Intellectual Property Newsletter, Spring 2007

ARNSTEIN & LEHR Attorneys at Law

LLP

Intellectual Property

Singer-Composer's Action for Rescission of Contract with Record Company Pre-empted by Copyright Act

About our Intellectual Property Practice Group Arnstein & Lehr's Intellectual Property Practice Group is comprised of attorneys from our Florida and Illinois offices. Our Firm provides legal services related to patents, copyrights, trademarks and trade secrets, including preparation and processing of trademark, patent and copyright applications, consultation regarding infringement, preparation of licensing agreements and related matters. If you have any questions about this article, including how it may impact you or your company, or for updates regarding Intellectual Property Law, please contact the lawyer in the firm with whom you are regularly in contact or one of the following persons in the Arnstein & Lehr Intellectual Property Practice Group: Miami Jeffrey B. Shapiro Chicago Robert D. Butters James F. Gossett Norman P. Jeddeloh

The U.S. Court of Appeals for the First Circuit has held that a singer-composer could not sue a record company for rescission of a contract existing between the parties because that suit was pre-empted by the federal Copyright Act. The ruling came in a suit filed by Gilberto Santa-Rosa against Combo Records, in which the plaintiff also sought a declaratory judgment that he had an ownership interest in five albums he recorded for Combo more than 15 years previously, which Combo had sold without providing payment to him. With regard to rescission, the Court of Appeals found that Santa-Rosa's claim was pre-empted, and therefore rightly dismissed by a lower court, because a successful claim for rescission would result in there being no written instrument signed by the parties, so that the court would be required to resort to interpretation of the Copyright Act in order to determine Santa-Rosa's ownership rights in the recordings and provide him with a remedy for Combo's alleged actions. The First Circuit then found that, since Santa-Rosa's contract claim for rescission was preempted by the federal Copyright Act, the rescission claim had to be dismissed for failing to state a cause of action. Santa-Rosa also lost out on the claim for a declaratory judgment, however, because the Court of Appeals found that the claim arose under the Copyright Act and a lower court properly dismissed that claim as time-barred under the Act's three-year statute of limitations. The First Circuit noted that the Act required claims under its provisions to be commenced within three years after they accrued, and Santa-Rosa's claim for a declaratory judgment would have accrued, at the latest, more than four years before he filed suit, when, according to his own pleadings, Combo began openly and notoriously selling his records without paying him any compensation. Because Santa-Rosa's claim was for a declaratory judgment as to his own rights in the recordings, though, the Court of Appeals held that his claim for a declaratory judgment accrued even earlier, that is, as soon as he created each work. The First Circuit noted that accrual of a claim under the Act would require that the plaintiff know or have reason to know of the act which was the basis for the claim. But, in this case, the Court of Appeals said that Santa-Rosa had reason to know of his claim of ownership over the recordings soon after they were created, and that was well over three years before he filed suit.1

_____________________________ 1 Source: Santa-Rosa v. Combo Records, U.S. Court of Appeals for the First Circuit, No. 05-2237, December 15, 2006. Intellectual Property | Spring 2007 | Page 1

Junior User of Trademark Does Not Engage in Progressive Encroachment by Making Immaterial Label Changes and Expanding Product Sales to Supermarkets The U.S. Court of Appeals for the Ninth Circuit has upheld a lower court's dismissal of trademark infringement claims because they were barred by the equitable doctrine of laches, where the complainant did not object to alleged trademark infringement until 25 years after it should have known that an alleged infringer's activities created a likelihood of confusion. The Court of Appeals rejected the complainant's argument that the delay in bringing its claims was justified because of the other party's "progressive encroachment" on its mark by changing its label designs and expanding sales to supermarkets, whereas it had previously sold most of its products to convenience stores and momand-pop groceries. The trademark complainant in this case sold dairy products, primarily cheese, under the "Tillamook" mark since at least as early as 1918. The alleged infringer sold meat products under the same mark beginning in 1976. But the senior user did not object to the other party's use of the mark until September 2000, even though it was aware of the alleged infringer's use of the "Tillamook" mark when it began doing business, and even sold the alleged infringer's products in its own gift shop and mail-order catalog. The trademark complainant said that it did not object to the alleged infringer's activities until 2000 because the junior user changed its product labels in the 1990s and expanded its product sales nationally to supermarkets, which had been previously confined mostly to convenience stores and momand-pop groceries. The trademark complainant contended that such activities constituted "progressive encroachment." On appeal of a trial court ruling that trademark infringement claims were barred by laches because of the complainant's delay in objecting to the other party's activities, the Court of Appeals affirmed the lower court's judgment. Key to the Court of Appeals decision was its rejection of the "progressive encroachment" argument raised by the trademark complainant, as the Court of Appeals ruled that the trial court did not abuse its discretion in finding that there was no progressive encroachment in this case. _____________________________

The Court of Appeals noted that common methods of encroachment included a junior user's expansion of its business into different regions or into different markets. But the Court of Appeals held that the alleged infringer's labeling changes in this case should not be considered progressive encroachment because the lower court reasonably concluded that they did not in any way make the alleged infringer's packaging more similar to the trademark complainant's. As for the alleged infringer's expansion of its product sales in supermarkets, the Court of Appeals said that such expansion represented normal business growth, not progressive encroachment. Had the alleged infringer expanded its business into different regions or into different markets - by, for example, selling cheese in grocery stores the Court of Appeals indicated that a different ruling might have been appropriate. The Court of Appeals also rejected an argument by the trademark complainant that the laches defense should not apply in this case because the public should be protected from the "inevitable confusion" that would result between the parties' product lines. While the court noted that public interest might trump laches in a narrow set of circumstances, where a product was harmful or otherwise a threat to public safety and well-being, the Court of Appeals found no such circumstances in this case, where the trademark complainant had not alleged that the other party's products were harmful.2 Accused Trademark Infringer Not Entitled to Summary Judgment Merely Because Trademark Complainant Uses Registered Service Mark to Refer to Products in Connection with Certification Program or Because Accused Infringer Does Not Directly Compete with Complainant The U.S. Court of Appeals for the Eighth Circuit has reversed a lower court grant of summary judgment to an accused infringer of the registered service mark "MQVP," concluding that there were genuine issues of material fact as to whether the accused infringer's unauthorized use of the mark "MQVP" was "likely to cause confusion" as to the origin of products or services or was false commercial advertising. The ruling came in a dispute between the owner

2 Source: Tillamook Country Smoker, Inc. v. Tillamook County Creamery Association, U.S. Court of Appeals for the Ninth Circuit, No. 04-35843, October 11, 2006

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of the mark, MQVP, Inc., and alleged infringer Mid-State Aftermarket Body Parts, Inc. MQVP, Inc. marketed a quality assurance program to manufacturers and distributors of parts used to repair damaged vehicles (aftermarket parts). Manufacturers were required to meet certain quality assurance requirements in order to participate in the program, and their parts could be entered into a "Global Online Certification System," run by MQVP's on-line software, which enabled end users of specific parts to trace the shipment of those parts from manufacturer through the chain of distribution, thereby validating the parts' quality. The MQVP program contemplated that participating manufacturers would sell their parts to participating distributors. But evidence in the case showed that some participating manufacturers sold parts to non-MQVPparticipants, including Mid-State, a distributor of aftermarket automobile parts that it purchased from various vendors. When Mid-State advertised that it had "MQVP parts available" and declined MQVP, Inc.'s offer of a license to use its service mark, MQVP, Inc. served Mid-State with a cease and desist letter, and this lawsuit followed. The trial court granted Mid-State's motion for summary judgment because it found that MQVP, Inc. had registered the "MQVP" mark as a service mark, but used it to refer to products "in terms that fit the definition of" a certification mark. In addition, the trial court found that there was no likelihood of confusion in this case because Mid-State did not offer services that competed with the MQVP services protected by the mark in question, and Mid-State's customers were collision shops who were parts end users, not the manufacturers and distributors who were potential purchasers of MQVP's services. On appeal, the Eighth Circuit found the trial court's application of the federal Lanham Act to the undisputed and disputed facts in the case was "flawed" and reversed the summary judgment granted by the trial court, remanding the case for further proceedings. Among other things, the Court of Appeals found that the trial court

should not have granted summary judgment merely because MQVP's registered service mark was being used by MQVP to refer to products. The Court of Appeals reached that conclusion, first, because the evidence was not conclusive that MQVP used its mark to refer to products. Second, the Court of Appeals said the trial court should not have concluded, as a matter of law, that the use of a registered service mark to refer to products was relevant to the likelihood of confusion and false advertising issues presented in this case, since a registered service mark could properly be used to identify the goods associated with the services protected by the mark, so long as the mark continued to identify the presence of some services and not only goods. As for the lower court's concern that MQVP's mark was used "in terms that fit the definition of" a certification mark, the Court of Appeals found that MQVP's use of its mark and the nature of the services protected by the mark were disputed issues for trial. Furthermore, MQVP was entitled to control the services sold under its service mark, even if Mid-State's use of that mark - "MQVP parts available" - made the mark look like a certification mark for products, divorced from the validating on-line software services that MQVP marketed as an essential part of the overall program. Finally, the Court of Appeals rejected the lower court's analysis of likelihood of confusion, which emphasized that Mid-State did not offer services competing with MQVP's services protected by its mark. The Court of Appeals said that, for purposes of ruling on a motion for summary judgment by Mid-State, the trial court should have viewed the evidence most favorably to MQVP, and in doing so, the Court of Appeals said that Mid-State could be found to be engaged in unauthorized use of the "MQVP" mark for the purpose of confusing, and indeed deceiving, end users into believing that they were buying qualified "MQVP parts" fully validated under the MQVP program, with all its attendant services. Therefore, summary judgment for Mid-State was inappropriately granted on the basis that Mid-State did not compete with MQVP.3

_____________________________ 3 Source: Mid-State After Market Body Parts, Inc. v. MQVP, Inc., U.S. Court of Appeals for the Eighth Circuit, No. 05-3057, October 19, 2006

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Legitimate, Bona Fide Efforts to Protect Trademark Ruled Immune from Antitrust Liability, Even Though Trademark Owner Was Later Found to Have No Legal Basis for Those Efforts The U.S. District Court for the Northern District of Illinois has held that a real estate brokerage franchisor was immune from antitrust liability under the Noerr-Pennington doctrine for its legitimate, bona fide efforts to protect its trademark by sending cease and desist letters, threatening litigation, among other things. The ruling came in a legal dispute between RE/MAX International, Inc. and Amerimax Real Estate Partners, Inc., over whether Amerimax violated RE/MAX's trademark rights by adopting and using a mark in the real estate brokerage business that contained the suffix "max." In this case, RE/MAX contacted Amerimax and demanded that it cease using its mark because RE/MAX owned exclusive rights in "max," threatening litigation if Amerimax did not comply. Amerimax filed a declaratory judgment suit seeking a ruling that "max" was a generic or common descriptive word, that RE/MAX had no exclusive rights in the word "max," and that Amerimax was not infringing on any valid rights of RE/MAX. In addition, the Amerimax complaint sought cancellation of RE/MAX's federal trademark registrations and alleged violation by RE/MAX of federal and state antitrust laws. On consideration of the issues raised by the parties, the district court gave Amerimax the declaratory judgment it sought, finding that "max" is not protectable as a trademark because it is a commonly used abbreviation for the word "maximum," and is therefore ubiquitous in both commerce and ordinary language. The district court also noted that RE/MAX had applied for federal trademark registrations of "max" for real estate franchise and brokerage services, but those applications had been refused by the United States Patent and Trademark Office and RE/MAX had later abandoned them. Although the district court found that Amerimax was entitled to its requested declaratory judgment, the court declined Amerimax's request for cancellation of RE/MAX's trademark registrations, and the court granted RE/MAX's motion to dismiss Amerimax's federal

antitrust claims, relinquishing jurisdiction over the state antitrust claims as a result. In so doing, the court concluded that RE/MAX had made legitimate, bona fide efforts to protect its "RE/MAX" mark through its prelitigation activities with respect to Amerimax, and that those activities were therefore immune from antitrust liability under the Noerr-Pennington doctrine, notwithstanding the fact that the district court itself had found that RE/MAX had no right to prevent Amerimax from using its name. The court found that the NoerrPennington doctrine, based on the First Amendment to the U.S. Constitution, "immunizes from antitrust liability bona fide lobbying and litigation efforts," whether or not these efforts are motivated by anti-competitive goals, unless such efforts are a "sham" and the court found that RE/MAX's pre-litigation activities in this case were not a "sham," in the sense that the purpose of those activities was not to deter Amerimax from using its mark by the process of litigating itself, regardless of the outcome.4 Operation of Internet Message Board Allowing Publication of Allegedly False and Defamatory Statements Concerning Company Does Not Constitute Dilution of Company's Trade Name Even If Operator of Message Board Derives Advertising Income from That Site The U.S. Court of Appeals for the First Circuit has affirmed a lower court's dismissal of a company's charges that the operator of an Internet message board allowing users to make allegedly false and defamatory statements about the company thereby diluted the company's trade name. The Court of Appeals found that the company's claim raised issues under the First Amendment to the U.S. Constitution and fell outside the boundary of trademark law. Additionally, the Court of Appeals held that the operator of the Internet message board made a noncommercial use of the company's trade name in so doing, and such use, allowing for commentary about trademarked products, could not constitute dilution,"even if the commentary takes the form of a commercial product," like an Internet message board producing advertising revenues for its operator.5

_____________________________ 4 Source: Amerimax v. RE/MAX International, Inc., U.S. District Court for the Northern District of Illinois, Eastern Division, No. 05 C 5300, September 26, 2006 5 Source: Universal Commc'n. Sys., Inc. v. Lycos, Inc., U.S. Court of Appeals for the First Circuit, No. 06-1826, February 23, 2007 Intellectual Property | Spring 2007 | Page 4

First Sale Doctrine Prevents Owner of Copyrights in Home Design from Obtaining Equitable Relief Prohibiting Sale or Lease of House Incorporating Pirated Design Once Copyright Owner Has Received Damages for Infringement The U.S. Court of Appeals for the Fourth Circuit has refused to prohibit a homeowner from selling or leasing a house incorporating a copyrighted home design the homeowner had obtained from a former client of a design firm. The design firm had charged the homeowner with copyright violation and had received damages of $20,000 from a federal district court. But the design firm appealed the judgment for money damages, requesting a new trial and a court order prohibiting the homeowner from selling or renting the home. On appeal to the Fourth Circuit, the Court of Appeals held that the "first sale doctrine" would apply to prevent any court from enjoining the homeowner's sale or lease of the house once the design firm had received damages for copyright infringement. The Court of Appeals also held that the plaintiff design firm was not entitled to a new trial and affirmed the lower court's ruling.6 Survey Evidence Is Not Required to Show Dilution When Conflicting Marks Are Identical and Trademark Owner Presents Circumstantial Evidence of Blurring The U.S. Court of Appeals for the Ninth Circuit has ruled for the owner of a registered trademark on a claim that the mark was diluted by a competitor's representations on the Internet, even though the trademark owner did not present survey evidence showing that the value of its mark had been diluted in the minds of the public. The ruling came in a suit by Horphag Research Ltd., owner of a federal trademark registration for "Pycnogenol," as applied to an herbal supplement, against a former licensed dealer for Horphag, which had begun selling a competing product on the Internet on a site that included numerous references to "Pycnogenol." Horphag sued the former dealer for trademark infringement and trademark dilution, but the only claim at issue before the Court of Appeals involved dilution. The defendant argued that the lower court's granting of

summary judgment to Horphag on the dilution claim should be reversed because Horphag had not presented survey evidence and the like showing "actual dilution," as the former dealer contended was then required by the holding of the U.S. Supreme Court in the case of Moseley v. V Secret Catalogue, Inc. The "actual dilution" requirement set forth in the Moseley case no longer applies to dilution claims because of recent amendments to federal statutory law requiring that dilution plaintiffs prove only a "likelihood of dilution." But the Ninth Circuit in this case found that even the Moseley "actual dilution" requirement did not prevent summary judgment for Horphag. Instead, the Ninth Circuit interpreted the Moseley decision as requiring no survey evidence or the like to prove "actual dilution" in cases like the one before the Ninth Circuit, where the disputed marks are identical and where there is "circumstantial" evidence of dilution by blurring. Here, the former dealer used the mark "Pycnogenol" extensively on the former dealer's website in an attempt to show that its product, and not the product sold by Horphag, was the original and "true" Pycnogenol, and the Ninth Circuit held that this was use of a mark identical to Horphag's mark in a way that lessened the capacity of Horphag's mark to uniquely identify and distinguish its product, thereby diluting Horphag's trademark. Furthermore, according to the Ninth Circuit, Horphag would prevail in this case even if the conflicting marks were not identical because of the circumstantial evidence produced by Horphag showing that the former dealer's use of Horphag's mark caused numerous consumers to phone Horphag asking whether the former dealer "was selling a real Pycnogenol product," which was uncontroverted circumstantial evidence that actual blurring had occurred. The former dealer sought to defend against the dilution claim by arguing that it was making "fair use" of Horphag's trademark. However, the Ninth Circuit held that the fair use defense could not apply in this case because the former dealer had not merely made use of Horphag's trademark for proper comparative commercial advertising, but had created an improper association between the mark and the former dealer's own product, instead of identifying the trademark owner's product.7

_____________________________ 6 Source: Phelps & Associates v. Galloway, U.S. Court of Appeals for the Fourth Circuit, No. 05-2266, February 12, 2007 7 Source: Horphag Research Ltd. v. Garcia, U.S. Court of Appeals for the Ninth Circuit, No. 04-55373, January 9, 2007 Intellectual Property | Spring 2007 | Page 5

Whether Laches or Statute of Limitations Applied in Suit for Infringement of Architectural Design Depended on Nature of Relief Sought The U.S. Court of Appeals for the Sixth Circuit, ruling in a suit brought by real estate developers for alleged infringement of their copyrights in an architectural design, held that whether the equitable doctrine of laches or the statute of limitations in the Copyright Act applied to the plaintiffs' suit would depend on the nature of relief sought. A federal district court had granted summary judgment to the defendants on the basis of laches, finding that they had been prejudiced by unnecessary delay between the time the plaintiffs had learned that construction of an allegedly infringing building was planned (or, alternatively, the time that construction was undertaken) and the time that the complaint was filed, even though the action was filed within the three-year statute of limitations provided by the federal Copyright Act. On appeal of the summary judgment ruling, the Sixth Circuit held that the statute of limitations should prevail in the case to the extent the plaintiffs were seeking monetary damages and injunctive relief, giving effect to a

presumption established previously by the Court of Appeals. However, the Sixth Circuit held that the statute of limitations should not be applied in those "unusual cases" when relief sought would work an unjust hardship upon the defendants or upon innocent third parties, producing judgments never envisioned by the drafters of the Copyright Act. Therefore, the Court of Appeals affirmed the judgment of the district court insofar as it dismissed the plaintiffs' efforts to mandate the destruction of the defendants' allegedly infringing condominium building, remanding the case to the trial court for further proceedings as might be appropriate in light of the Sixth Circuit's opinion.8 _____________________________ 8 Source: Chirco v. Crosswinds Communities, Inc., U.S. Court of Appeals for the Sixth Circuit, No. 05-1715, January 10, 2007

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