Intellectual Property Advisor

On April 8, 2009, the U.S. Court of Appeals for the Federal Circuit issued a decision in TransCore, LP v. Electronic Transaction Consultants Corp. (No. 2008-1430) that will have a significant impact on how agreements relating to patents are interpreted. Patent owners must consider this decision when entering into agreements affecting their patent rights. The Federal Circuit held that (i) an unconditional covenant not to sue has the same effect as an unconditional license for purposes of patent exhaustion, and (ii) a covenant not to sue conveys an implied license, by virtue of legal estoppel, to later-issued patents that are necessary to practice the subject matter of patents to which rights were granted, even if the agreement includes express language that it does not convey rights to other patents.

In 2000, TransCore, a manufacturer of automated toll collection systems, sued Mark IV Industries, a competitor, for patent infringement. The parties resolved the action by a settlement agreement pursuant to which Mark IV agreed to pay TransCore $4.5 million, TransCore released all existing claims against Mark IV and TransCore agreed to an unconditional covenant not to sue Mark IV for infringement of certain patents owned by TransCore.

Subsequent to entering into the settlement agreement with TransCore, Mark IV sold toll collection systems to the Illinois State Highway Authority (“Highway Authority”), which engaged Electronic Transaction Consultants (“ETC”) to install and test the systems. Based on this work for the Highway Authority, TransCore sued ETC for infringement of (i) the patents that were the subject of the settlement agreement with Mark IV and (ii) one additional patent.

In May 2008, the District Court for the Northern District of Texas granted summary judgment in favor of ETC based on ETC’s claims that its actions were authorized by the settlement agreement pursuant to patent exhaustion, implied license and legal estoppel. TransCore appealed to the Federal Circuit.

When considering TransCore’s appeal, the Federal Circuit referred to the U.S. Supreme Court’s decision in the recent Quanta case to reiterate the longstanding patent exhaustion doctrine, which states that the first authorized sale of a patented product terminates all patent rights to that product. Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008).   

The Federal Circuit then looked to the TransCore-Mark IV settlement agreement, specifically at the unrestricted covenant not to sue, to determine whether Mark IV’s sale of the toll collection systems was authorized by TransCore. In determining whether that covenant not to sue authorized Mark IV to sell items that infringe TransCore’s patents, the court relied on precedent which holds that covenants not to sue and nonexclusive licenses have identical effects. Applying this concept to the TransCore-Mark IV settlement agreement, the court found that TransCore’s unambiguous and unrestricted covenant not to sue did indeed authorize Mark IV’s sale of the products that infringe the TransCore patents.   

Because the sale of infringing items by Mark IV to the Highway Authority was authorized by TransCore, TransCore’s patent rights in such items were exhausted by that sale. Therefore, ETC did not infringe TransCore’s patent rights.

Next, the Federal Circuit found in favor of ETC with respect to legal estoppel, finding that ETC had an implied license to a patent that was not explicitly subject to the TransCore-Mark IV settlement agreement. In doing so, the court expanded earlier legal estoppel law, which had stated that a patent licensor is estopped from asserting a previously issued patent to detract from a patent license that had been granted. The Federal Circuit expressed its belief that the legal estoppel doctrine should not be limited to previously issued patents only, and held that it should apply to later-issued patents that are necessary to practice expressly licensed patents. The court came to this conclusion even in the face of express language in the TransCore-Mark IV settlement agreement that stated that the covenant not to sue did not apply to any other patents issued in the future, stating that the language did not permit TransCore to detract from the rights it had expressly granted.

So what does this decision mean for parties contracting with respect to patent rights?  First, an unrestricted covenant not to sue results in exhaustion in the same manner as an unrestricted nonexclusive license. Parties should be sure to consider and include any restrictions on a covenant not to sue with the same precision and care that are typically brought to bear when drafting a license agreement. Second, a patent owner should not rely on a generic reservation of rights clause in the hopes of preserving rights to a to-be-issued patent that is arguably necessary to practice expressly licensed patent rights. To do so may result in the granting of a royalty-free implied license. Instead, the patent owner should expressly address the license rights and royalty obligations with respect to those patents.

The International Trade Commission (“ITC”) offers broad injunctive relief in the form of exclusion orders, which exclude infringing articles from importation into the United States. While the Federal Circuit’s recent decision in Kyocera Wireless Corp. v. Int’l Trade Comm’n (545 F.3d 1310 (Fed. Cir. 2008)) only addressed one specific exclusion order practice, its reasoning has led the Commission to undertake a broader re-examination of its framework for awarding remedies. Thus, managing litigation in the ITC requires an understanding of the ramifications of Kyocera and crafting strategies for responding to the new – and still evolving – landscape.

Relief in the ITC

The Commission is authorized by statute to issue exclusion orders, which are injunctions against unfair importation into the United States, and cease-and-desist orders against domestic entities engaged in unfair methods or acts. 19 U.S.C. § 1337(d) & (f) (2006). There are two basic types of exclusion orders – a limited exclusion order (“LEO”) and a general exclusion order (“GEO”). An LEO is enforceable against the parties named in the investigation, while a GEO is enforceable against anyone. LEOs are the default remedy. The far-reaching relief afforded by GEOs is only available if a complainant can establish:  “(A) [it] is necessary to prevent circumvention of an exclusion order limited to products of named persons; or (B) there is a pattern of violation of [the section] and it is difficult to identify the source of infringing products.” Id. at § 1337(d).

Pre-Kyocera Remedy Determinations

Before Kyocera, a few seminal ITC decisions guided the Commission’s remedy determinations. The seminal opinion setting forth the analytical framework for whether to award a GEO was Certain Airless Paint Spray Pumps and Components Thereof (“Spray Pumps”). Inv. No. 337-TA-90, USITC Pub. No. 1199, 216 U.S.P.Q. 465 (Nov. 1981). In Spray Pumps, the Commission explained that a complainant must prove (i) “a widespread pattern of unauthorized use of its patented invention” and (ii) “certain business conditions from which one might reasonably infer that foreign manufacturers other than the respondents to the investigation may attempt to enter the U.S. market with infringing articles.” Id. at 473. The Commission also detailed the kinds of evidence which would be probative of whether a GEO was justified.

In practice the Spray Pumps test proved difficult to satisfy, and complainants sought to maximize the relief they could obtain under an LEO, without having to meet the Spray Pumps test. Complainants sought LEOs that would cover manufacturers of “downstream products” – that is, products incorporating articles found to infringe in the ITC proceeding. For example, a complainant might seek to exclude computers that incorporate infringing memory chips. In Certain Erasable Programmable Read Only Memories, Components Thereof, Products Containing Such Memories, and Processes for Making Such Memories (“EPROM”), the Commission decided that downstream products manufactured by a named respondent could be excluded under an LEO and set forth several factors to govern whether such relief should be granted. Inv. No. 337-TA-276, USITC Pub. No. 2196, 1989 ITC LEXIS 122 (May 1989). In other words, a respondent manufacturing infringing memory chips could be excluded from importing computers it manufactured containing those memory chips.

The Commission later extended the use of these EPROM factors to situations where the downstream products were manufactured by third parties not named as respondents in the investigation. This meant that, even if the computer were manufactured by a non-respondent, it could be excluded because it contained the infringing memory chips made by a respondent.

Kyocera v. Int’l Trade Comm’n

In Kyocera, the central issue was whether the Commission actually had the authority to issue LEOs that cover downstream products of non-respondents. Broadcom had filed a complaint against Qualcomm, accusing Qualcomm’s semiconductor chips of infringement, but Qualcomm imported very few chips into the United States. Broadcom sought an LEO that would cover downstream products containing those chips, such as cell phones, which were manufactured by third parties. Qualcomm and a number of intervenors (various cell phone manufacturers and service providers) argued that the statute did not permit an LEO to cover downstream products made by third parties who were not named as respondents. Both the ALJ and the Commission rejected this argument, and, consistent with its established practice, the Commission issued an LEO covering downstream products.

On appeal, the Federal Circuit agreed with Qualcomm and the intervenors, and vacated the exclusion order. The court based its decision on the statutory language, which provides “[t]he authority of the Commission to order an exclusion from entry of articles shall be limited to persons determined by the Commission to be violating this section unless the Commission determines that [a GEO is warranted].” 19 U.S.C. § 1337(d)(2) (emphasis added). The Federal Circuit interpreted this language as only granting the Commission authority to exclude products of named respondents, unless the complainant met the higher statutory burden required to obtain a GEO. Kyocera, 545 F.3d at 1356. Accordingly, the court held that the Commission overstepped its statutory authority by awarding an LEO that covered downstream products, such as cell phones, manufactured by non-respondents.

Post-Kyocera Developments

Since Kyocera, the Commission has begun a broader re-examination of its analytical frameworks for awarding both LEOs and GEOs, casting aside its own precedent in favor of a singular focus on the statutory text. At first, the Commission elevated the significance of the statute without entirely abandoning its precedent. In Certain Hydraulic Excavators and Components Thereof (“Hydraulic Excavators”), (Inv. No. 337-TA-582, Comm’n Op., slip op. (Fed. 3, 2009)) even though the Commission primarily focused its analysis on the statutory language, it also indicated that its Spray Pumps test for awarding a GEO could still provide useful guidance. However, subsequently in Certain Ground Fault Circuit Interrupters and Products Containing the Same (Inv. No. 337-TA-615, Notice of Comm’n Final Determination of Violation of Section 337; Termination of Investigation; Issuance of Limited Exclusion Order and Cease-and-Desist Orders (March 9, 2009). The authors represented the complainant in this investigation.), the Commission made clear its intent to divorce itself completely from its Spray Pumps framework, and instead focus exclusively on the statute. There, the Commission found infringement of four patents by seven different products, violations by four foreign manufacturers and 10 domestic distributors and resellers, a history of name changes by the foreign manufacturing respondents, and the use of shell companies by respondents to import into the United States. Despite all these factual findings, which traditionally weighed heavily in favor of granting a GEO, the Commission refused to follow the ALJ’s recommendation to issue a GEO, and instead granted an LEO.

The unavailability of an LEO against downstream manufacturers and the uncertainty surrounding the new analytical framework for GEOs has led the Commission to consider some novel issues. In Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing the Same (Inv. No. 337-TA-605, Notice of Comm’n Decision to Request Additional Briefing on Remedy and to Extend the Target Date (March 26, 2009). Goodwin also represented the complainant in this investigation), the Commission requested that the parties address the complainant’s request for a “tailored GEO,” which, unlike a standard GEO which is effective against everyone, would reach only certain downstream products manufactured by non-respondents. The Commission also requested that the parties address whether the Commission has authority to issue exclusion orders at different times, i.e., to issue an LEO immediately and then take more time to assess whether to award a GEO.

Litigation Strategies Post-Kyocera

Kyocera has highlighted the need to consider carefully which parties should be named as respondents because it may now be more difficult, or impossible, to obtain relief against unnamed parties. Complainants who previously would have sought an LEO covering downstream products of non-respondents must choose between naming all known manufacturers of downstream products or endeavoring to meet the higher burden required to obtain a GEO. Often the manufacturers of the downstream products are customers or potential customers, presenting challenges to naming them as respondents.

Even if a complainant would prefer not to name the downstream entities, complainants who forgo naming them and instead decide to pursue a GEO may nevertheless face an uphill battle. The Commission has long believed that complainants should name all infringers, and may refuse to grant a GEO on the basis that the complainant should have named the downstream entities and thus would have been able to obtain effective relief under an LEO. Furthermore, both the identities of and the number of named respondents can factor into the Commission’s impressions of the state of the market. In addition, it will take some time for the uncertainty regarding the ITC’s new analytical framework for GEOs to be resolved, and some complainants may find themselves caught by sifting sands in the transition period.

One strategy complainants may consider to alleviate the inherent tension in suing its customers (or potential customers) is to offer to enter into consent orders with them at an early stage. This would allow complainants to terminate the investigation of its customers quickly, if the customers agree to be bound by the result of the ITC investigation. Thus, a complainant may increase its chances of obtaining effective relief while sparing its customers or potential customers the expense of litigating. This would not only ameliorate the hard feelings that may result from naming a customer or potential customer in a lawsuit, but also reduce the complexity of the investigation.

Conclusion

The Commission’s renewed focus on the statutory text and broader re-examination of its analytical framework for remedies requires ITC practitioners to re-assess their litigation strategies, from their pre-filing evaluations of which parties to name as respondents to their post-trial arguments concerning the appropriate remedy. Creative new approaches, such as naming customers or potential customers simply to secure consent orders, are likely to be required to adjust to the evolving post-Kyocera landscape.

In a decision that could have important implications for all companies with an online presence, the U.S. District Court for the Northern District of Texas recently held that an arbitration provision in a website user agreement that reserved a website operator’s right to unilaterally modify the agreement was an unenforceable “illusory contract.” Harris v. Blockbuster Inc., 2009 U.S. Dist. LEXIS 31531 (N.D. Tex. Apr. 15, 2009).  The case is noteworthy given that it’s very common for website operators to reserve the right to make unilateral changes to terms of use agreements at any time, in a manner that is very similar to what was done by the defendant in this case. Many website operators consider it to be critically important to have the right to make changes to their website user agreements at will in order to address changes in their businesses and in the applicable legal environment.

Background

The underlying case that prompted the analysis of the terms of use is interesting and timely, as it involved behavioral advertising, a topic likely to be the subject of continued controversy in years to come. Harris, the plaintiff in the Blockbuster case, alleged that Blockbuster violated the federal Video Privacy Protection Act (18 U.S.C. § 2710 (“VPPA”) by sharing information about her movie selections with third parties without first obtaining her consent. The VPPA prohibits movie rental service providers from disclosing consumers’ personally identifiable information, including movie rental selections, to third parties without the informed written consent of the consumer at the time of the disclosure, and allows for damages of $2,500 for each violation.

The alleged VPPA violation arose out of Blockbuster’s participation in Facebook’s Beacon behavioral advertising initiative. This program allowed companies partnered with Facebook to advertise by posting notices in Facebook users’ “news feeds” when the applicable Facebook user took an action, such as making a purchase, playing a game or posting a product review on a third-party website that participated in Facebook’s Beacon program. When initially launched, Facebook users had the right to opt-out of Beacon, but, in response to consumer complaints, Facebook later changed Beacon from an opt-out to an opt-in system. Apparently, Harris did not wish for her video rental data to be broadcast to her Facebook friends, and brought an action, seeking $2,500 per VPPA violation for herself and for a class of similarly situated individuals.

Court Determines Unilateral Right to Modify Terms is Problematic

Blockbuster’s user agreement that was in effect at the time was displayed as a “clickwrap” style agreement. Significant to the issue at hand, the agreement included clauses providing for binding arbitration and a waiver of any class action litigation against Blockbuster. Blockbuster filed a motion to compel arbitration based on the arbitration clause in its terms of service. Denying the motion, Judge Barbara M.G. Lynn ruled the arbitration provision of the terms of service an unenforceable illusory contract because Blockbuster had reserved to itself the right to change the terms at any time. On this issue of modification, the Blockbuster agreement provided:

Blockbuster may at any time, and at its sole discretion, modify these Terms and Conditions of Use, including without limitation the Privacy Policy, with or without notice. Such modifications will be effective immediately upon posting. You agree to review these Terms and Conditions of Use periodically and your continued use of this Site following such modifications will indicate your acceptance of these modified Terms and Conditions of Use. If you do not agree to any modification of these Terms and Conditions of Use, you must immediately stop using this Site.

In reaching its decision, the Harris court followed closely the recent decision of Morrison v. Amway Corp., 517 F.3d 248 (2008). In Morrison, the U.S. Court of Appeals for the Fifth Circuit held that the arbitration provision of Amway’s contract with its distributors was illusory because Amway reserved to itself the right to unilaterally modify all aspects of its deal with the distributors by publishing notice of the changes. It was important to the Morrison court that the Amway contract did not include language precluding retroactive modification of the arbitration provision with respect to disputes that arose prior to the date of modification.

The court found the Morrison reasoning to be convincing and concluded that the Blockbuster provision was illusory for the same reason it was in Morrison. The court contended that “other than providing that such changes will not take effect until posted on the website,” there is nothing in the Blockbuster agreement that would prevent Blockbuster from unilaterally changing any part of the contract. The court also seemed to be concerned that changes made to the arbitration clause in the user agreement may not only be prospective in nature. The court concluded that the limitation that the changes would not come into effect until posted online was not enough to save the arbitration clause. Because the court concluded that the agreement was illusory and thus unenforceable, it did not address the plaintiff’s argument that the arbitration clause was also unconscionable.

Implications

Given the prevalence of unilateral modification rights in online agreements, this is potentially a very significant ruling. Although it and the cases to which it refers deal primarily with the arbitration provisions of contracts, dicta in the Blockbuster decision indicate that Blockbuster’s terms of service themselves, and not just the arbitration provision, are illusory. Not only does it open the door for others to join in the class action suit against Blockbuster, it also opens the door for other lawsuits challenging terms of use agreements that can be changed at will. If challenged, it is not clear how well the decision will fare on appeal. However, at this time, there is cause to give thought to the potential implications of the decision. This is not the first time that a court has sided with a party that has challenged the enforceability of an online agreement and it is not likely to be the last.  As online agreements continue to be litigated, further guideposts are likely to continue to emerge. In the meantime, companies with website or other terms of use or online contracts that allow unilateral modification may wish to explore whether they should take additional steps in order to bolster the likelihood that their online agreements will be enforceable.

On April 3, 2009, the U.S. Court of Appeals for the Second Circuit issued a decision that has the legal and business communities abuzz. Exactly one year after hearing oral arguments in Rescuecom Corp. v. Google Inc. (Docket No. 06-4881-cv), the Second Circuit reversed the lower court’s dismissal of Rescuecom’s trademark infringement claims against Google that were based on Google’s search engine advertising practices. The decision, which has sent the case back to the lower court for further proceedings, has serious ramifications for search engine advertising practices that make use of competitors’ trademarks.

The Rescuecom Dispute

In 2004, Rescuecom filed suit against Google alleging that Google had infringed and diluted Rescuecom’s federally registered trademark RESCUECOM. Rescuecom’s claims relate to Google’s use of context-based advertising to respond to search requests using Google’s search engine.

Typically, a person using Google’s search engine enters a term to launch a search. Google’s system responds to this search request in two ways. First, Google’s proprietary algorithms organize search results in order of descending relevance (as deemed by Google). These results are then displayed along the left side of the screen. Second, and more pertinent to the issues presented by the Rescuecom litigation, the search results also display context-based advertising triggered by the term entered. This advertising is paid for by an advertiser believing that the placement of its ad, complete with a link to the advertiser’s website, will be of interest to the searcher. These paid advertisements are displayed either directly above the relevance-based search results, or along the right-hand side of the screen. These advertisements are usually identified with a banner which states that they are “sponsored links.”

Google uses two programs to facilitate this context-based advertising: AdWords and Keyword Suggestion Tool. AdWords is a program whereby advertisers purchase specific keywords. The keywords, in turn, trigger the appearance of the advertiser’s ad. Keyword Suggestion Tool is just that – a “tool” that recommends to advertisers keywords that may be of interest. The keywords are for sale, as they are in AdWords.

Rescuecom, a computer service company, took umbrage with Google’s advertising program. Claiming that Google recommended and sold the RESCUECOM trademark to Rescuecom’s competitors for purposes of Google’s context-based advertising, Rescuecom sued Google for trademark infringement, false designation of origin and dilution of its trademark. Among its allegations, Rescuecom claims that Google, in cooperation with Rescuecom’s competitors, uses the RESCUECOM mark to divert potential customers away from Rescuecom and to trade on the goodwill of the RESCUECOM name.

Google filed a motion to dismiss Rescuecom’s complaint for failing to adequately state a claim.

The District Court Ruling:  No Actionable “Use in Commerce” Under Trademark Law

In 2006, the district court agreed with Google and dismissed Rescuecom’s claims. In doing so, the district court relied heavily on the Second Circuit’s 2005 decision in 1-800 Contacts, Inc. v. WhenU.com, Inc., 414 F.3d 400 (2d Cir. 2005).

In 1-800, the defendant offered a proprietary software which it freely distributed to computer users. The software program utilized specific search terms to generate pop-up advertisements. Thus, once downloaded, the program would display pop-up advertisements when certain search terms or websites were entered into the user’s browser. The advertisements were displayed randomly, based on the category of the term entered. The advertisers could not purchase specific keywords to trigger their ads.

The Second Circuit concluded that the defendant in 1-800 did not use, reproduce or display the plaintiff’s mark. Rather, the court reasoned, any use of the plaintiff’s mark was merely an internal component of the software, and therefore was not a “use in commerce” within the meaning of federal trademark law.

Relying on this precedent, the district court in Rescuecom concluded that Google’s actions similarly were not a “use in commerce” because the competitor’s advertisements did not actually exhibit the RESCUECOM trademark. The court concluded that any use of the RESCUECOM trademark was merely internal – much like that in 1-800. As such, Rescuecom failed to allege the requisite “use in commerce” needed to support its claims.

Rescuecom appealed the decision to the Second Circuit.

The Court of Appeals: Distinguishing the 1-800 Decision

In reviewing the district court’s decision, the Second Circuit has gone to great lengths to distinguish the precedent set by its 1-800 decision from the facts alleged by Rescuecom. Specifically, the software in 1-800 did not sell keywords or other terms. As the 1-800 plaintiff did not market or sell keywords to the advertisers in question, using or otherwise displaying a competitor’s trademark in one of the pop-up advertisements was not possible.

In addition, the subject ads in 1-800 appeared in a separate browser window, with the defendant’s brand displayed in the window frame. Therefore, according to the Second Circuit, “there was no confusion as to the nature of the pop-up as an advertisement, nor as to the fact that the defendant, not the trademark owner, was responsible for displaying the ad, in response to the particular term searched.” Slip. Op., p. 9.

Similarly, in 1-800 the plaintiff did not allege that the defendant used the plaintiff’s trademark to generate the advertisements in question; instead, the 1-800 defendant used the plaintiff’s website address.

The Second Circuit seized on these differences to explain its ruling:

[I]n contrast with the facts of 1-800 where the defendant did not “use or display,” much less sell, trademarks as search terms to its advertisers, here Google displays, offers and sells Rescuecom’s mark to Google’s advertising customers when selling its advertising services. In addition, Google encourages the purchase of Rescuecom’s mark through its Keyword Suggestion Tool. Slip. Op., p.11.

Notably, the Second Circuit’s decision reserves judgment as to whether Google’s practices are benign or whether consumers are likely to be confused.  Because the lower court’s decision was made on a motion to dismiss, any such conclusion would be premature.  It is important, however, that the court distinguished and sharply limited its precedent in 1-800 in order to allow Rescuecom to pursue its case against Google.

Looking Ahead

In its analysis of whether Google’s use of Rescuecom’s trademark constitutes “use in commerce,” the Second Circuit significantly limited the scope of its decision in 1-800. In finding that Google’s recommendation and sale of Rescuecom’s trademark to Google’s advertising customers was not merely “internal use,” the court opened the door for additional lawsuits against search engine advertising practices. In fact, as recently as May 11, 2009, a software company filed against Google and its related entities what is believed to be the first class action suit stemming from the sale of keywords for targeted advertising. FPX, LLC v. Google, Inc., et al., 2:09-cv-00142-TJW (E.D. Tex. 2009).

Of course, it remains to be seen whether Rescuecom will prevail in proving the merits of its case. The Second Circuit’s decision will nonetheless be instructive. Companies and individuals participating in any search engine service which generates context advertising should carefully consider the potential liabilities arising from the purchase and use of a competitor’s trademark as an ad-triggering keyword. Google also recently announced a change to its AdWords policy. Beginning in June, Google will allow advertisers in certain circumstances to use third-party trademarks in their AdWords text. See “Update to U.S. ad text trademark policy,” http://adwords.blogspot.com (May 14, 2009). Thus, trademark owners similarly should take note: context-based advertising should be closely monitored and considered when crafting enforcement strategies.

As is already evident, the Second Circuit’s decision has significant legal ramifications for Rescuecom and Google. However, the practical considerations of this decision may prove to be even greater for trademark owners and those advertising on the Internet.

Publications

Jeffrey I. Klein and Jacqueline Klosek published  “Every Click You Take, They’ll Be Watching You: Top Online Behavioral Advertising Privacy Issues” in the May 2009 issue of Privacy & Data Security Law Journal. 

Stephen G. Charkoudian contributed to the article “Attorneys Share Entrepreneurs’ IP Mistakes” in the April 17, 2009 issue of Mass High Tech.

Brian A. Fairchild, Ph.D. and Edmund R. Pitcher published “Enforceable Diagnostic Method Patents” in the April 1, 2009 issue of Genetic Engineering & Biotechnology News. 

Steven J. Frank published “IP Due Diligence In Corporate Transactions” in the March 24, 2009 issue of IP Law360. 

Mark J. Abate and Calvin E. Wingfield, Jr. published “Pleading Requirements in the ITC and Tips to Starting Off an Investigation on the Right Foot” in the March 2009 issue of IP Litigator.

Jacqueline Klosek, Agnes Bundy Scanlan and Rachel A. Samuels published “Preventing Identity Theft and Other Harm Through Increased Controls on Social Security Numbers: A Review of Select State Laws” in the March 2009 issue of Privacy & Data Security Law Journal.

Hope D. Mehlman, Steve J. Frank and Adam D. Swain published “Attorney-Client Privilege and IP Due Diligence: Balancing the Need for Information for the Deal Against the Risk of Waiver” in BNA’s Patent, Trademark & Copyright Journal.

Kingsley L. Taft published “IP Joint Ownership Creates Challenges For Cos” in the February 18, 2009 issue of IP Law360.

 

Upcoming Conferences

The Hebrew University Faculty of Law Annual IP Symposium
Date: June 1, 2009
Location: ZOA House, 26 Ibn Gvirol Street, Tel Aviv, Israel
This symposium, hosted by Hebrew University, brings together academics and practicing attorneys, and will address recent trends and developments in patent, copyright and trademark law in Israel and abroad. Frederick Rein will be speaking on the “Biogenerics: The Future Legal Framework in the United States” panel.

Nature Biotech SciCafe - Boston
Date: June 11, 2009
Location:  Goodwin Procter Conference Center, Boston, MA
This event, hosted by Nature Biotechnology and sponsored by Goodwin Procter, matches up-and-coming life science investigators with the local investment community. It features science and technology presentations with networking opportunities before and after the program.

PLI’s Fundamental of Patent Prosecution 2009: A Boot Camp for Claim Drafting & Amendment Writing
Dates: June 17-19, 2009
Location:  PLI Center, New York, NY
Marta Delsignore and Louis Sorell will speak on, respectively, “Patent Opinions” and “Claim Construction and Doctrine of Equivalents” during the Litigation Issues program on June 19.  Marta, Louis and Lindsey Repose will serve as instructors for the Clinic III of this conference, focusing on patent prosecution issues and opinion drafting.

Medical Development Group Meeting
Date: June 17, 2009
Location:  287 Washington Street, Newton, MA
Chris Stamos will present “Top 10 Things for an MDG Member to Know About IP Portfolios,” which will focus on different types of IP, how they overlap and how patents can be properly obtained yet the filer may still be at risk to be sued for patent infringement.  MDG is New England’s premier organization for individual professionals in the medical device and related fields. 

PLI’s Patent Basics 2009
Date: July 15, 2009
Location:  PLI Center, New York, NY
Robert Crawford will present on patent issues in M&A transactions.

The Internet Corporation for Assigned Names and Numbers (“ICANN”) has announced plans to create an indefinite number of new generic top-level domains (“gTLDs”) and will accept the first applications for such new gTLDs as early as the first quarter of 2010. Currently, users are limited to 21 gTLDs, including .com, .org, .net and .info. But pending final approval of the implementation plan, ICANN will remove this restriction and allow eligible parties to apply for virtually any self-selected gTLD, including trademark-specific domains like .coke or .google, generic terms such as .sport and .bank, geographic terms such as .paris, as well as virtually anything else. The proposed changes will also permit the registration of gTLDs featuring non-Roman characters.

According to ICANN: “Opening up these addresses so new names can appear could produce a new wave of innovation – innovation for businesses and billions of non-English speakers.”¹ ICANN claims that this initiative comes in response to demand from the Internet community and that many potential registrants are thrilled at the possibilities the new gTLDs present. Proponents view the change in the domain system as an opportunity to increase their visibility in an Internet space presently dominated by the overcrowded .com domain.

More established brand-holders and many members of the trademark bar, however, have generally remained skeptical if not hostile to the proposal. They see no pressing need for additional gTLDs and believe their introduction will only impose on brand owners significant costs and burdens (neither of which are needed in this economic climate) to protect their brands from countless new opportunities for cybersquatting. To the extent that there is “demand” for new gTLDs, opponents believe that the demand is coming from the registrars which will benefit enormously from the potentially infinite new pool of names to be bought, and not from potential registrants, or brand owners. The six-figure application/evaluation fee, which ICANN insists is no higher than is necessary to recover the costs associated with the new program, opponents argue, is excessive bordering on extortionate, and the potential for consumer confusion created by the new domains is far too great.

Background

When ICANN was founded in 1998 to, among other things, manage the domain name system, there were eight existing gTLDs. Many of these original gTLDs (e.g., .com, .edu and .gov), in fact, continue to be the most widely used gTLDs today. Soon after its founding, ICANN started to clamor for the introduction of additional gTLDs (the implementation of which would, of course, result in additional revenues for ICANN). That work culminated in the introduction of seven new gTLDs in late 2000, including .aero, .biz and .coop. A further round of new gTLDs, which included .asia, .jobs and .mobi, was then introduced in 2004. In December 2005, the Generic Names Supporting Organization (“GNSO”) was called on to create a standing policy to guide the introduction of new gTLDs. Its policy development work continued until September 2007 when it issued its final report. ICANN subsequently approved the GNSO’s recommendations in June 2008 and embarked on its current plan to dramatically expand the Internet domain system. After a series of draft applicant guidebooks, public comment periods and delayed launch dates, a final applicant guidebook is expected in December 2009, allowing the first round of applications to be filed in early 2010.

No Sunrise Period for Trademark Owners

ICANN’s original plan did not automatically reserve gTLDs for trademark holders. Instead, the new gTLD registration process will operate on a first-come, first-served basis.² Thus, companies will soon have to decide whether to spend the over $150,000 per name filing fee to register their brand-specific gTLDs (e.g., .nike) or risk seeing their marks registered by someone else. Companies will also have to decide whether to apply for any variations in spelling, spacing, hyphenation, abbreviation, gripe names, common typographical errors, etc., to protect against typosquatters, scammers and phishers. Moreover, with every potential new gTLD for a generic term, brand owners in the relevant industry will have to think seriously about whether they want to register first the generic term itself, and then whether to register their marks as domains under that top-level domain. Thus, for example, a large brand-centric company like Coca Cola would face a number of daunting and expensive choices. They would need first to consider registering key trademarks as gTLDs like .coke, .cocacola, .sprite and so on. But they would also need to decide whether to register generic terms like .cola, .soda and .drink. And then they would have to decide whether to register domains within those gTLDs like coke.drink, sprite.soda, and so on. The permutations are limited only by the imagination and the budget.

How ICANN Plans to Protect Trademark Owners Against Infringing gTLDs

In order to provide some protection for brand-owners, ICANN’s plan calls for an objection-based process for dispute resolution where third parties can object to a gTLD application before ICANN approves it. An objection, which will be considered before a panel of qualified experts, can only be based on one of four grounds:

• String Confusion. An applied-for gTLD string cannot be “confusingly similar to an existing TLD or to another applied-for gTLD.”
• Legal Rights. An applied-for gTLD string cannot “infringe existing legal rights of the objector.”
• Morality and Public Order. An applied-for gTLD string cannot be “contrary to generally accepted legal norms of morality and public order that are recognized under international principles of law.”
• Community. An applied-for gTLD string will be refused if there “is substantial opposition . . . from a significant portion of the community to which the gTLD string may be explicitly or implicitly targeted.”

The objected-to applicant must either file a response or withdraw the application. If it does neither within 30 days, it will be deemed to be in default and the objection will prevail. By withdrawing the application, the applicant will be entitled to a partial refund of its evaluation fee – the amount of which depends on the stage in the process at which the application is withdrawn.³ The non-refundable portion of the evaluation fee (at least 30%, or $55,000) serves as a significant deterrent against frivolous applications.

ICANN is also implementing a process where new gTLD applicants are required to describe within their applications their Rights Protection Mechanism (“RPM”) for second-level domains. That is, once a new gTLD is up and accepting registrations, how will the registrar resolve disputes between competing applicants for names immediately to the left of the “dot”?  ICANN will publish these RPMs at the same time it makes the applications available to the public. The RPMs must, at the very least, ensure that all second-level registrations will be subject to ICANN’s well-known Uniform Dispute Resolution Policy, which governs .com (and other) domains. But it remains unclear how stringent these RPMs must be.

Relying on ICANN’s Processes May Not Adequately Protect All Trademarks

ICANN’s protective mechanisms should discourage most entities from applying for gTLDs that are frivolous or obviously violate the trademark rights of others, as should the costly application fee and (if the application is approved) the mandatory annual service fee (at minimum, $25,000 per year). Furthermore, ICANN’s dispute resolution process should prevent the approval of any applications from obvious scammers/cybersquatters, assuming trademark owners object in a timely manner. It is important to note, however, that ICANN will not notify trademark owners in advance if another entity has applied for a gTLD that includes the owner’s brand. Indeed, ICANN will not take any affirmative steps to determine whether a new gTLD application contains a third party’s trademark. Accordingly, trademark holders, particularly those which do not register their brand-specific domains, will have the burden of monitoring ICANN’s website regularly for potentially infringing gTLD applications.

Relying on ICANN’s processes, however, may not adequately protect all brands. In cases where trademark infringement is not obvious, for example, trademark owners run the risk of coming out on the losing end of the dispute resolution process. Furthermore, a domain that is similar to, or even the same as, an owner’s brand may not necessarily be objectionable, as companies often have trademarks in the same word or phrase for different goods or services or in different jurisdictions. For example, is Delta Airlines entitled to the .delta gTLD, or is Delta Faucets?

Similar domains, even if not infringing, can nevertheless pose practical problems for people looking for the site of a particular brand on the Internet. Search results, for example, will return all similar names as plausible hits. And with the introduction of an unlimited number of new gTLDs, not to mention second-level domains, the number of hits will dramatically increase, making it far less likely (and perhaps at some point, virtually impossible) for a user to find the site he or she is looking for. Indeed, the new domain system will make Internet searching much more complicated and the web much less user-friendly. No longer will Internet users be able to simply tack “.com” to the end of a brand’s name to find a site. Sometimes these problems can be serious. Take the example of an organization that fraudulently creates a site that looks similar to that of a brand owner and then requests private account information, like credit card information. If such a scam (known as pharming) were successful, not only would this cause tangible problems for the brand’s customers but it could also cause customers to mistrust the brand in the future.

Planning Ahead

Recognizing that there are still significant trademark protection issues left to resolve, on March 6, 2009, the ICANN board unanimously passed a resolution requesting the GNSO’s intellectual property constituency to assemble an implementation recommendation team (“IRT”) composed of an internationally diverse group of experts to develop and propose solutions to the trademark issues that have arisen with regard to the introduction of new gTLDs. On May 29, 2009, the IRT published its final report to the ICANN community.

The report outlines five solutions that, according to the IRT, address the most salient trademark issues but also represent only the bare-minimum protections to safeguard trademark owners’ rights. Summarized, the five solutions were to:  (i) create an “IP Clearinghouse,” which will function as an information repository, to reduce the cost and administrative burdens of protecting trademarks; (ii) require all new gTLD registries to take part in a Uniform Rapid Suspension System; (iii) implement a post-delegation dispute resolution mechanism much like the one proposed by the World Intellectual Property Organization; (iv) make “thick WHOIS” mandatory for all registered names; and (v) adopt a revised algorithm for determining string confusion. In a recent hearing before Congress, ICANN would not commit to implementing any of the five recommendations, but indicated that two of them, “thick WHOIS” and streamlined dispute resolution, would be mentioned in its next applicant guidebook, due out in October 2009.

The controversy over the new gTLDs coincides with, and has complicated, the upcoming renewal deadline of ICANN’s contract with the U.S. Government to manage the domain system, which is due to expire this coming September 30. ICANN is eager to be free of government involvement, but opponents of the new gTLD system argue that the controversy is proof that ICANN is not yet ready to be completely independent. Two members of Congress, Reps. Howard Coble (R-NC) and Lamar Smith (R-TX), recently wrote to ICANN to express these concerns, stating that the domain expansion is “likely to result in serious negative consequences” for trademark owners and the public, and that “Given the late consideration of intellectual property concerns, the lack of a credible independent analysis on competition issues in the context of proposals to expand gTLDs, as well as ICANN’s less-than-stellar track record on a variety of other issues, … we have serious misgivings about the prospect of terminating the formal relationship between the U.S. Government and ICANN….”

In the meantime, trademark owners should start thinking about how to protect their brands in light of the new domain space. On February 18, 2009, ICANN released a second draft of its applicant guidebook and accompanying explanatory memoranda detailing the gTLD application and registration process. ICANN also published an analysis of the hundreds of public comments it received in response to the first draft. These materials can be found on the ICANN website here. Brand owners should review these materials thoroughly.

Companies will have to give serious thought to registering their brand-specific gTLDs (and any variations in spelling, spacing, etc.) and should budget for this cost very soon. Moreover, all companies, even those that plan on registering their brand-specific names, should become familiar with ICANN’s dispute resolution processes in the event they have to protest any infringing top-level and/or second-level domains.

Conclusion

Despite significant criticism and limited public support, ICANN insists that its plan to expand the current Internet domain system is good for consumers and good for business. In the long run, as the Internet continues to expand and its reach becomes increasingly global, this may be true. But one point is clear:  there is no current market demand for new gTLDs. Instead, the new domain name system will come at a cost, both literally and figuratively, to trademark owners. Trademark owners will have no choice but to spend a significant amount of time and money to protect their brands, with no immediate prospect of a tangible return on that investment.