Intellectual Property Newsletter, Summer 2007

ARNSTEIN & LEHR Attorneys at Law

LLP

Intellectual Property

Court Finds Purchasing Key Word for Purposes of Advertising with Internet Search Engines Can Constitute "Use" of Trademark Within Meaning of Lanham Act When Search Result Displays Trademark

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: Chicago Robert D. Butters James F. Gossett Norman P. Jeddeloh Miami Jeffrey B. Shapiro

The U.S. District Court for the Northern District of New York has partially granted and partially refused to grant a motion to dismiss in a lawsuit based, among other things, on the defendant's alleged violation of the Lanham Act through the operation of a search function on its website and the defendant's purchasing of certain key words for purposes of advertising with Internet search engines. The plaintiff alleged that it owned a registered trademark, "The Dating Ring," and that the defendant, Zale Corporation/Delaware, violated the Lanham Act by causing certain results to appear on its website when a search was performed on the phrase "dating ring," as well as by purchasing the key words "dating ring" for purposes of advertising with Google, Yahoo and other Internet search engines. Considering the plaintiff's allegations, the district court granted the defendant's motion to dismiss with respect to the plaintiff's claims regarding the results of searches on the defendant's website. The district court noted that the plaintiff's allegations indicated that, when a search was performed on the defendant's website for "dating ring," over 500 results appeared, none of which had anything to do with the plaintiff. But the district court held that the mere fact the website generated a results list displaying various rings for sale in response to the search "dating ring" did not constitute a "use" within the meaning of the Lanham Act that would indicate a violation of that Act, since the plaintiff's trademark was not displayed in any of the links to rings offered for sale on the defendant's website. On the other hand, the district court refused to grant a motion to dismiss with respect to the plaintiff's charges concerning the defendant's alleged purchase of key words for purposes of Internet advertising. The district court noted that, according to the plaintiff's allegations, the defendant had purchased key words so that various Internet search engines would display a result "Dating Rings - Zales" when a computer user searched for "dating ring" or "dating rings," and, if so, the plaintiff's trademark might have appeared on the displays in such a way that would constitute "use" under the Lanham Act.1 Court of Appeals Interprets "Restored Copyright" Enforcement Provisions to Limit "Reliance Party" Status The U.S. Court of Appeals for the Second Circuit has affirmed a lower court decision granting a preliminary injunction against Uneeda Doll Company for infringing a copyright restored pursuant to Section 104A of the Copyright Act. In doing so, the Court of Appeals interpreted Section 104A so as to limit the ability of infringers to claim "reliance party" status within the meaning of that section, entitling them to sell off existing inventory of infringing products for one year after receiving notice that the owner of a restored copyright intends to enforce rights against them. Section 104A was enacted in its present form as part of the Uruguay Round Agreements Act ("URAA"), which amended the Copyright Act to bring the United States into

_____________________________ 1 Source: Hamzick v. Zale Corporation/Delaware, U.S. District Court for the Northern District of New York, No. 3:06-cv-1300, April 18, 2007. Intellectual Property | Summer 2007 | Page 1

compliance with the international Berne Convention for the Protection of Literary and Artistic Works. It restores copyrights for a wide range of foreign works that had previously entered the public domain in the United States because of noncompliance with certain formalities, primarily notice of copyright, imposed by U.S. copyright law, but not required under the Berne Convention. In this case, Troll Company sued Uneeda Doll Company for allegedly infringing copyrights in certain "troll" dolls that had been first created in the late 1950s by a Danish woodcarver, who registered copyrights in the United States in 1965 through a company he had established. The copyright registration in the United States for the troll dolls was invalidated the year it was granted because some dolls had been sold in the United States without a copyright notice then required by U.S. law. But it was undisputed that the copyrights in the troll doll were restored by Section 104A, and Troll Company relied on those copyrights, as a successor in interest to the original registrant, in seeking and obtaining a preliminary injunction against Uneeda Doll Company at the district court level. On appeal of that district court ruling, the defendant argued, among other things, that it was a "reliance party" within the meaning of Section 104A and the preliminary injunction was entered without regard for its right to sell off its existing inventory of troll dolls during a one-year sell-off period. Section 104A creates several categories of "reliance parties," who have legitimately exploited a work in which copyrights have been restored during the period when the work was in the public domain. The Court of Appeals, in this case, ruled that Uneeda Doll Company was not a reliance party entitled to a one-year sell-off period, and the Second Circuit therefore affirmed the lower court's order granting the preliminary injunction. In deciding against Uneeda Doll Company, the Second Circuit had to interpret, for the first time, several provisions of Section 104A. First, the Court of Appeals noted that the status of a reliance party under Section 104A turns on whether that person took certain actions with respect to a work prior to the date that the "source country" of that work became an "eligible country" for purposes of restoration of copyrights. The Second Circuit noted that other courts had mistakenly looked to the date on which copyrights were restored under Section 104A, January 1, 1996, rather than the date when the URAA was enacted, December 8, 1994, as determining when source countries became eligible countries. But, in this case, the Court of Appeals concluded that Denmark became an eligible country for purposes of restored copyrights on December 8, 1994 because it

was a member of the Berne Convention when the URAA was enacted. Therefore, in order to be a reliance party under Section 104A, Uneeda was required to have taken certain actions with respect to troll dolls prior to December 8, 1994. Uneeda's claim to reliance party status, however, also required the Court of Appeals to interpret Section 104A's requirement, in subsection 104A(h)(4)(B), that reliance parties must have "continued" to engage in certain acts after the source country became an eligible country. Troll Company argued that Uneeda was not entitled to reliance party status under Section 104A, even if it began infringing acts in reliance on the public domain status of troll dolls before December 8, 1994, since it was undisputed that Uneeda had not continuously engaged in its infringing acts after that date, but had, for nine or ten years, ceased engaging in such acts, only to pick them up again later, because of the cyclical nature of public interest in troll dolls. Uneeda responded that Section 104A does not require infringing activity by a reliance party to be uninterrupted, but that the periodic renewal of cyclical exploitation "continues" such exploitation. Considering the legislative history of Section 104A, the Court of Appeals agreed with Troll Company that Uneeda could not claim protection as a reliance party under 104A based on its continuation of an infringing act after December 8, 1994. The Second Circuit ruled that Uneeda's renewed manufacture and sale of troll dolls after a nine- or ten-year hiatus was not a continuation of infringement under Section 104A. Uneeda's claim to "reliance party" status was not fully disposed of at that point, though, because Uneeda argued that the continuous exploitation requirement was only contained in subsection 104A(h)(4)(A) of the Copyright Act, and was not contained in subsection 104A(h)(4)(B), which Uneeda claimed was intended to establish a different class of reliance parties than the one addressed in subsection 104A(h)(4)(A). Subsection 104A(h)(4)(B), on its face, establishes that [any person who,] "before the source country of a particular work becomes an eligible country, makes or acquires one or more copies . . . of that work" can claim reliance party status with respect to that work. Consequently, Uneeda argued that it was entitled to reliance party status under subsection 104A(h)(4)(B) because it had unquestionably made or acquired at least one copy of the troll doll before the URAA's enactment. Again, however, the Court of Appeals ruled against Uneeda, because the Second Circuit pointed out that Uneeda was arguing for the right to sell, not dolls made or acquired before December 8, 1994, but dolls manufactured since restoration of the copyrights owned by the plaintiff, which the Court of Appeals deemed to be "an absurd result." The Court of Appeals

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interpreted subsection 104A(h)(4)(B) as limiting the benefit of reliance party status only to those copies made or acquired before the URAA's enactment, which could, in fact, be sold during the one-year sell-off period. But, since the sales of such dolls were not at issue for purposes of the preliminary injunction, because those dolls had been sold long ago, the Court of Appeals found that Section 104A provided no basis for overturning the district court's injunction order2 Court of Appeals Applies FTDA "Likelihood of Dilution" Amendment to Appeal of Prior District Court Decision Denying Injunctive Relief The U.S. Court of Appeals for the Second Circuit has decided that an amendment of the Federal Trademark Dilution Act, entitling the owner of a famous, distinctive mark to an injunction against the user of a mark that is "likely to cause dilution" of the famous mark, should be applied in an appeal of a federal district court decision that was handed down in a dilution case before the Act was amended. The Second Circuit ruled in a suit brought by Starbucks Corporation and Starbucks U.S. Brands, L.L.C. against Wolfe's Borough Coffee, Inc. for allegedly infringing and diluting the "Starbucks" trademark for coffee by selling coffee under the name "Mister Charbucks" or "Mr. Charbucks." Starbucks had sued Wolfe's for trademark infringement and unfair competition under the Lanham Act, common law unfair competition, and trademark dilution under the FTDA and New York state law. The district court ruled for Wolfe's on all counts, and Starbucks appealed. But the Second Circuit decision addressed only the district court's judgment with respect to the FTDA claim, vacating the district court's judgment and remanding the case for further proceedings. In its decision, the Second Circuit noted that the district court, in ruling on the Starbucks FTDA claim, applied a pre-October 6, 2006 version of the FTDA, as construed by the Supreme Court of the United States, which required proof of actual dilution for relief under the Act, determining that Starbucks had failed to prove actual dilution of its mark by Wolfe's. However, the Court of Appeals concluded that the amendment of the FTDA to require only proof of a likelihood of dilution, which was effective October 6, 2006, should be applied to this case on appeal of the district court's decision because Starbucks was seeking only injunctive relief, which would do no more than avoid a continuing harm to the plaintiff and, therefore, would not involve giving Starbucks some sort of retroactive relief.

Interestingly, the district court had considered whether Starbucks had shown a likelihood of dilution when it rejected Starbucks' state law claims against Wolfe's, because New York state law, at that time, required a showing of a likelihood of dilution in order to obtain the relief Starbucks sought. But the Second Circuit remanded the case for further proceedings consistent with the amended FTDA because the Court of Appeals was not clear as to whether New York state law was coextensive with the amended Act, and because the district court's treatment of the New York statute did not permit a review of whether that court's analysis conformed with the amended Act.3 Builders Can Be Held Liable Under Federal Architectural Works Copyright Protection Act The U.S. District Court for the Eastern District of New York has held that a builder, as well as a drafter of blueprints, could be held liable for copyright infringement under the federal Architectural Works Copyright Protection Act. Plaintiff Axelrod and Cherveny had copyrighted a home design under the Act, which they called the "Canterbury Design," and they sued a general contractor for a residential development after they saw a house in the development that allegedly infringed their copyrights. But the general contractor had argued that the Act imposed liability only upon architects who might steal each other's designs, not builders, seeking to shift responsibility for copyright infringement to the development's architect that had drafted blueprints using photos of a "Canterbury Design" home taken by a home buyer. Considering the evidence in the case, the district court noted that the home buyer who had taken the photos showed them to the defendant builder and asked whether a house could be built in the development with the "Canterbury Design," whereupon the architect for the development, under the builder's guidance, drafted blueprints based on the "Canterbury Design" and the builder constructed a house using the architect's blueprints. Under such a set of facts, the district court held that builders could be found liable under the Act, and the district court granted the plaintiff's motion for summary judgment.4 Copyright Claims Subject to Arbitration Agreement The U.S. District Court for the Northern District of California has held that a dispute over a development and license agreement, which included claims of copyright infringement and violation of the anticircumvention provisions of the federal Digital Millennium Copyright Act, was required to be

_____________________________ 2 Source: Troll Company v. Uneeda Doll Company, U.S. Court of Appeals for the Second Circuit, No. 05-6487-cv, April 13, 2007. 3 Source: Starbucks Corporation v. Wolfe's Borough Coffee, Inc., U.S. Court of Appeals for the Second Circuit, No. 06-0435-cv, February 15, 2007. 4 Source: Axelrod & Cherveny Architects, P.C. v. Winmar Homes, U.S. District Court for the Eastern District of New York, No. 2:05-cv-711-ENV-ETB, March 6, 2007.

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arbitrated pursuant to a provision of the agreement. The dispute arose when Valencia Systems, Inc. charged Packeteer, Inc. with reverse engineering some of Valencia's proprietary source code for customized software Valencia had licensed to Packeteer. The development and license agreement between the parties contained a provision stating that "any dispute concerning [the] Agreement . . . shall be resolved by binding arbitration before one single arbitrator . . . under the rules of the American Arbitration Association." Valencia sought arbitration of its claims that Packeteer had infringed its copyrights and violated the anticircumvention provisions of the Digital Millennium Copyright Act. But Packeteer filed a declaratory judgment action, asking the district court to make a determination that Valencia's copyright infringement and DMCA claims could not be arbitrated because federal statutory law had provided the federal courts with exclusive jurisdiction over copyright and DMCA matters. On Valencia's motion to dismiss the declaratory judgment action, the district court granted the motion, holding that arbitration of the copyright infringement and DMCA claims was proper. The district court looked to a number of previously decided court cases in holding that "someone other than a federal court [may] determine a copyright claim." In this case, because the development and license agreement included an arbitration clause, the district court held that there was a presumption of arbitrability unless it could be said "with positive assurance" that the arbitration clause did not cover the asserted dispute. But the district court could not make such a determination with positive assurance as to the copyright and DMCA claims raised by Valencia.5 Lanham Act Does Not Preempt State Laws Permitting Punitive Damage Awards The U.S. Court of Appeals for the Seventh Circuit has held that the federal Lanham Act does not preempt state law claims for unfair competition simply because the state law allows for punitive damages while the Lanham Act does not permit punitive damages for federal trademark infringement claims. The ruling came in a suit filed by JCW Investments, Inc. against Novelty, Inc., arising from Novelty's use of the phrase "Pull My Finger" in connection with dolls that competed with JCW products. On appeal of a district court judgment awarding JCW damages for trademark infringement and copyright infringement, as well as punitive damages based on Illinois unfair competition law,

and attorneys' fees, the Seventh Circuit affirmed in all respects. With regard to the district court's award of punitive damages based on a state unfair competition law, Novelty argued that the federal Lanham Act preempts any state law provision permitting punitive damages because the Lanham Act, while providing for the trebling of compensatory damages in federal trademark infringement cases, forbids other penalties. But the Seventh Circuit disagreed with that analysis, noting that, in the area of trademark law, preemption by the Lanham Act is an exception rather than the rule, finding that the Lanham Act did not expressly or by necessary implication preempt state laws permitting punitive damages, and ruling that Congress would have acted more clearly if it had intended to displace state punitive damage remedies.6 Non-Exclusive Licensee's Claims for Unfair Competition and Unjust Enrichment Found Wanting Where License Agreement Prohibited Filing Unfair Competition Suit Without Notice to Licensor and NonExclusive Status Prevented Licensee from Proving Loss of Profits to Defendant The U.S. District Court for the District of New Jersey has held that a non-exclusive licensee of the "Sean John" trademark for clothing could not assert unfair competition claims under the federal Lanham Act and unjust enrichment claims under state law based on the defendant's selling allegedly counterfeit underwear and lounge wear goods bearing the "Sean John" trademark. Dismissing claims brought by O.O.C. Apparel, Inc. against Ross Stores, Inc., the district court held that both the unfair competition and the unjust enrichment claims failed because of the plaintiff's status as a licensee, but for different reasons. With respect to the unfair competition claims, the court noted that a licensee could bring suit under the Lanham Act, even if its license was non-exclusive. But, in this case, the plaintiff's license agreement with the owner of the "Sean John" mark prohibited the licensee from bringing any suit based on infringement of the mark, imitation of the mark, or counterfeiting, without notifying the licensor and obtaining its permission, and, since the plaintiff had not provided notice to the licensor before bringing suit, it had no standing to bring such claims against the defendant. On the other hand, the district court ruled that the plaintiff in this case could not state a claim for unjust enrichment against the defendant because of the plaintiff's status as a nonexclusive licensee. The court noted that the plaintiff's claim

_____________________________ 5 Source: Packeteer, Inc. v. Valencia Systems, Inc., U.S. District Court for the Northern District of California, No. 06-7342, March 6, 2007. 6 Source: JCW Investments, Inc. v. Novelty, Inc., U.S. Court of Appeals for the Seventh Circuit, No. 05-2498, March 20, 2007.

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appeared to be that the defendant earned profits at the plaintiff's expense, but the court found that the plaintiff could not prove it would have earned the profits in question if not for the activities of the defendant, apparently because other licensees could have derived such profits instead of the plaintiff.7 Restitution Order Inappropriate Penalty in Criminal Copyright Case Where Counterfeiting Defendant Has Not Cost Copyright Owner Sales The U.S. Court of Appeals for the Tenth Circuit has reversed and vacated a lower court's order requiring a defendant in a criminal copyright infringement prosecution under federal law to pay $321,663 in restitution to Microsoft after he was convicted of counterfeiting Microsoft products. The lower court had based its restitution order on the fair market value of Microsoft products counterfeited by the defendant and sold to a company that immediately became suspicious of the products' authenticity and turned them over to the U.S. government for prosecution. In this case, the defendant had offered "steep discounts on various Microsoft products," and a Maryland company had placed an order for 537 copies of certain software at a total purchase price of $85,383. When the Maryland company contacted the U.S. government about the transaction, the defendant was charged with conspiracy to infringe a copyright in violation of 17 U.S.C. Section 506(a)(1) and 18 U.S.C. Sections 371 and 2319(b)(1), to which the defendant entered a guilty plea. The lower court then sentenced the defendant to a one-year term of imprisonment and ordered him to pay restitution to Microsoft based on Microsoft's retail price for 537 copies of its product, which was $599.99 per copy.

Appeals noted that the Maryland company had turned over all copies of the counterfeit product to the government within fifteen days of their receipt and without having used them, which gave the Court of Appeals no reason to believe that the purchaser's demand for the product would have changed, preventing Microsoft from selling its own product to the purchaser. If anything, said the court, the defendant's actions merely made Microsoft aware that the Maryland company was a potential purchaser of its product.8 Advertising Business Can Be Use of Trademark for Infringement Purposes, Even If Business Hasn't Opened The U.S. District Court for the Central District of Illinois has ruled that the use of a trademark for advertising availability of hotel services, even before the hotel has opened, can involve the use of a trademark in interstate commerce for purposes of infringement. The ruling came in a suit filed by Best Western International against owners and operators of a new hotel property, which was originally intended to be a Best Western hotel, but which later became a Ramada property. According to the complaint, Best Western signs were used outside the hotel during its construction, even after the owners and operators of the hotel lost their contract with Best Western. Best Western International sued for trademark infringement, among other things, and the hotel owners and operators moved for summary judgment, claiming, that they had not used Best Western's trademarks in interstate commerce while the hotel was under construction, as required for trademark infringement under the Lanham Act.

The defendant appealed the restitution order on the ground that Microsoft had suffered no actual loss from his offense, and the Tenth Circuit agreed that the restitution order was improper because the government had not demonstrated that the defendant had actually cost Microsoft sales of 537 copies of its product at Microsoft's retail price. Noting that the purpose of restitution "is not to punish defendants or to provide a windfall for crime victims," the Court of Appeals said any restitution order must be based on actual loss, which the government bore the burden of proving.

The district court refused to grant the motion for summary judgment, however, finding that the owners and operators of the hotel could be considered to have engaged in interstate commerce using the Best Western signs prior to the opening of the hotel for business. The court noted that it was common practice in many industries for a service or product to be advertised before it was actually available for consumption or purchase by a consumer, and it was at least arguable that Best Western International had lost exclusive control over its reputation and goodwill because of the unauthorized use of Best Western's marks in this case.

In this case, though, the Court of Appeals, as an initial matter, said it was very skeptical of the implicit suggestion that the Maryland company's agreement to purchase 537 copies of a product for a total price of less than $86,000 proved that it would have agreed to purchase the same number of copies from Microsoft for more than $321,000. Furthermore, the Court of

The court, however, was not sufficiently convinced that the interstate activity requirement of the Lanham Act had been satisfied by the plaintiff so as to allow the court to give final judgment to Best Western on its trademark infringement claims. Consequently, further proceedings were required so that the parties could present additional evidence on that question.9

_____________________________ 7 Source: O.O.C. Apparel, Inc. v. Ross Stores, Inc., U.S. District Court for the District of New Jersey, No. 04-6409 (PGS), March 20, 2007. 8 Source: U.S. v. Hudson, U.S. Court of Appeals for the Tenth Circuit, No. 06-6199, April 17, 2007. 9 Source: Best Western International v. Prime Tech Development, U.S. District Court for the Central District of Illinois, No. 05-05-4049, April 20, 2007. Intellectual Property |Summer 2007 | Page 5

Collage Works Found Derivative of Original Photographic Images and Not Collective Works Privileged Under 17 U.S.C. Section 201(c) The United States Court of Appeals for the Ninth Circuit has held that collage works incorporating copyrighted photographs can be derivative works, and not collective works shielded from copyright infringement suits under 17 U.S.C. Section 201(c). The ruling came in an infringement suit filed by photographer Chase Jarvis against K2, Inc., a maker of outdoor sporting goods, which had used the photographer's slides in its advertising for years, and which continued to use many of those slides after an agreement for use between the parties had terminated. A federal district court found that K2, Inc. was liable for infringement with respect to many of Jarvis's slides. But the district court found that K2, Inc.'s use of twenty-four slides in the creation of collage advertisements that combined Jarvis's images with other images and graphics, after K2's authority to use Jarvis's images by agreement had expired, did not constitute infringement, because the collage works were covered by the collective works privilege as set forth in 17 U.S.C. Section 201(c). On appeal of the district court's decision with respect to the images included in the collage advertisements, the Ninth Circuit held that the district court erred in concluding that the collage works were protected by 17 U.S.C. Section 201(c). The Court of Appeals stated that Section 201(c) gave the owners

of collective works the privilege of reproducing and distributing someone else's copyrighted voluntary contributions to those works in any revision of those works and any related collective works in the same series, absent any agreement to the contrary. But the Court of Appeals concluded that the collage advertisements in this case did not constitute collective works for the purposes of Section 201(c), but, instead, were derivative works. The Court of Appeals went on to say that K2, Inc.'s collage advertisements might have been collective works if they had merely compiled Jarvis's slides as an album might have. But the ads actually shrank, expanded, distorted, overlaid and otherwise edited Jarvis's original images, while also combining them with photos taken by other photographers, additional graphics, the K2 logo and marketing slogans, which constituted recasting, transforming or adapting in the manner that defined a derivative work. Accordingly, the Court of Appeals reversed the district court's ruling on the Section 201(c) defense and remanded the case for further determinations consistent with the Ninth Circuit's opinion.10 _____________________________ 10 Source: Chase Jarvis v. K2, United States Court of Appeals for the Ninth Circuit, No. 05-35609, April 30, 2007.

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