circuit had to decide whether a prior, unsuccessful suit by a writer later determined to have no copyright interest barred a suit by the true rights holder. 

Plaintiffs hired William Green to write a screenplay based upon their 30-page treatment for the film. The plaintiffs began shopping the screenplay around in 1989, and director James Cameron allegedly expressed an interest in making the movie. That film project, titled “The Minotaur,” allegedly featured a shape-shifting creature. Two years later, Cameron released “Terminator 2,” a film that also features a character that can transform itself into human and nonhuman forms. Green sued Cameron for copyright infringement in federal court in 1993. The district court dismissed the suit after ruling the films are not substantially similar.

Plaintiffs later challenged Green’s ownership in “The Minotaur” in an Australian court in 1998. After prevailing in that action, plaintiffs sued Cameron in Los Angeles federal court claiming that Cameron misappropriated their idea of the character from “The Minotaur.” The district court barred plaintiffs’ lawsuit. In reversing, the Ninth Circuit said plaintiffs were “free to pursue” the copyright infringement claim because they were not a party to the earlier case and because Green was not acting as plaintiffs’ agent when he pursued his case against Cameron.

In Silvers v. Sony Pictures Entertainment, Inc., 402 F.3d 881 (9th Cir. 2005), the Ninth Circuit addressed whether an assignor of a right to sue can bring a copyright action. Nancy Silvers, a screenwriter, wrote the script for the television movie “The Other Woman” for Frank & Bob Films. Frank & Bob Films retained ownership of the underlying copyright to the script but assigned to Silvers “all right, title and interest in and to any claims and causes of action against Sony Pictures Entertainment, Inc., Columbia TriStar and any other appropriate persons or entities, with respect to the screenplay ‘The Other Woman’ and the motion picture ‘Stepmom.”‘ Silvers filed a copyright infringement suit against Sony in federal court, alleging Sony’s movie “Stepmom” was substantially similar to her script for “The Other Woman.” The full Ninth Circuit heard the case en banc and determined that Silvers lacked standing to bring the suit. Analyzing the copyright law, the Court said, “[e]xclusive rights in a copyright may be transferred and owned separately, but Section 201(d) creates no exclusive rights other than those listed in Section 106, nor does it create an exception to Section 501(b).” The Court held that when Congress explicitly lists who may sue, it should be understood as an exclusion of others from uing for infringement, and an assignee of the right to sue is barred from recovery.

TRADEMARK

The Ninth Circuit also rendered several notable decisions involving trademark cases during 2005.

In American Circuit Breaker Corp. v. Oregon Breakers,Inc., 406 F.3d 577 (9th Cir. 2005), the Ninth Circuit addressed trademark issues involving gray markets. A gray market good is a foreign manufactured good, bearing a valid U.S. trademark, that is imported without the consent of the U.S. trademark holder. Plaintiff American Circuit Breaker Corporation (ACBC) held the U.S. trademark for “STAB-LOK.” Schneider Canada held the Canadian trademark for “STAB-LOK.” One company manufactured circuit breakers for both ACBC and Schneider under the same “STAB-LOK” trademark – ACBC’s black circuit breakers for the U.S. market and Schneider’s gray circuit breakers for the Canadian market. Defendant Oregon Breakers, Inc., a competitor of ACBC, bought Schneider’s gray circuit breakers in Canada, which it then sold in the U.S. without ACBC’s or the manufacturer’s permission. ACBC brought an action against Oregon Breakers asserting claims of trademark infringement, unfair competition and trademark dilution.

After discussing the different kinds of gray markets, the Ninth Circuit found no trademark infringement or unfair competition where goods imported from Canada were genuine and not materially different from the same manufacturer’s goods sold in the U.S. market. The Court wrote that “consumers  purchasing circuit breakers from Oregon Breakers are getting exactly the same circuit breaker, both in specification and quality, as they would purchase from ACBC.”

In Bosley Medical Institute, Inc. v. Kremer, 403 F.3d 672 (9th Cir. 2005), the Ninth Circuit addressed noncommercial use of a trademark. Defendant was a patient at Bosley Medical Center, where he received hair restoration treatments. After being unsatisfied with his experience, he purchased the domain names “BosleyMedical.com” and “BosleyMedicalViolations.com.” On the former site, he provided information critical of  Bosley Medical, but did not offer goods or services or take in any revenue. No links to websites of Bosley Medical’s competitors were present, but a link to defendant’s other site was present, which included a link to a site that included advertisements for Bosley Medical’s competitors. The trademark owner, Bosley Medical, sued for trademark infringement.

The Ninth Circuit held that the noncommercial use of a trademark as a domain name of a website for consumer commentary about goods and services is not “commercial use” and does not constitute infringement under the Lanham Act. However, the Court reversed summary judgment for defendant on his Anticybersquatting Protection Act (ACPA) claims, finding that the ACPA does not have a commercial use requirement. The Court remanded for the lower court to determine whether defendant had a bad faith intent to profit from his use of Bosley Medical’s mark in his domain name.

In Surfvivor Media, Inc. v. Survivor Productions, 406 F.3d 625 (9th Cir. 2005), the Ninth Circuit revisited reverse confusion claims in the trademark infringement context. Reverse confusion occurs when consumers dealing with the senior mark holder believe that they are doing business with the junior one. Here, the owner of the “Surfvivor” mark for beach-themed products sued “Survivor” reality television show producers, alleging trademark infringement from defendants’ placement of their mark on consumer products. Plaintiff Peter Deptula sold a variety of Hawaiian-themed products, including T-shirts, surfboards and sunscreen, under the name “Surfvivor.” Deptula owned three trademarks using “Surfvivor.” Deptula advertises his wares on television, radio and a Website. The “Survivor” television series aired several years after Deptula came up with “Surfvivor.” The show’s mark appears on a variety of consumer merchandise and is accompanied by the words “outwit, out-play and outlast” superimposed over a graphic.

The district court granted defendants’ summary judgment motion concluding that Deptula failed to present sufficient evidence of likelihood of confusion, one of the necessary elements of a trademark infringement claim. The Ninth Circuit considered several factors in its analysis of the likelihood of confusion in this “reverse confusion” case. First, it determined that “Surfvivor” was a suggestive mark, meaning that it requires some imagination to associate the mark with a product. As a suggestive mark, the term was protectable as a trademark. The Court also determined there was no evidence that customers were likely to associate “Surfvivor” products and “Survivor”- related products with a common source. As to similarity of marks, the Court found that, while they sounded very similar, they appeared very different. On balance, the Court concluded the factors did not raise a material issue of fact regarding likelihood of confusion, and it affirmed the district court’sjudgment.

In KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., 408 F.3d 596 (9th Cir. 2005), the Ninth Circuit revisited this ongoing trademark infringement case following the U.S. Supreme Court’s remand in late 2004. KP Permanent Make-Up and Lasting Impression are both cosmetic companies that used some form of the trademark “MICRO COLOR” on or in connection with permanent make-up. KP brought a declaratory judgment action against Lasting alleging the manufacturer’s registered “MICRO-COLORS” mark was generic and not entitled to protection. Lasting counterclaimed for trademark infringement, among other claims. In 2004, the U.S. Supreme Court unanimously held that, even where some confusion exists, fair use can still be raised as a successful defense where a descriptive mark is used by another to accurately describe its goods. However, the extent of consumer confusion can impact whether a use is determined to be “fair.” The Court noted that the statutory language of the fair use defense contained no reference to likelihood of confusion, and said there was no requirement to negate confusion before raising fair use as a defense. The Supreme Court further held that the burden of proving a likelihood of confusion rests with the party claiming trademark infringement, not with the party asserting a fair  use defense.

On remand from the Supreme Court, the Ninth Circuit reversed the district court’s grant of summary judgment for KP,  concluding that its trademarked term was not generic and entitled to trademark protection. The Court observed that the district court had entered summary judgment for KP after determining that the words “micro colors,” as distinct from Lasting’s entire logo, were not protected because they were generic. Further, the Court found that even if they were not generic, they were descriptive and had not acquired secondary meaning. According to the Court, KP presented no evidence the term was used or understood by consumers as a generic term rather than a brand name, while Lasting presented evidence that the term was understood as a brand name. The Court also said the district court erred by requiring Lasting to demonstrate secondary meaning of the words “micro colors” because the incontestable registration of the mark was conclusive evidence that the mark was non-descriptive or had acquired secondary meaning.

TRADE SECRETS

Several important decisions concerning California’s Uniform Trade Secrets Act (CUTSA) were rendered in 2005. In a case of first  impression, the California Court of Appeal in Advanced Modular Sputtering, Inc. v. Superior Court, 132 Cal.App.4th 826 (2005), addressed two important issues involving trade secret discovery. The first issue was whether Code of Civil Procedure §2019.210 (formerly Section 2019(d)) – which provides that discovery related to trade secrets may not commence until the trade secret is identified with “reasonable particularity” – extends to any cause of action which relates to the trade secret where the party alleging the trade secret misappropriation also asserts a cause of action under CUTSA. The second issue was the degree of “reasonable particularity” that must be met to satisfy the identification requirement needed before the commencement of discovery.

Plaintiff Advanced Modular Sputtering (“ADS”), an equipment manufacturer, sued former employees and their competitor company, alleging causes of action for trade secrets misappropriation and nine other state law claims, all of which depended on the foundational allegation that defendants misappropriated plaintiff’s trade secrets. The superior court entered an order staying discovery relating to the misappropriation claim based on a discovery referee’s conclusion that ADS failed to specify trade secrets in dispute with sufficient particularity, but permitting discovery to proceed on the remaining nine causes of action.

The appellate court held that Cal. Civ. Proc. §2019.210 extended to any cause of action relating to trade secrets. The court further held that “reasonable particularity” does not suggest the party alleging misappropriation must provide every detail of the trade secret. Rather, the trade secret must be identified so that it can be distinguished from matters of general knowledge in the field, thereby limiting the scope of discovery. The disclosure level will depend on the type of trade secret at issue. A higher level of particularity may be required when the trade secret is a highly specialized, incremental change  in the current state of the art. The court, however, left open the question of whether CCP §2019.210 applies to non-CUTSA claims that are tantamount to a trade secrets misappropriation claim but are pled to avoid the statute’s restrictions.

In Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025 (N.D. Cal. 2005), the district court ruled that CUTSA preempts unfair competition and unjust enrichment claims based on an allegation of trade secrets misappropriation. Plaintiff alleged that Google’s use of its technology that allowed Google to make an “educated guess” about the approximate location of  site users breached a licensing agreement, and also filed misappropriation, unjust enrichment and unfair competition claims arising from the same conduct. While holding that material questions of fact precluded Google’s summary judgment motion for breach of the license agreement, the court granted Google’s request for partial summary judgment on plaintiff’s remaining claims based upon the preemptive effect of CUTSA.

The statute, Google argued, explicitly states that it does not preempt claims that are based upon breach of contract, criminal remedies, or other claims that are not based on trade secrets misappropriation, and “there would be no need for inclusion of this provision in California’s statutory scheme unless the CUTSA preempted other claims based on misappropriation.” The court agreed, finding that because plaintiff’s unfair competition and unjust enrichment claims were based on the same nucleus of fact as its trade secrets misappropriation claim, those claims were preempted.

If you have any questions regarding this bulletin, please contact Heather L. McCloskey, Esq., Editor of this publication and a partner in ECJ’s Intellectual Property Department, at 310.281.6349 or hmccloskey@ecjlaw.com or Andres F. Quintana, Esq. at 310.281.6340 or aquintana@ecjlaw.com, or John M. Houkom, Esq. at 310.281.6372 or jhoukom@ecjlaw.com. If one of your colleagues would like to be a part of the IntellectualProperty Reporter mailing list, or if you would like to receive copies electronically, please contact Cynthia S. Kaiser at 310.281.6328 or ckaiser@ecjlaw.com.