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New York Office

On the one year anniversary of Osterberg LLC, I’m pleased to announce the opening of a New York office at 112 West 34th Street, 18th Floor, New York, NY 10120.

2013 Substantial Similarity Shipped

I sent the 2013 update of Substantial Similarity in Copyright Law to the publisher PLI earlier this week.  This will be the tenth anniversary edition.  We’ve included more illustrations of the works at issue in the cases discussed, a significant revision of the chapter on useful articles, and more.  Look for it in on the PLI website and Amazon around May or June.

Work For Hire Part II – Scope of Employment

Following up on my last post concerning works made for hire, this post tackles the question: When is a work “prepared by an employee within the scope of his or her employment?”

The answer is determined based on common law principles as set forth in the Restatement (Second) of Agency. The three criteria are: (1) whether the work is of the kind of work the employee is employed to perform; (2) whether the work occurs substantially within authorized work hours; (3) whether it is motivated, at least in part, by a purpose to serve the employer.

When evaluating whether the work is of the kind the employee is employed to perform, courts generally have defined the scope of the employee’s work very broadly, holding that it encompasses work that is “incidental” to the employee’s work. Courts typically refer to comment b of Section 229 of the Restatement (2d) of Agency, which reads:

An act may be incidental to an authorized act, although considered separately it is an entirely different kind of act. To be incidental, however, it must be one which the servant is employed to perform. It must be within the ultimate objective of the principal and an act which it is not unlikely that such a servant might do. The fact that a particular employer has no reason to expect the particular servant to perform the act is not conclusive.

Applying that principle, one court held that software development work performed by a doctor employed as a research fellow was incidental to the work he was hired to do because his job description recited: “The fellows will acquire skills required to organize, administer, and direct a critical care unit, and to work effectively as a member of a multidisciplinary team.” The software, the court explained, helped organize and administer the critical care unit. In another case, a court found that computer programs developed by the supervisor of a quality control laboratory qualified as a work for hire because the supervisor was responsible for the organization and updating of the laboratory. The court held that “development of the computer programs was at least incidental to his job responsibilities because it was within the ultimate objective of the principal and an act which it is not unlikely that such a servant might do. ”

Of the three factors, the second, whether the work occurs substantially within authorized work hours, typically is the least important. Plenty of courts have found works created after hours to be works for hire. With respect to the third factor, it is important to remember that it is not necessary that the servant’s only motivation be to help his or her employer; the motivation only needs to be partial.

Work For Hire – Eligible Works

One commonly misunderstood aspect of IP law is the limited scope of work for hire. The broad concept of work for hire is that one can hire another person to create something, and the hiring party will own the copyright. What many layman and attorneys either do not realize or forget, however, is that unless the work is created by an employee as part of their job (the subject of my next post on this topic), only certain types of works can ever qualify as works for hire, and the list does not include many of the types of works most businesses typically hire outside personnel to create.

Most fundamentally, work for hire is strictly a creature of copyright law. It cannot ever apply to patents. If a business wants to own an invention, it needs to get an assignment.

Even with the respect to copyright, the class of eligible works is small. The list comes right from the definition of work made for hire in the Copyright Law. Here it is.

A “work made for hire” is— (1) a work prepared by an employee within the scope of his or her employment; or (2) a work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.

As one can see, the list does not include many things a business might hire someone outside to create, such as: software; advertising copy; a jingle or theme song; or a drawing or logo. Moreover, for even the permissible classes of works to qualify as works made for hire, there must be a written agreement.

When your business hires an outside source to create material for it, one should always be wary when someone proposes that the parties just execute a work for hire agreement. One must ask, can the work actually qualify as work made for hire? If not, you’ll need an assignment. Consider the type of work involved and if an assignment is required, get it.

In my next post I will discuss what it means to for a work to be prepared by an employee “within the scope of his or her employment.”

Injunctions in Patent Cases – Still Usually the Right Thing to Do

Notwithstanding a series of cases that seemed to tip the scales against enjoining infringers from continuing to infringe, the patentee’s right to enjoin infringing conduct remains not only alive and well, but presumptive.  That is the teaching of the Federal Circuit in the recent case of Edwards Lifesciences v. Corevalve.

In eBay v. MercExchange, the Supreme Court reminded us that injunctions in patent cases were not to be granted automatically, but rather subject to principles of equity.  Several subsequent cases seemed to further tilt the pendulum toward the infringer, notably ActiveVideo Networks, Inc. v. Verizon Communications, in which the Federal Circuit vacated a permanent injunction after a jury verdict of infringement.

In Edwards Lifesciences, the Federal Circuit seems to have righted the ship.  The Court explained:

A patentee’s right to exclude is a fundamental tenet of patent law.  The innovation incentive of the patent is grounded on the market exclusivity whereby the inventor profits from his invention. Absent adverse equitable considerations, the winner of a judgment of validity and infringement may normally expect to regain the exclusivity that was lost with the infringement…The Court in eBay did not hold that there is a presumption against exclusivity on successful infringement litigation.  The Court did not cancel 35 U.S.C. §154, which states that “Every patent shall contain . . . a grant . . . of the right to exclude others from making, using, offering for sale, or selling the invention,” nor did the Court overrule Article I section 8 of the Constitution, which grants Congress the power to “secur[e] for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” The Court held that equitable aspects should always be considered, stating: “We hold only that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.” eBay, 547 U.S. at 394. Statutory and historical as well as commercial considerations impinge on every equitable determination.  Precedent illustrates the variety of equitable considerations, and responsive equitable remedy in patent cases: for example, the grant of a royalty-bearing license instead of imposing an injunction in situations where the patentee would experience no competitive injury, or where there is an overriding public interest in continued provision of the infringing product.

This is as it should be.  The most fundamental of intellectual property rights, like other property rights, is the right to exclude.  It is only in un-ordinary circumstances that the patentee’s right yield to some other equitable consideration.  What remains questionable in my mind is whether such circumstances should include a case like ActiveVideo v. Verizon.  By refusing the injunction and imposing a license fee, doesn’t the court substitute its wisdom as to the appropriate fee for that of the parties, who would likely negotiate a license if the injunction were granted?

Three Things You Should Have in Your NDA, But May Not

1. A requirement that the party receiving confidential information identify all personnel who are given access to the information, make them aware of the NDA and insure that they are bound by it. Identification is particularly important, in case you wind up in litigation with the receiving party, or if personnel leave. If an employee leaves the receiving company and his new company seems to be using your confidential information, you’re going to want to know that the employee had access to it at his former company.

2. A requirement that the receiving party preserve all materials pertaining to the confidential information that are generated or received by all personnel who are given access to the confidential information. If you wind up in litigation, you’re going to want those materials in discovery.

3. A bright line test for what constitutes confidential information. It can be everything disclosed, or only what is labeled, so long as its clear. You don’t want to litigate whether about whether the information was appropriately identified.

The Latest From the Federal Circuit on Injunctions, Sunset Royalties, and Future Royalty Rates

Even if you win your patent infringement case, you still may not get an injunction prohibiting ongoing infringement.  In a case decided last month by the Federal Circuit, ActiveVideo v. Verizon, a jury found that Verizon infringed ActiveVideo’s method patents pertaining to video-on-demand technology, but the Federal Circuit held that the district court erred by imposing a permanent injunction prohibiting Verizon from future infringement.  This is a stark example of the impact of the Supreme Court’s 2006 ruling in Ebay v. MercExchange that injunctions should not automatically issue in patent infringement cases, and worthy of analysis.  Also worthy of scrutiny is what Federal Circuit wrote concerning the appropriate royalty Verizon should be required to pay for future use.

I.               Injunction

There are four elements courts must consider when deciding whether to impose an injunction after liability has been established:  (1) whether the harm to the patent owner is irreparable; (2) whether the harm is compensable with money damages; (3) the balance of the hardships on each of the parties depending on whether the court issues the injunction; and (4) the public interest.

A.             Irreparable Harm/Efficacy of Money Damages

The Court determined that the injury suffered by ActiveVideo as a result of Verizon’s infringement would be compensable by money damages, and would not be irreparable.  The following chart depicting the manner in which the court weighed facts pertaining to irreparable injury.

Factors Favoring Irreparable Harm Factors Weighing Against Irreparable Injury Non-Factors
The parties are not direct competitors Litigation costs – the Federal Circuit held that litigation costs cannot constitute irreparable harm
License non-exclusive – ActiveVideo could maintain its existing license to Cablevision and also license Verzion Loss of market share by ActiveVideo’s licensee Cablevision – the Federal Circuit held that if Verizon takes a customer away from ActiveVideo’s licensee Cablevision, the only harm ActiveVideo suffers is loss of a license fee from Verizon
Ease of quantifying a license fee – Cablevision paid ActiveVideo 17 cents a month per subscriber, Verizon could be required to pay monthly per subscriber also Loss of business opportunity or brand recognition could constitute irreparable injury, but neither was proven
Verizon is able to pay the license fee – the Federal Circuit distinguished the Bosch v. Pylon Mfg. case, in which the Federal Circuit held that the fact that the defendant might not be able to pay a license fee contributed to irreparable injury
No evidence of damage to ActiveVideo’s brand name because Cablevision markets its service using the “io” name, not the Activevision name, so retail customers are unlikely to associate Activision with the service
Verizon’s service increases demand for VOD overall and therefore increases opportunities for ActiveVideo
No evidence of price erosion
ActiveVideo sought to broadly license its patents, including to Verizon
ActiveVideo wiling to extend sunset licensing period

B.             Balance of Hardships

The Federal Circuit held that the balance of hardships favored the infringer.  It analyzed the factors as follows.

Factors Favoring Patent Owner Factors Favoring Infringer Non-factors
Sunset licensing fee alone would generate, in one month, 70% of what patent owner earned in its entire 23 year history Patent owner’s small size
Patent owner would only suffer if not compensated

C.            Public Interest

The Federal Circuit upheld the district court’s finding that the public interest in enforcing the patent owner’s right to exclude outweighed the interest the infringer’s customers may have in maintaining their access to entertainment.  But the court held that the public interest factor could not outweigh the other two, explaining:

If the general public interest in upholding patent rights alone was sufficient to mandate injunctive relief when none of the other three factors support injunctive relief, then we would be back to the general rule that a patentee should always receive an injunction against infringement. But the Supreme Court rejected the idea that there is a general rule that courts should issue permanent injunctions against patent infringement. eBay, 547 U.S. at 393-94. We vacate the grant of a permanent injunction in this case and remand for the district court to consider an appropriate ongoing royalty rate for future infringement by Verizon.

II.             Sunset Royalties

A sunset royalty is, as its name implies, a royalty an infringer must pay while it phases out its infringing product.  The district court imposed a sunset royalty far greater than the amount paid by ActiveMedia’s licensee, Cablevision.  The Federal Circuit upheld the higher royalty amount, explaining:

The district court accepted ActiveVideo’s expert testimony that Verizon received an incremental profit of $6.86 per FiOS-TV subscriber per month. The court analyzed the respective bargaining positions of the parties post-verdict, and concluded that “it would have been reasonable for the parties to make an agreement whereby Verizon would receive 60% of the profits and ActiveVideo would receive 40% of the profits.”  This results in the $2.74 per subscriber per month royalty. The district court rejected Verizon’s suggestion that it should pay the same rate as Cablevision. The district court found that after the patent is held not invalid and infringed by Verizon, ActiveVideo is in a much better bargaining position with Verizon than it was with Cablevision in 2009. Based on the fact that Verizon may be able to design around, but does not know precisely how effective such a design around might be, the court discounted the profit split from the 50/50 to 60/40 (in favor of Verizon).

This may seem high, and while it is likely true that Verizon would not have agreed to that amount prior to litigation, Verizon has been adjudicated to infringe and the patent has been held not invalid after a substantial challenge by Verizon. See Paice [LLC v. Toyota Motor Corp.], 504 F.3d at 1317 (Rader, J., concurring) (“[P]re-suit and post-judgment acts of infringement are distinct, and may warrant different royalty rates given the change in the parties’ legal relationship and other factors.”); Amado [v. Microsoft], 517 F.3d at 1362 (“Prior to judgment, liability for infringement, as well as the validity of the patent, is uncertain, and damages are determined in the context of that uncertainty. Once a judgment of validity and infringement has been entered, however, the calculus is markedly different because different economic factors are involved.”). The district court is correct; there has been a substantial shift in the bargaining position of the parties. See Amado, 517 F.3d at 1362 (“There is a fundamental difference, however, between a reasonable royalty for pre-verdict infringement and damages for post-verdict infringement.”). We reject Verizon’s argument that the district court erred in concluding that the jury verdict placed ActiveVideo in a stronger bargaining position.

III.           Future Royalties

Because the Federal Circuit vacated the injunction, it now becomes necessary for the district court to fix a royalty for the infringer to pay going forward.  The court offered the following comparison of sunset and ongoing royalties, and guidance for the district court on remand:

We held in Amado that an assessment of prospective damages for ongoing infringement should “take into account the change in the parties’ bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability.” Amado, 517 F.3d at 1362. And, although Amado dealt with the imposition of royalty damages while an injunction was stayed during appeal, this holding applies with equal force in the ongoing royalty context.  Though we vacate the district court’s injunction, we see no error in its post-verdict royalty calculation. The district court, on remand, should determine an appropriate ongoing royalty, an inquiry that is much the same as its sunset royalty analysis. The district court may wish to consider on remand additional evidence of changes in the parties’ bargaining positions and other economic circumstances that may be of value in determining an appropriate ongoing royalty. See Paice, 504 F.3d at 1315 (“Upon remand, the court may take additional evidence if necessary to account for any additional economic factors arising out of the imposition of an ongoing royalty.”). Indeed, ActiveVideo’s bargaining position is even stronger after this appeal. We leave the procedural aspects of how to proceed on the issue of prospective damages to the discretion of the district court.

The Federal Circuit further explained that some of the Amado factors considered by the district court in its sunset royalty analysis might not be appropriate to consider when calculating an ongoing royalty. Those might include the defendant’s likelihood of success on appeal, the ability of the defendant to immediately comply with the injunction, and the evidence and arguments found material to granting the permanent injunction.

IV.           Effect on Apple v. Samsung

The Federal Circuit’s teachings in the ActiveVideo case are likely to have significant influence on Judge Koh’s upcoming decision on Apple’s request for an injunction prohibiting future sales of infringing smartphones in the Apple v. Samsung case.  In the fist instance, she is likely to be guided by the ActiveVideo opinion in determining whether to impose the injunction Apple wants.  If she decides not to impose the injunction, then she will likely refer to it if she needs to impose an ongoing royalty.

 

 

IP Licensing Checklist

Here is a general checklist of things to consider when licensing IP, in no particular order. If you spot any significant omissions, please comment.

1)    What precisely is being licensed?

2)    What will be the term of the license?

a)     any automatic renewal?

b)    options?

c)     fee changes in subsequent license periods?

d)    termination rights?

3)    What will be the fee?

a)     how calculated? flat fee? percentage of sales? gross or net?

b)    how often paid?

c)     what currency?

4)    What territory?

5)    Exclusive or non-exclusive?

6)    Licensee’s Rights and Duties

a)     Accounting

b)    Reporting

c)     Branding

d)    Training

e)     Updates

f)     Quality control

g)     Right to modify materials?

h)    Who owns licensee modifications?

i)      Any right to sublicense?

j)      Any right to assign license?

k)    Any sell off of any materials at the end of the term?

l)     Any minimum sales quota or other duty to exploit the IP?

m)  How will complaints be handled?

7)    Licensor’s Rights and Duties

a)     Warranties or Indemnities (duty to defend licensee?)

b)    Training

c)     Updates

d)    Provision of materials

e)     Trouble shooting?

f)     Right to inspect/monitor/approve product and/or marketing materials

8)    Choice of law, choice of forum, mediation or arbitration?

9)    IP registrations, how will they be handled?  Licensee acknowledges licensor’s IP?

10)  Who sues infringers?  If license is exclusive, will licensee have any right?

The Practical Difference Between Contributory Infringement and Inducing Infringement in Patent Cases

The Federal Circuit’s recent decision in Toshiba v. Imation highlights a key difference between the concept of contributory infringement and inducement of infringement in patent cases.  It is that an accused infringer may escape liability for contributory infringement if his product is capable of “substantial non-infringing use”, but if the accused infringer encourages infringing use, the fact that his product is capable of substantial non-infringing use will not save him from inducement liability.

Toshiba illustrates the point.  The Federal Circuit affirmed summary judgment for the defendant on contributory infringement, but reversed on inducement.  The case involved patents for DVD recorders. The court held: (1) Toshiba had not proven that an insubstantial number of Imation users did not take the last step claimed by the patent of “finalizing” their DVDs after recording them; (2) therefore (common sense notwithstanding) a not insubstantial number of Imation users could be skipping that step; and thus (3) Toshiba had not proven that the Imation recorders were not capable of substantial non-infringing use and its claim of contributory infringement therefore failed.

With respect to inducement, however, the Federal Circuit held that because Imation urged users of its product to finalize the DVDs, it was error to grant summary judgment for the defendant.  The Court explained that just because a product is capable of non-infringing use does not mean the defendant is not inducing its users to use it in an infringing manner.  Moreover, in this context, the court explained, where an alleged infringer designs a product for use in an infringing way and instructs users to use the product in an infringing way, there is sufficient evidence for a jury to find direct infringement.

In addition to highlighting the important distinction between contributory infringement and inducement, the case illustrates the potential significance of burdens of proof.  If Imation had been required to prove substantial non-infringing use, it does not seem certain it could have done so.  One might ask whether, as a matter of policy, it is best to place the burden on the plaintiff to prove that an accused product is not capable of substantial non-infringing use, but that is a topic for another day, or for comments to this post.

Good News For Brand Owners Seeking Injunctions

A  judge in the Western District of New York (think Buffalo) wrote last week in a case between two beauty pagaent promoters, Mrs. United States and Miss United States of America :

The potential loss of good will and customers by plaintiff, and possible damage to its reputation, as a result of defendants’ alleged infringement of plaintiff’s marks is not easily quantifiable or remediable by damages, and supports a finding of irreparable harm.

This is more evidence that concerns that the Supreme Court decision in eBay v. MercExchange rejecting the presumption of irreparable harm in patent cases would raise the bar to obtaining injunctions in all IP cases, were overblown. Potential loss of good will and customers  and possible damage to reputation are likely to be present in the majority of trademark infringement cases. 

The court in the Mrs. United States case went on to give the following useful summary of the state of the presumption of irreparable harm law in IP cases.

It is unclear whether a court may presume irreparable harm upon a finding of likelihood of success on a trademark claim. The Supreme Court has held that such a presumption is improper in patent or copyright cases, see eBay, 547 U.S. at 392 (noting that Court’s ruling with respect to patent cases “is consistent with our treatment of injunctions under the Copyright Act”); see also Flexible Lifeline Sys., Inc. v. Precision Lift, Inc., 654 F.3d 989, 996 (9th Cir. 2011) (“under eBay, a presumption of irreparable harm is equally improper in a case based on copyright infringement as it is in a case based on patent infringement”); Salinger, 607 F.3d at 82 (“After eBay, … courts must not simply presume irreparable harm”) (copyright case). To date, however, no consensus has emerged as to whether that holding applies to trademark infringement cases as well. See Peoples Federal Sav. Bank v. People’s United Bank, 672 F.3d 1, 9 n.11 (1st Cir. 2012) (finding it unnecessary, and declining, to decide issue); Southern Co. v. Dauben Inc., 324 Fed.Appx. 309, 318 n.13 (5th Cir. 2009) (same); North American Medical Corp. v. Axiom Worldwide, Inc., 522 F.3d 1211, 1228 (11th Cir. 2008) (same). At least some district judges from within this circuit have applied eBay to trademark cases, however. See, e.g., Ascentive, LLC v. Opinion Corp., ___ F.Supp.2d ___, 2011 WL 6181452, at *5 (E.D.N.Y. 2011) (“Although prior to Salinger, courts in this circuit presumed irreparable injury in trademark cases where a likelihood of confusion was shown, post-Salinger, this presumption is no longer applicable”); Tecnimed SRL v. Kidz–Med, Inc., 763 F.Supp.2d 395, 402 (S.D.N.Y. 2011) (applying Salinger to a trademark claim), aff’d, 462 Fed.Appx. 31 (2d Cir. 2012). The Second Circuit has not yet spoken directly on this question, though it has suggested that the presumption may still have some force in trademark cases; see Zino Davidoff SA v. CVS Corp., 571 F.3d 238, 246-47 (2d Cir. 2009) (noting presumption in trademark cases, without referencing eBay or Salinger, but finding that even without benefit of presumption, plaintiff had shown irreparable injury).