Fifty Shades of Shady: Copyright Piracy, Copyright Trolls, and Adult Video Entertainment

Fifty Shades of Shady: Copyright Piracy, Copyright Trolls, and the Bellwether Porn Trial

If you've ve been living under a rock, Fifty Shades of Grey was the latest world craze in the Female friendly pulp romance novel after the Twilight phenomenon.  Twilight's hook was a romantic vampire, leading to a world Vampire craze.  German to this blog is that in this craze the romantic protagonist is not a vampire, but a sex-obsessed but romantic and loveable S & M addict (Sadomasochism).  Apparently the book was so irresistable that new Fifty Shaeds book have flown off shelves and suddenly vidoes with explicit sexual content, notable S&M video with pulp plot and intimate explicit sex scenes aimed at women, has become somewhat legitimate.  Rumors of a baby boom and other signs of world peace have flared up, including a new market for what is commonly called porn.  Many men have never touched the book but thanked a higher power for seemingly universal consumption of this, uh, novel.  In fact it is likely this phenomenon that spurred said blogger's interest and the approval to write it. 

THE COPYRIGHT LAW ON SEXUALLY EXPLICIT MATERIAL

             Copyright law is designed to promote and give incentives to create new copyrightable material and make a market for the holders of copyrights. In Ashcroft v. ACLU, No. 03-0218 (2004) the Supreme Court struck down Congressional laws aimed at regulating access to sexually explicit internet films, holding that the laws did not do enough to protect the right of adults to consensually view explicit sex scenes. In other words, adults have the right to access and view x-rated films online or buy DVD's through the mail. Therefore, producers of sexually explicit material have the right to copyright and distribute this material over the internet. Thus, the widespread practice of free downloading of porn is illegal under the Copyright Act and could subject perpetrators to substantial civil penalties, and possibly criminal prosecution. Simply put, as a matter of federal law, it is wrong. But a staggering number of people are doing it, along with music and mainstream movies, which greatly dampens respect for copyright law and breeds a culture of the ridiculous belief that because "information wants to be free," so should downloading of creative material, including sexually explicit material, also be free. But in my opinion it is stealing. According to reports, illegal downloading is a major economic problem for the adult video industry.

            CNBC recently published an interesting series of articles about the adult internet and film business. It seems speculative (virtually none of the business involves public corporations) but it estimated this loose confederation of studios and websites as a $14 billion industry. A brief look at the dockets shows powerhouse Biglaw firms, with the whitest of white shoe reputations representing the megaproducers in big money cases. However, there is paltry writing in the Biglaw blogosphere about piracy of adult video, which involves smaller high volume instances of stealing by mostly individuals.

 

            The reality is that the volume is so high in the aggregate that piracy overwhelms the business, and Biglaw cannot make money off of it. So they must look elsewhere. Since the adult industry is embattled in the first place, it would behoove it to hire lawyers and inform them to hew carefully to a strategic plan that carefully protects their reputation. Many lawyers either don't know or aren't mature enough to do that on their own.

THE ADULT EMPIRE STRIKES BACK AND GETS A LEGAL AND PR BACKLASH

             Some minority of big money producers of adult content such as "Pink Visual" have taken action to go after illegal downloading through copyright enforcement means by obtaining ISP addresses associated with illegal downloading and filing volumes of "John Doe" lawsuits. These actions seem to be accompanied by a threatening lawyer's "nastygram" warning that it will shame the recipient by putting its name on the lawsuilt lest the ISP address owner pay a large settlement. Not surprisingly, these clumsy tactics have created a backlash as old ladies whose Wi-Fi has been trespassed get scary and abusive threats when they check their mail. One feisty allegedly innocent woman has fought back filing her own class action lawsuit against the alleged "copyright trolls," as they are called by pro-downloading media. Named plaintiff Jennifer Barker of Kentucky sued four California-based companies: Patrick Collins Inc., Malibu Media, K-Beech, and Third Degree Films, and London-based Raw Films in Barker and Hutchinson v. Patrick Collins Inc. et al. KYWD 3:12-cv-00372 (W.D.KY. filed July 7, 2012).

             Barker claims the porn distributors have "a new business model" which uses the court system to "extort" money from users of file-sharing sites who have never downloaded their videos.

            Forbes published an article highlighting the feats of an apparently proud attorney who allegedly self -describes as a "copyright troll" proclaiming that he has made millions writing these letters and gobbling up settlement money. Recently, the same lawyer was sued for "extortion" tactics in Liuxia Wong v. Hard Drive Productions, Inc. 4:12-cv-00469 (N.D. Cal. filed Jan. 30, 2012). The case has already settled.

            More ominously, judges have angrily thrown out such piracy lawsuits, swayed by concern that little effort has been done to ethically do the footwork necessary to weed out innocent victims of Wi-Fi trespass or hacking from the overwhelmingly guilty horde of young males committing piracy. See “A new record: 9,729 P2P porn pushers sued at once” (http://arstechnica.com/tech-policy/2010/11/a-new-record-9729-p2p-porn-pushers-sued-at-once/). Supposedly, in one instance, a particular anti-piracy lawyer filed 200,000 lawsuits against Bittorrent users. These chickens are coming to roost, however, as a judge for the District Court for the Eastern District of Pennsylvania ordered a bellwether trial to fight such cases in 2013. Forty-eight of the cases referred to the judge were named either Malibu Media, Inc. v. John Does or Patrick Collins, Inc. v. John Does. The judge selected five of the defendants for the bellwether trial, which will be going forward soon. This trial will set a huge precedent for the winner: either the adult industry or the free information supporters.

             The anti-piracy attorney mentioned above defends the scattershot tactics by saying that recurring fact patterns emerge from these cases defending the tactics. Of course they do. Innocent victims of trespass get scared to death and angry over threats giving ammunition to the copyright freeloaders, and the real perpetrators often lie or have no money to pay and elude collection. The proof and collection problems make it hard to profit quickly off anti-piracy or to deter it. At the same time while three or so corporate studios fight piracy, the vast majority fret over the backlash and the already precarious credibility of the business.

 

           

HOW THE ADULT INDUSTRY CAN DO THIS THE RIGHT WAY EVEN IF THEY LOSE THE TRIAL

             The backlash against the studios working to protect their copyrights raises the question whether the adult content producers are getting the savviest legal advice from their counsel. The high volume, scattershot approach is what created the backlash. Lawyers ought to ask these clients ahead of time about the implication of a clearly foreseeable backlash. Perhaps there would be less liability to litigants fighting back if the attorneys worked harder to learn who the bad guys really are and avoided threatening the obviously innocent owners of ISP addresses. That is, learn who is actually doing the stealing rather than threatening everyone. This way, adult content copyright holders could make the case that they are not trying to harass innocent and naive owners of ISP addresses whose Wi-Fi has likely been trespassed.

     Moreover, although the case law is sparse, I know in Georgia that the Computer Fraud statute may be applicable for the trespass to wifi, although I have not researched it yet and am at the moment just throwing it out there.  Computer Trespass is part of the law and there is a private right of action.  I am not sure fully its application in this scenario but it could be an idea to find out who the trespasser is and they could well be liable to indemnify the IP address holder.  And voila, no scamming old ladies, no harassment, no black eye.  I have a lot of following up to do on this and will update as I learn more. 

             To be sure, not all ISP owners are innocent. Only those who have had people outside the home get on their Wi-Fi where there is no password would be innocent. The ISP address is property as well, and the owner has some responsibility to protect it. They may argue the kids got on it, but why don't they have a filter on the computer to which the kids do not know the password? Why doesn't the Wi-Fi have a any security? The owner might not know how, but the industry could use these communications in a positive way to explain this and further secure their property, which is the ultimate goal, instead of trying to get all of the unknowing to pay a big fee.

            Now, doing the right thing in all these instances makes the cases less profitable for the company and their lawyers. What the industry could do, in that case, is hire outside counsel under the old way of doing things. Instead of paying a cut of the winnings, pay the lawyer a retainer for a set amount of hours and cases filed that allows the lawyer to do right by their reputation. They can file a specified volume of cases with the ability to prosecute them the right way—a way that will not anger judges, the media, or alleged perpetrators. The lawyers can still make money and do the right thing.

 
            The industry needs to learn that slow, steady, and not “shady” wins the race on the balance sheet and in the court of public opinion. And for their sake, hopefully the next craze isn't back to vampires or on to robots.   


 

It Takes More Than a Village Registration to Be Infringement Says Florida District Court

      Recently the Middle District of Florida ruled that even though a trademark was incontestable it was so weak that it could not support a preliminary injunction to halt alleged infringement of a use of the same word in a very similar mark.  Holding Co. of the Villages v. Power Corporation, 101 U.S.P.Q.2d 1528 (M.D.Fla. 2012).  This is important because it reiterates the principle that even though a mark may have been registered more than five years, and thus  has become incontestable under 15 U.S.C. 1065; it may be so weak in spite of this that an alleged infringer may win the "strength of mark" factor in the likelihood of confusion analysis undertaken by all eleven Circuit Courts of Appeal in the U.S. Thus even though an incontestable mark may be valid it still may be attacked by an opponent in an infringement case.

      In this case the plaintiff stated that it sold residential real estate throughout the United States under the mark "The Villages" since as early as June 1993, and had long held a registration for the Mark. The Defendant sold real estate lots for a development called Lakeside Landings at The Villages and later The Villages at Lakeside Landings.   The Eleventh Circuit requires a seven factor test to determine whether the alleged infringing mark is likely to be confusing to consumers with the plaintiff's mark.  The first factor is the type of mark and its "strength."  Because of the registration more than five years the plaintiff's Mark "The Villages" was incontestable.  However, the Court noted that the word "incontestable is really a misnomer because an incontestable mark that is weak can still be attacked by a defendant in an infringement lawsuit.   The Defendant claimed it was weak, and thus less likely to cause confusion, by demonstrating that there were 79 active registrations for marks using the term "Villages;" 34 registrations disclaiming the word "Village" as a descriptive term; 19 registrations of "Village" claiming use prior to that of the plaintiff; 17 trademarks with the term "Village" or "The Village" followed by a place name; and 1,165 companies registered in Florida using the word "Village."  Therefore the defendant did a great job showing how nearly generic the term "Village" was in the trademark and business world.  Therefore, the Court found that the Mark of the plaintiff was weak and can be afforded only a narrow range of protection.  Interestingly the Court never labeled the Mark as descriptive or any of the other standard terms used in the trademark cases to place the strength of the mark in a certain spot on the scale.  It simply found that it was weak based on the quality of the defendant's evidence. 

     The Court went on to weigh the remaining factors and found that the services and customers were similar, and the advertising media were similar, which weighed in favor of the plaintiff. However, the other factors weighed in favor of the defendant, including the strength of the mark,  the dissimilarity of the marks, the intent of the defendant, and evidence of actual confusion.  In the end the balance went for the defendant and the court found no likelihood of success.  Therefore, the motion for an injunction was denied. 

Wisconsin Court of Appeals Determines That The Glove Fits: Trade Dress Suit Was a Covered Advertising Injury Claim Triggering Duty to Defend

The Wisconsin Court of Appeals reversed a lower court ruling in favor of the insured recently, finding that the insurer of Ross Glove Company did indeed have to duty to defend a lawsuit against Ross alleging, among other things, trade dress infringement.  Acuity v. Ross Glove Company, 2012 WL 1109035 (Wis. Ct. App. 2012).  The case is not really a difficult one, and it is hard to see how the lower court got it wrong.  The underlying suit was brought by Seirus against Ross based on certain cold weather face and neck protection gear sold by Ross through a deal with Cabela's sporting goods stores.  The complaint alleged patent infringement and trade dress infringement.  Trade dress involves the look and feel of the product, and/or its packaging, such that infringement would be an attempt to imitate or "knock-off" the original product. 

Under its Commercial General Liability ("CGL") Policy, Ross was covered against claims for "advertising injury."  The trade dress allegations, as they often do in cases involving retail consumer products, including claims that the packaging for the allegedly infringing products was substantially similar and likely to confuse customers as to whether the products sold by Ross were associated with the Seirus products.  It is well settled that packaging is advertising and that putting a packaged product on retail shelves is "publishing" the advertising to the public.  Therefore, the allegations regarding the alleged confusion over the shelf products constituted claims of injury related to the advertising of Ross.  It is worth noting that Wisconsin follows the general rule regarding the duty of an insurance company to defend a lawsuit with potentially covered claims in it. If any of the claims in the complaint could be covered, then the insurer must pay to defend all of the claims, even, in this case, the patent claims which were apparently not covered by the policy.  Therefore, as a result of the ruling, Acuity has to pay to defend the entire lawsuit as long as the trade dress claims remain part of the case. 

The lawsuit sought enhanced Lanham Act damages against Ross claiming intentional trade dress infringement.  Acuity sought to get out of the defense of the suit based on an exclusion in the policy for "knowing" or "intentional" infringement.  However, as the court pointed out, the lawsuit also alleged damages based on unintentional infringement, and while intent is a factor in a trade dress case, it is not a prerequisite that intent be demonstrated in order to succeed on a trade dress claim.  Moreover, while the complaint contained a bare allegation of intent and damages as a result of it, it did not recite any specific facts in support of the claim that Ross intentionally imitated the Seirus trade dress.  Under these circumstances, the court held that the exclusion for intentional activity would not excuse Acuity from defending the case.

This is just another reason why it is important to have CGL insurance for a business, because trade dress claims continue to increase.  Also, as I have pointed out before, a 2007 survey of litigants found that the average cost per party of trade dress litigation was $700,000.  Many companies do not even realize they have coverage for advertising injury related to trade dress or other intellectual property claims, and they may fail to notify their insurance company of a lawsuit for infringement.  It is critical to notify the CGL carrier of such lawsuits.  It is also important to have counsel that understands the area of IP insurance coverage if the insurer balks at defending the case.  I have had insurers deny coverage for a client initially, but have gotten them to reverse themselves and pay for the defense after a challenge from  me arguing that the policy does trigger the duty to defend.  For a small business that cannot afford to pay six figures to get out of a lawsuit, the question of the duty to defend can become a "bet the company" situation.  That is why it is critical to have experienced advisers dealing with this kind of situation. 

The Law Follows Common Sense 99% of the Time (and So Should Intellectual Property Law)

                         

"The Law follows common sense 99% of the time." This was and still is the mantra of The Hon. R Lanier Anderson, III, former Chief Judge of the Eleventh Circuit U.S. Court of Appeals. I had the incredible good fortune of clerking for Judge Anderson and he repeated this phrase often in his thick, Georgia red clay accent, prefaced by "My Granddaddy told me...." The Judge's father and grandfather practiced for life in Georgia, and with this mantra as his guide Judge Anderson has long been revered by judges and court personnel on the right, left, and center as an intellectual force on the court, and the very embodiment of Georgia's motto, Wisdom, Justice and Moderation.

We were taught as clerks by the judge to use common sense in appraising the legal arguments of lawyers, and this gauge was an incredible way of framing the questions presented, and looking at the Law through that lens serves as a barrier against frothy arguments and the intellectual pretzels in which lawyers get tied. Sometimes I refer to this radar, this sense that the Law is based on the ordinary sense of right and wrong, as the Common-Sense-ometer. One of the manifestations of this in the common law is the reasonable person. The reasonable person is a legal fiction of the common law representing an objective standard against which any individual's conduct can be measured. Generally the reasonable person applies to tort laws and its duties, but the reasonable person is invoked throughout the law. Inherently, the reasonable person has a usual share of the common sense of a reasonable person.

Another lawyer in a patent case expressed this recently about a case we were working on.  Defending a rather frivolous patent infringement suit, the lawyer observed that because our device was obviously not infringing, we were not "the side that has to be cute."  This was another way of saying that common sense was on our side.  Our job was not to let the other side use smoke and mirrors or confusing technical verbiage to obscure the fact that the "smell" test in the case went our way for anyone having ordinary skill in the art involved in that case.  In patent litigation, the reasonable person is a little more technically gifted, because the common sense barometer is based on a "person having ordinary skill in the art."  This is the reasonable technician, not the genius. In most cases a reasonable person can tell which side of the case "smells" bad, or which side has to be "cute" to fit a square peg into a round hole.  These cases make up 99% of litigation, and they should all follow common sense.  The other 1% often involves political or religious issues where there really is not much common sense to be found in the past cases, the language of the law, and the passions of the parties. 

Trademark bullying is a topic I have covered quite a bit recently, and once again common sense should prevail in looking at trademark infringement claims and whether there is a likelihood of confusion.  Most jurisdictions have a test for likelihood of confusion that delves into myriad factors related to the uniqueness of the mark, marketing, customer overlap, similarity of the product, and such.  None of this stuff should obscure the fact that the test is based on common sense, whether a reasonable customer is likely to be confused between the two marks or brands.  Not possibly confused, but probably confused.  Any judge or juror can look at a case in a few seconds and tell whether a person with any common sense ought to be confused by the marks. Generally that first impression is what the law should be, and the judgment should be, infringing or not.  The problem that has manifested itself with trademark bullying is the endless discovery and failure to award summary judgments in easy cases.  Most cases are obvious whether confusion is probable or not.  Courts should make decisions based on common sense and get rid of frivolous trademark bullying cases early.  They should also get rid of obvious infringement cases early and stop the infringing activity. 

Judge Hammers "Not Believable" Trade Secret Defendant With Injunction in Northern District

Judge William Duffey of the Northern District of Georgia issued a scathing opinion against a defendant in a trade secret case after an evidentiary hearing, calling the defendant's testimony "not believable" and "troubling."  Amedisys Holding, LLC,  v. Interim Healthcare of Atlanta, Inc., Et al,  Case No.  1:11-cv-1437-WSD, Decided June 3, 2011, 2011 US DIST LEXIS 59260 (N.D. Ga). 

This case involves three former employees of the Plaintiff, Amedisys, who left to work for Interim Healthcare in April, 2011.  These were two salespeople and an assistant.   The business involved is home healthcare services.  The Plaintiff filed suit against the former employees and Interim, alleging that they had taken trade secret materials with them to Interim.

The trade secret materials involved what was called a "Referral Log."  The Referral Logs are a resource to track patient referrals. They contain detailed information regarding current and prospective patients. Amedisys employees use the Referral Logs to target their sales efforts to particular clinicians and facilities most likely to refer patients to Amedisys.  This allows their employees to concentrate their marketing efforts on the clinicians most likely to generate business for Amedisys.  The Referral Log in question contained the information of over 1200 patients.  It also showed who referred the patients to Amedisys, among other things.

There was a hearing on a TRO motion in early May at which the defense submitted declarations from the three former employees saying that they did not need the material, did not want it and would give it back.  Based on this, Judge Duffey denied the motion for a TRO but set some expedited discovery and a preliminary injunction hearing.  He also ordered the former employees to submit to forensic examinations of their computers.  By the time of the second hearing, several misrepresentations from one of the former employees had been unearthed.  This employee was hired to go to Interim as a manager of business development, and had emailed herself the Referral Log to her home address.  She turned out to have made several false statements in her declaration.  At the injunction hearing she testified, and the court found her "spin" about what she had done, when she had done it, and why to be unbelievable.  Thus, the court found that it was likely that this defendant had copied the logs and was using the information in her new job.  

The defense argued that the Referral Logs were not trade secrets but simply a list or directory of names of patients and healthcare providers that were publicly available. Amedisys argued that the Referral Logs reveal which doctors refer which patients to Amedisys and allow its sales representatives to identify which patients require long-term care and are susceptible to "poaching" by a competing home healthcare provider. The court agreed with the plaintiff.  Besides finding that reasonable measures had been taken to keep them secret (they were marked confidential on each page, among other things) the Court noted that the logs "are more than a list of names of healthcare providers and facilities. They are not simply a directory of healthcare providers. They contain valuable, proprietary information uniquely known to Amedisys, and which is not publicly available. This information, which Amedisys collects, evaluates, analyzes, and arranges, enables Amedisys employees to make informed, fact-based decisions on where to focus their business solicitation efforts. It is this information that transforms an ordinary list of doctors and healthcare providers to a trade secret."  

Going on the Court said "while the names of the doctors and healthcare centers could be developed in the logs by other means, including through a cumbersome and time-intensive deconstruction of medical directories, visitation to hospitals, internet searches, and the like, these "public" sources do not indicate which doctors or healthcare centers refer patients to in-home care, for what ailments the patients suffer from, who provided the referrals, and do not allow one to identify which patients are susceptible to poaching by a competing home healthcare provider."  In summary, although the names were not a secret, the analysis that the plaintiff had done on the names in compiling the "referral log" into a special list made it nonpublic and economically valuable.  From there the Court to determined that this person had stolen the logs for the benefit of herself and the new company.  

What is unclear about the opinion is just what these logs were about.  For example, if the logs dealt with hospitals all over Atlanta that would much more likely to be a trade secret than if the logs were about two or three hospitals.  A salesperson would have to be pretty dim to be unable to figure out whom to call on at a particular hospital for home healthcare referrals.  It would seem that this would be the doctors who deal with people who are going to be bedridden for some time or forever.  Not hard to figure out.  On the other hand, if this log dealt with facilities all over the metro Atlanta and culled specific marketing targets it would be easier to see it as a trade secret.  For example, if it had compiled data and a list of "top ten sales targets" it would more easily be seen as a trade secret. 

Because the Court distrusted the witness, it seems, it ordered a far-reaching injunction, prohibiting the new employer  from allowing this particular new employee "to contact on behalf of Interim, either directly or indirectly, any healthcare facilities, providers, patients, or prospective patients referenced in the Referral Logs she emailed to her personal email account on April 12, 2011, or any other Referral Logs or Referral Log information to which she now has access ("the Reference Log Persons"). Indirect contact shall include, but is not limited to, assisting others at Interim to identify, plan for, or make contact with any Reference Log Person."  This preliminary injunction, unless altered, will last for the rest of the case.  The defense argued that this injunction was essentially a noncompete against the witness and thus overreaching, but the Court noted that it did not prohibit her from working for Interim in other capacities or calling on places not listed in the logs.  Given the fact that the Logs likely included her best customers, this is probably cold comfort for her and Interim.  Chances are that most of the value of the defendant salesperson has been gutted by the injunction.  That is what you get for being unable to back up what you say in Court and trying to spin your way out of it.  You get punished.   

The court found no evidence that Interim had asked the former employee to take these trade secrets or to lie about it.  Unfortunately, they are stuck with the damage done by their new sales manager.  If these logs really are trade secrets, chances are that committing these illegal acts are a violation of Interim's deal with her.  It would not be surprising if Interim fired her and moved on without her.  In my experience, when what I call "Newco," the new employer, finds out about the theft of trade secrets and their potential liability, they are all too willing to fire the employee who caused all of the trouble. 


As a side note, the two other former employees were found to be truthful and not enjoined from doing work for the new company at all in their full capacities.  This was a salesperson who, the Court found, had accidentally failed to return her Workbook, but was able to recite from memory her contacts and referral sources.  Also, an assistant was found not to have any trade secret material.  They are free to work for Interim.  These two folks seem to have been part of the "package" that included the senior manager who is know hobbled by the injunction. 

Whitewash: Commerce Department Issues Trifling Report On Trademark Bullying

Borat Says:  Government Report is Niiice!

To whitewash is "a metaphor meaning to gloss over or cover up vices, crimes or scandals or to exonerate by means of a perfunctory investigation or through biased presentation of data. It is especially used in the context of corporations, governments or other organizations."

Last year Congress passed a law ordering the Commerce Department to do a study and report back on the phenomenon of trademark bullying, which is the use of abusive litigation tactics, or the threat of the same, to harass competitors or other small businesses through frivolous trademark infringement claims.  The USPTO described a trademark bully as  "a trademark owner that uses its trademark rights to harass and intimidate another business beyond what the law might be reasonably interpreted to allow."  This law was inspired by Senator Patrick Leahy of Vermont after the infamous Rock Art Brewery fiasco.  Rock Art is a Vermont mom and pop brewery that was using the term "Vermonster" to promote its product.  A cease and desist letter was sent to Rock Art by Monster Energy demanding that they stop using Vermonster, frivolously claiming that "Vermonster" beer was likely to confuse customers of Monster Energy drinks.  Rock Art did not back down, using the demand as an opportunity to shame Monster Energy and gain positive publicity for itself.  In sponsoring the law on the Trademark bullying study, Senator Leahy explained the problem. "When a corporation exaggerates the scope of its rights far beyond a reasonable interpretation in an attempt to bully a small business out of the market that is wrong."  The law required policy suggestions from the report among other things.  

I represent both trademark owners and those accused of infringing.  A trademark owner has every right to protect its brand.  However, trademark owners should be penalized for frivolous litigation designed to overprotect a brand, or to simply try to put a small and practically defenseless company out of business.   Justice requires a system that balances fairly the rights of the trademark owner with the rights of the accused such that it is not cost prohibitive to defend oneself no matter whether anything wrong has been done. 

One of the questions a mark or brand owner has to ask is when to take action and when to let things slide.  It appears that many lawyers deceive themselves into thinking that scorched earth enforcement is the only way to go.  Conveniently, that is very lucrative for the lawyers, and it also justifies the existence of the in-house lawyer to an extent, although for them budgets determine where the IP enforcement resources go.  Ethical companies need to know where to draw the line based on common sense and good counsel. 

One of my favorite legal quotes is from Elihu Root, a famous Wall Street lawyer a hundred years ago or so. He said "About half of a decent lawyer's practice is telling prospective clients that they are damn fools and should stop."  Sadly, not many Elihu Roots seem to be around any more.  But what Root said is true for both sides.  If the trademark owner is going over the line and bullying, they need to assess the scenario with common sense and let it slide.  If the upstart is infringing they should stop and remake their brand, if possible.  There are companies out there, however, that do not operate based on an ethical compass. For them, what is right is what they can get away with, not what is fair and reasonable. Because nefarious intent is not dispositive of trademark infringement claims, however, good lawyers working for a determined bully can make life very difficult for a defendant that has done nothing wrong and is not harming the mark owner one iota. 

What was published Friday is a perfect example of a total waste of taxpayer money, and truly offered nothing of substance to anyone.  One thing that surprised me is that when the USPTO published a survey and invited folks to respond about bullying, only thirteen lawyers filled out the form, yours truly included.  Overall, there were 79 responses.  This is disappointing, but underscores how poorly the survey was disseminated and advertised to the stakeholders in the marketplace.  Otherwise, based on the items listed in the report, the investigation apparently consisted of having a meeting that few attended, reading some articles, and avoiding reality entirely. 

The report spends much of its 28 pages basically writing a legal memo to Congress as a primer on trademark law.  They could have just sent them a link to Wikipedia and saved us all some money.  Whatever.  Then, when it gets down to analyzing the paltry data that it studied, it essentially says it cannot conclude anything because not enough people filled out the survey.  Basically, it says that no problem can be ascertained from available information.  That is patently ridiculous based on reviewing simply the data the AIPLA puts out.  That data makes it clear that the number of trademark infringement cases has steadily risen and that the cost of defending or prosecuting these claims is $700,000 as of 2007 and rising over 20% per year. 

What was really funny was that the report concluded that existing controls on abusive litigation exist in federal law to adequately protect small businesses from being bullied out of existence.  Everyone involved in this flawed system knows this is totally false.  First, the report states that the sanctions available under Rule 11 provide remedies for trademark bullying victims.  Under Rule 11, eventually, after expensive litigation, a party might convince a judge to sanction a bully's lawyer for filing a frivolous lawsuit.  Rule 11 awards are extremely rare, kind of like sightings of Bigfoot.  Second, the report mentions the Lanham Act's statutory award for attorneys' fees in "exceptional cases."  Again, judges are rarely willing to award fees in these cases, and for true victims of trademark bullies, they cannot afford to pay for a lawyer to fight that fight through the time in which a judge makes a decision.  

Unless there is insurance to pay for the defense costs of the innocent victim of trademark bullying, the small business targeted by bullies has little choice but to change its brand or go out of business.  From personal experience I can say that it is virtually impossible for a small, growing company to obtain the capital necessary to grow with a lawsuit like this hanging over their heads, even with an opinion of noninfringement from competent counsel.  Banks will not loan money to the company embroiled in a lawsuit like this, and equity investors will not bet their capital on such a company either.  From a finance perspective, the trademark bully can paint a scarlet letter on the defendant merely by filing a complaint and launching the expensive process of litigation.  These cases can take upwards of two years to complete, and by that time the defendant has exhausted all of its funding, financing has run dry, and the trademark bully has achieved its competitive goal regardless of the question of infringement. 

The recommendations made by the report made me laugh out loud.  Basically, they suggest that lawyers do pro bono work defending small business from trademark bullies.   Yeah, that's it, we will ask lawyers to solve the problem by working for free.  Everyone put down your Habitat for Humanity paint brushes and come to the office Saturday so we can defend a trademark lawsuit for free.   I can see all of the IP Atticus Finches running to sign up for this duty.  Since the average trademark case costs $700,000 to defend all the way to the end, that suggestion is feckless and offensive.  Sure, it is one thing to do a free response to a cease and desist letter, it is another thing to bust your gut and try a case for nothing.  Otherwise, the report suggests more education for small business owners about intellectual property.  Lack of knowledge is not the problem for small business owners.  Lack of common sense protection against trademark bullies in the forms of faster and cheaper disposition of frivolous cases is the problem. 

Here are the recommendations: 

1. Engage the private sector about providing free or low-cost legal advice to small businesses via pro bono programs and intellectual property rights clinics;

2. Engage the private sector about offering continuing legal education programs focused on trademark policing measures and tactics;

3. Enhance Federal agency educational outreach programs by identifying resources that enable small businesses to further their understanding of trademark rights, enforcement measures, and available resources for protecting and enforcing trademarks.

As you can see, there is nothing innovative or productive that came out of this exercise.  Nothing is going to change to stop the real trademark bullies except judges getting rid of cases and charging the bullies for the defense costs of the bullied.  This kind of change in the legal system rarely occurs from within, it usually requires significant legislative and executive influence.  The only question I have now is how much this frolic cost the American taxpayers.  Whatever that amount was, it was too much.  

Trademark Bullies and Insurance Coverage Against Infringement Claims

     Trademark Bullying occurs when trademark owners, especially large companies, file frivolous and abusive lawsuits, especially against smaller companies that are competitors.  The Patent and Trademark Office ("PTO") has said a trademark bully "could be described as a trademark owner that uses its trademark rights to harass and intimidate another business beyond what the law might be reasonably interpreted to allow." An epidemic of trademark bullying has occurred in the U.S., so much so that federal legislation has been passed and the PTO has undertaken surveys and studies to address trademark bullying and the litigation tactics of trademark bullies. The Trademark and Technical Conforming Amendment of 2010 directs the Secretary of Commerce to "study and report" to Congress on how small businesses are being harmed. 

     Many times the big company ("Bigco") will write the small company ("Littleco") a cease and desist letter, or just go ahead and file a lawsuit alleging all sorts of intellectual property infringement such as trademark, trade dress, service mark, unregistered trade name, domain name or just unfair competition or false advertising.  Many small companies have to capitulate even if they really have done nothing wrong because of the high cost of litigation.  Indeed, the American Intellectual Property Owners Association ("AIPLA") ran a survey in 2007 and determined that just the lawyer fees and costs of taking a trademark case to resolution has an average cost per party of $700,000.  Very few small and growing businesses have the capital to fight such a fight, regardless of whether they are right or wrong.  For these companies the prospect of defending themselves is simply out of the question.  

     What can such a company do?  The very first thing they need to do is check all of their insurance policies, because without even knowing it they might be covered by their existing or even an expired policy.  Most companies have a CGL or basic Commercial and General Liability Policy.  Almost all of these policies have some kind of coverage for what is called "advertising injury."  This means there is some kind of coverage for a claim made that some kind of marketing has caused harm.  Trademark infringement usually fits into the definition of advertising injury in a CGL policy.  Insurance companies have in recent years been writing form policies that do more and more to limit coverage for trademark claims, but that is not the end of the story, a full legal analysis must be done to determine the rights of the insured.  Personal, business or umbrella policies may also provide coverage for claims such as defamation, libel, slander or disparagement.  The disparagement claim might trigger a duty to defend an entire case under one of these kinds of policies. 

     It is a very technical and complicated legal analysis to determine whether your company is actually covered against a lawsuit.  It involves a full comparison of the allegations in the complaint or the cease and desist letter to the wording of the policy.  Most states including Georgia weight the analysis heavily in favor of the insured as to the duty to pay for a lawyer to defend the claim.  If ANY allegation triggers the duty to defend, the insurer has to defend all of the allegations.  Thus, although one of the allegations might be for trademark infringement, which might be excluded from the policy, other allegations, such as false advertising, might be covered.  It only takes one covered allegation for the insurer to have to pay to defend the case.  

     There is more good news.  Usually if the insurer takes up the defense it will do so under a "reservation of rights" which means that if certain facts come to light it has the right to not pay any damages or the right to come back after their money paid in fees.  This is often a reservation of the right to deny coverage if intentional infringement is discovered by the insurance company.  Usually the victim of a trademark bully has no intention whatsoever to infringe, so there is little to worry about.  However, because the insurer has reserved certain rights, it would be a conflict for the insurance company to be able to pick its own lawyers to defend the case.  This is another place where it is imperative to have an experienced intellectual property coverage attorney involved.  The insurance company will usually try to hire the cheapest lawyers they can find to handle the case, not a higher priced higher quality lawyer.  But in this situation, Littleco usually has the right to pick a more experienced and skilled intellectual property attorney, and the insurance company has to pay the fees.  There are also companies such as IPISC that sell insurance that will specifically covers intellectual property claims.  You can also purchase intellectual property coverage from some insurance companies as an endorsement to an existing CGL policy.  After a lawsuit is filed it is too late to get insurance for what has happened already. But if you are reading this and have not had the misfortune of getting hit with a trademark bullying lawsuit yet, it would be wise to consider making sure you are covered.

    If you get a lawsuit or a cease and desist letter from a bully, It is a mistake for the accused company to simply talk to their insurance agent or the insurance company directly without legal representation in the process of making a claim for coverage.  Often the insurance company will initially deny coverage and the insured has to have someone skilled to fight to get a legal defense covered.  Many times the agent will not be aware that there is coverage under the policy for intellectual property claims.  Other insurance companies are very willing to pay to defend claims when the policy requires it, but a claim has to made to find out.  Often the law on whether defense costs must be paid by the insurer is unsettled or murky and good, persistent lawyering could influence the decision.  We have had four cases in the past year where we were hired by the insured to review the case and the insurance and to guide the client through the claims process.  In each case eventually the defense was picked up by the insurance company, and we ended up being chosen by the client, with the approval of the insurance company, to defend the case.  One of these cases we settled recently for no payment to the plaintiff, and no change in the trade name of the client.  Only some adjustments to the advertising took place. So if you get bullied get the right lawyer to help you out.  It could save your brand, and save your company.