Troy & Schwartz Attorneys-At-Law

Unlike a patent, registered copyright, or registered trademark, all of which are the result of a formal grant by a government agency such as the United States Patent & Trademark Office, a trade secret has no such formal governmental recognition.  Instead, the trade secret owner must take proactive steps to both establish and protect its trade secrets.  To prevail in a trademark misappropriation lawsuit, the trade secret claimant must be able to define the trade secret, explain why it’s a trade secret, and demonstrate the steps it has taken to protect the trade secret from dissemination.

A common mistake in the world of trade secret IP is that many think that simply designating a document as confidential will automatically confer trade secret status on that document and its underlying content.  As discussed in our Nov. 21, 2023 blog entitled “Boosting Enterprise Value Through Trade Secrets,” this understanding is incorrect.

Consider a recent 2023 case out of Texas where the jury concluded that a telecom company acted in bad faith by filing a $23 million trade secret misappropriation lawsuit against a competitor; the court found that the underlying technology was not a trade secret.  Telegistics, Inc. v. Advanced Personal Computing, Inc. d/b/a/ Liquid Networx, no. 2019-15000 in the 190th District Court of Harris County, Texas.  Telegistics alleged that its former employee obtained a copy of Teligistic’s internal Request for Proposal (“RFP”) and used it as the basis for tweaking his new employer’s (Liquid Networx) internal RFP.  That is, the former employee altered the RFP so that it could be used by his new employer.  As such, Liquid Nerworx did not itself spend time and resources developing its own RFP.

Telegistics had made its RFP available to on-line to bidders who were invited to submit responses for Telegistics’ products and services.  The document included a confidentiality notice and information that permitted bidders to submit responses for Telegistic’s telecom products and services.  Telegistics claimed that the RFP was a trade secret.

Defendant Liquid Networx challenged the existence of Teligistic’s alleged trade secrets, claiming the plaintiff had not clearly defined its trade secrets.  Liquid Networx argued that while the source code of Telegistic’s platform, for example, could qualify as a trade secret, the actual output generated by the platform, such as the RFP, was not entitled to trade secret protection just because a confidentiality label was affixed to it.  Unfortunately for it, Telegistics was also unable to demonstrate any reasonable efforts it had made to keep the information it received from bidders confidential once received.

The jury agreed.  Interestingly, the jury went a step further and additionally found that Teligistics acted in bad faith by filing its lawsuit.  Networx is now seeking its attorneys’ fees as a result.

As our earlier blog emphasized, the plaintiff in a trade secret misappropriation lawsuit must at the get-go establish that it does indeed have protectable, definable trade secrets.  Telegistics did not meet this threshold.  Texas, as with almost all of the other fifty states, including Florida, has adopted the Uniform Trade Secrets Act as its statutory trade secret law.  Accordingly, it is highly likely that the same decision would have been reached no matter what jurisdiction the Telegistics case had been brought, namely, that the RFP was not a trade secret.

Take-Home Points.

The “confidential” labelling of a document, without more, will likely be insufficient for converting the confidential document into a trade secret.   Moreover, documents generated automatically by a software program that itself qualifies as a trade secret (e.g., source code and/or object code) may not qualify as a trade secret if other factors are not present.  For example, what steps has the trade secret claimant made to limit the dissemination of the collected information within the organization?

Here are some tips for consideration.

1. Consider the nature of the document. Is it a general information form or something highly unique to be used in generating a potential economic benefit, e.g., a manufacturing document containing trade secret raw material specifications and which has limited access within the company.
2. What is the purpose of the document?  Does it contain information about a trade secret (e.g., generally unknown information about a critical raw material component) where the development of the underlying trade secret involved creativity, considerable time, and considerable resources from human resources to financial resources (e.g., R&D spending)?
3. Is the “confidential” document more of a general information form or a specially developed form?
4. Is there an economic value that comes from maintaining the document’s confidence?
5. What steps are taken to keep it from third parties and to limit access to the document within the company?
6. If it is to be disseminated to third parties, what safeguards are in place to limit the dissemination of the document?
7. When hiring an employee who has worked for a competitor, consider having the employee sign a document stating that, if he had any access to his/her former employer’s trade secrets, that he/she will not use any such trade secrets in the course of his new employment.  Such a document may help the new employer, if ever accused of trade secret misappropriation, establish that it took reasonable precautions to prevent the “entrance” of any trade secret information belonging to the trade secret claimant into new employer’s business.   This approach could help reduce the amount of any damages award.

In conclusion, every business, no matter how small, should be looking into trade secrets as a valuable asset, meaning one which can be monetized and form a part of an IP portfolio.  However, claiming something is a trade secret in a trade secret misappropriation lawsuit does not necessarily make it so as the Telegistics case demonstrates.    Any attorney who commences a trade secret lawsuit on behalf of a client needs to honestly assess whether the alleged trade secret will actually qualify as a trade secret under state statues and case law.   The same also applies where federal trade secret theft claims are involved as under, e.g., the Defend Trade Secrets Act.  Contact Susan at Troy & Schwartz (305-279-4740) to request a complimentary copy of her trade secret implementation checklist and work with her to conduct a trade secret audit, create appropriate protection systems, etc. or to represent you in trade secret misappropriation matter.

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL, THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.

© 2023 by Troy & Schwartz, LLC

Background & Current Issues.  Trade secrets have historically been an outlier in the area of intellectual property (IP) law because they have not been viewed as “real” IP.  Today they are being increasingly viewed as valuable IP assets.  Indeed Gene Quinn, one of the most influential IP thought leaders in the U.S., has predicted that trade secrets may pass patents in terms of valuation.

Nevertheless, trade secrets have their own unique challenges and characteristics.  The following lists some of the issues currently comprising the trade secret ecosystem.

1. A weakened patent system resulting from the America Invents Act and subsequent court decisions which have both invalidated patents and impacted the issuance of new patents. Trade secret protection either singularly or in connection with patents may be a viable way to reduce patent invalidation risk and and/or strengthen a patent’s commercial viability over the long term.
2. The explosion of AI and Large Language Models (LLMs). Here the issue pertains to controlling what can and cannot be shared. Where the possibility of divulging copyrighted, patented, or trade secrets as the result of generative AI exists, the resulting output could infringe on intellectual property rights, divulge valuable trade secrets, or breach confidentiality obligations (e.g., the need to protect personally identifiable information or to comply with obligations under an NDA).
3. Remote work and employee mobility. Today, more and more potentially valuable business information is “leaving” the office traveling through space so to speak to remote servers, computers, and the “cloud.”   The locked file cabinet with tightly controlled access of years past is fast becoming a relic, being replaced by systems subject to cybersecurity risks 24/7.   Trade secrets are often viewed as a potential liability by companies due to cyber threats and employee “movement”.
4. The move to eliminate non-competes. The Federal Trade Commission is attempting to regulate non-competes out of existence, and some states already have or are in the process of doing so.
5. A patent document, registered copyright certificate, or registered trademark certificate issued by a government agency provides proof that the associated IP rights actually exist. With trade secrets, however, no government agency is involved in establishing the IP right.  Instead, the trade secret owner is tasked with establishing that the confidential information indeed qualifies as a trade secret.  Proof that a trade secret actually exists is required by the courts in any trade secret misappropriation lawsuit.  Requiring proof of documentation establishing the existence of the trade secret is considered a reasonable measure by the court.
6. Trade secrets are protected under state law and federal law. Damages in a misappropriation case often exceed the damages in patent infringement case.  Europe has largely adapted the trade secret law of the United States and trade secret law is seeing global standardization.

Trade Secrets and Confidential Information. Referring to item #5 above, many still assume that confidential company information automatically qualifies as a trade secret.  Trade secrets of course constitute confidential information, but not all confidential information will qualify as a trade secret.  For example, Florida’s Uniform Trade Secrets Law, largely based on the Uniform Trade Secrets Act, defines “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process that: “Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means, by other person.”

The unauthorized use of a trade secret is known as misappropriation.  To prevail in a court of law on a trade secret misappropriation claim, the plaintiff must first establish that the misappropriated information is indeed a trade secret and has been handled as a trade secret by the plaintiffs.  Documentary proof is generally the standard required for meeting this requirement.  Contracts such as an employment handbook, NDAs, employee onboarding/exit documentation, trade secret assignment documents, an in-house trade secret policy, etc. are types of acceptable documentation.

Several years ago, the commentator was able to get a motion for summary judgment granted on behalf of the defendants because the plaintiff could provide no documentary proof that he indeed had a trade secret.  Even large companies one would think should know better have lost their trade secret misappropriation lawsuits because of the lack of documentation or poor documentation.  See e.g., California Healthcare Services v. Amgen and Bundy Baking Solutions v. Mallet.  Other helpful factors in establishing trade secrets to the satisfaction of a court include having conducted trade secret audits to evaluate the efficacy of a business’s procedures to protect its trade secrets, using robust cybersecurity efforts, etc.

Non-disclosure agreements (NDAs) can be confusing when it comes to trade secret protection because they are generally limited to protection of exchanged confidential information for a period of only 1 to 3 years following the NDAs’ termination. However, if trade secrets are to be divulged, it is important that any disclosed trade secrets be protected by the receiving party indefinitely and the NDA should state as such.  Otherwise, trade secret protection could be at risk.  Most receiving parties do not want the burden of protecting the disclosing party’s divulged trade secrets indefinitely.   Accordingly, the NDA’s disclosing party should think twice before disclosing a trade secret or insist on adequate provisions in the NDA to protect any divulged trade secrets.

Gearing Up for Trade Secret Protection. Any business, no matter how small, may have valuable trade secret assets which can enhance the business’s value.  A robust trade secret approach may also be attractive to potential venture capitalists and future buyers of the business.   If you aren’t sure is something could be a trade secret, ask yourself the $64,000 question:  What would be the consequences for my business if this confidential information became known by others?

How does one get started in identifying and protecting a trade secret?  Here are some questions to ask to get the process going.

What is the trade secret (e.g., software code, a special recipe, a customer list that the business has spent money and time on developing, certain steps of a manufacturing process requiring tight control, a raw material having “special” requirements, etc.)?

Who will have access to the trade secret (e.g., employee, independent contractor, business partner)?

What documentation should the business have in place to protect the trade secret asset (e.g., employee handbook, code of conduct, onboarding/exit documentation, IP assignment of any developed trade secrets to the business, NDAs, independent contractor agreements, trade secret policy documents, shareholder/partnership/operating agreements, etc.)?

How do we educate employees and independent contractors that it’s a trade secret which must be carefully and diligently protected (e.g., asset notice and acknowledgement documentation)?

How do we train those who require access to the trade secret to protect the trade secret (e.g., ensure they know it’s a trade secret)?

How do we monitor the interaction between those who have access and the frequency of interaction (e.g., by maintaining a privilege or access log which states the people who have access, how the access is provided, and have them document the dates on which they accessed the trade secret)?

Getting Started with a Legal Advisor.   In conclusion, every business, no matter how small, should be looking into trade secrets as a valuable asset, meaning one which can be monetized and form a part of an IP portfolio.   Contact Susan at Troy & Schwartz (305-279-4740) to request a complimentary copy of her trade secret implementation checklist and work with her to perform a trade secret audit, create appropriate documents, etc. or to represent you in trade secret misappropriation matters.  As an IP attorney who practices patent, trade secret, trademark, and copyright law, she is uniquely qualified to address best practices for procuring, monetizing, and enforcing IP rights.

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL, THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.

© 2023 by Troy & Schwartz, LLC

This blog, part 1 of a 2-part series on the cancellation of federally registered trademarks, focuses on the cancellation of registered trademarks by operation of law.  The maintenance of federally registered trademarks should be part of a strategic planning approach for protecting and enhancing the value of intellectual property rights obtained through hard work, a dream, and perseverance.   For registered marks that are still being used in commerce, failure to renew these marks may well have a detrimental impact on registered mark’s owner strategic business plans including its exit strategy.  This blog discusses: I) the importance of trademark registration renewals; II) the USPTO’s registered trademark renewal schedule; and III) recommendations for monitoring registration due dates.

I. Background on Registered Trademarks & the Ramifications of Non-Renewal

Federally registered trademarks are valuable, monetizable business assets for even small businesses because they promote brand recognition in the minds of target consumers/businesses.   A registered mark may be leased, sold, and even used as collateral. Registered marks help establish the mark owner’s credibility amongst its customer base, whether that base is comprised of consumers or other businesses.  Also, registered marks allow the mark owner to use and enforce the mark throughout the country in which it is registered.  For the United States, the “reach” of registered trademarks includes all 50 states and U.S. territories.

Securing a registered trademark is no small feat.  That’s why registered mark owners need to understand that mark registration does not automatically result in “forever” associated rights under the law.  Continued registration status is contingent upon the periodic renewal of the mark with the United States Patent & Trademark Office (and/or the foreign office(s) in countries where the mark has been registered).  Failure to renew the registered mark will result in cancellation of the mark.  The only way to get the mark “back” is to submit a new application which may or may not be approved.

Failure to renew a registered mark can have serious ramifications including a decrease in a business’s valuation due to the loss of registration status; failure to procure the same registered mark upon submission of a new application; loss of brand awareness and client loyalty; and greater difficulty for a company to protect its goods or services against piracy or counterfeiting.

If a registered trademark loses its registration status and cannot “regain” registration status, the user of the mark will need to depend on common law rights which are generally more difficult and costly to enforce.   Common law trademarks generally only allow the owner to sue for infringement in state court.  Also, whereas federally registered trademark owners may seek injunctive relief, common law trademark owners are generally restricted to receiving monetary damages. Finally, lack of a registered trademark(s) can also interfere with a company’s growth strategy across state lines including growing a franchise.

Once a mark is cancelled, anybody may file an application to register the mark through the USPTO (or other relevant jurisdiction).  This does not mean that the application will actually evolve into a registered mark since the application will be examined on its own merits.  Theoretically, the former owner of the registered mark may also still have common law priority rights in the mark.

II. The USPTO’s Trademark Renewal Schedule

The owners of a registered trademark must periodically renew their registered trademark to maintain the mark’s registered status.  This process of “renewing” a registered trademark is known as post-registration maintenance.  Failure to do so will result in cancellation of the mark. Trademark law imposes the following renewal deadlines:  between the 5^th and 6^th years after the registration date though a Section 8 Declaration, the 9^th and 10^th years after the registration date, and every 10 years thereafter.  The latter two types of renewals involve the filing of a combined Section 8 and Section 9 Declaration. The Section 8 Declaration actually refers to mark maintenance while the Section 9 Declaration refers to mark renewal.

It is important to note that the registrant is asserting that the mark is indeed being used in commerce when submitting the declarations.  Additionally, the registrant must amend the original description of goods and/or services to delete any goods/services no longer being sold or offered in commerce.  Specimens showing use of the mark must also be submitted. In other words, Section 8/9 Declarations require something more than a statement “we’re good to go.” If the registered mark is no longer being used in commerce with at least one of the registration’s specified goods/services, the registrant should not file a Section 8/9 Declaration.

The USPTO provides a 6-month grace period after each of the deadlines for filing the renewal for an additional filing fee.  Failure to at least file the required declaration within the 6-month grace period will result in cancellation of the registered mark.  The registrant may file a petition to revive the cancelled mark within 2 months of the USPTO’s notice of cancellation.  The petition must be accompanied by all necessary declarations and fees.  If more than 2 months have passed since the USPTO’s cancellation notice, a trademark owner will need to file a new application for the same mark.  There is no guarantee that the new application will evolve into a registered mark.

If a registered mark is subsequently cancelled by operation of law (i.e., for failure to renew), the effective cancellation date stated in the USPTO’s record’s publicly viewable records will be the last day immediately preceding the start of the 6-month grace period associated with the renewal period.

III. Steps a Registered Mark Owner Should Take to Monitor Renewal/Maintenance Due Dates

The commentator advises her trademark/IP clients to do the following to not only maintain their registered trademarks but also to enhance their value and the value of all of the registrant’s other intellectual property:

1. For a new registrant, calendar the due date for the 5/6 year Section 8 Declaration. Ideally, file the documentation on the 5^th anniversary date and no later than 6^th year anniversary date even though the USPTO does offer a 6-month grace period following the 6th year anniversary date .  If our law office obtained the registration on behalf of the registrant, our office also calendars the due dates.  It is recommended that the required documentation be filed by an attorney, preferably the original attorney of record to ensure that any required amendments to the original description of goods and services are made.
2. If a Section 8 Declaration 8 is filed as above, calendar the 10th anniversary date and the last date to timely file the Section 8/9 Declarations if the registrant is going to rely on the 6-month grace period.  Keep calendaring the renewal days in 10 year increments.
3. We encourage all registrants to establish an IP portfolio which contains all government-granted IP rights (patents, registered trademarks, and registered copyrights) wherein the portfolio is maintained by a designated authorized representative for business registrants. Such organized records may come in very handy for those businesses which are seeking investors, potentially involved in an M&A, establishing a growth strategy, or considering selling/licensing their IP assets.  It is noted that issued utility patents must also be maintained periodically. Any such patent owner also needs to calendar patent maintenance due dates.
4. If trademark rights are assigned by the registrant, the assignee should plan to take charge of all renewal dates and calendar the due dates.

In Need of Legal Counsel on Trademark Matters?

Trademark law is a complex area of the law.  Contact Susan at 305-279-4740 for a complimentary consultation on trademark law matters as well as matters related to patents, copyrights, and trade secrets.

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.

© 2023 by Troy & Schwartz, LLC

The blog provides a detailed analysis of the U.S. Supreme Court’s June 29, 2023 decision in Abitron Austria v. Hetronic International, a case which involves international trademark rights.   Justice Sotomayer’s concurrence, reading more like a dissent, is, in this commentator’s opinion, the correct legal application of the Lanham Act.

Quick Overview of Abitron’s Take Home Points:

1. More than ever before, trademark owners will likely need to protect their marks abroad by registering the mark in the countries in which the goods/services will be sold and/or even manufactured.
2. Contracts between U.S. companies and foreign parties need to clearly specify ownership and use of the relevant IP globally to clearly provide a contractual basis for trademark infringement liability related to conduct outside of the U.S.

Analysis

U.S. trademark law is governed by the Lanham Act (“Act”).  The Lanham Act was enacted at a time when international commerce was far less common than it is today. Sections 1114(1)(a) and 1125(a)(1) of the Act specify remedies for trademark infringement.  The former section pertains to situations when a person without the consent a trademark registrant uses in commerce a reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offer for sale, distribution, or advertising of any goods or services or in connection of such use is likely to cause confusion, cause a mistake or deceive with a registered is used in commerce.  The latter section pertains to situations where any person, who on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device or any false designation of origin, false, or misleading description of fact or false or misleading representation of fact is likely to cause confusion, cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person as to the origin, sponsorship, or approval of his or her goods.

Registered marks are enforceable under the laws of the country in which they are registered.  As for infringement activities, neither of the above referenced Lanham Act sections define what is meant by “in commerce.”  That is, does “in commerce” pertain to infringing activities of a U.S. registered mark only in the United States for a U.S. registered mark? Or does it “in commerce” include commerce within foreign jurisdictions?

The underlying case involved Hetronic’s radio remote controls, which are used to operate heavy-duty construction equipment, such as cranes.  An agreement between Hetronic and Abitron allowed Abitron to make and sell Hetronic-branded products that contained genuine Hetronic parts. In 2015, Hetronic sued Abitron and its affiliates in Oklahoma federal court, alleging they breached the contracts by making and selling products with unauthorized parts.   The district court awarded Hetronic a permanent injunction blocking Abitron from further infringement worldwide.  The jury’s $96 million dollar award was upheld by the Tenth Circuit Court of Appeals even though Abitron had argued that 99.98% of its infringing sales happened abroad.

In affirming the district court, the appeals court found that a significant amount of Abitron’s foreign sales of the infringing products ended up in the U.S. and Hetronic provided evidence that these sales caused confusion among U.S. customers and “even Abitron Germany’s own U.S. distributor.”  In finding for Hetronic, the appellate court also stated that the fact that only a small percentage of Abitron’s products made it into the U.S. was irrelevant.  “Otherwise, billion-dollar-revenue companies could escape Lanham Act liability by claiming millions of dollars of their infringing products from entering the U.S. represented only a fraction of their sales.”  The opinion also emphasized that the Lanham Act applied because Abitron “diverted tens of millions of foreign sales from Hetronic that otherwise would have ultimately flowed into the U.S.”

Abitron appealed to SCOTUS arguing that the Lanham Act is not applicable when infringement occurs outside of the U.S. for a U.S. registered mark and does not cause likelihood of confusion within the U.S.  Arbitron again emphasized its “small” percentage of U.S. sales.

SCOTUS construed the “in commerce” references in Sections 1114(1)(a) and 1125(a)(1) as providing no express statement of [the Act’s] extraterritorial application beyond U.S. borders or any other clear indication that [the Act] is one of the ‘rare’ provisions that do apply abroad. Having found that the Lanham Act provisions are not extraterritorial, SCOTUS next determined whether Hetronic’s claims involved domestic (i.e., in the U.S.) conduct.  According to the majority, Arbitron’s use in commerce (i.e., conduct) was not in the U.S.  As such, there could be no likelihood of confusion in the U.S and the Tenth Circuit’s decision was thus vacated.

Justice Sotomayer’s concurring opinion argued that the analysis should actually include a two-pronged approach.  She agreed that there is no indication that the Lanham Act’s “in commerce” provision has an extraterritorial reach.  However, a “domestic application of the statute can implicate foreign conduct in prong two of the analysis so long as the plaintiff proves a likelihood of confusion domestically.”   She concluded that the case should be vacated not because of the majority’s reasoning but because the Tenth Circuit and the district court did not apply the proper two-prong test.  As she emphasized, for a plaintiff to prevail on the second prong of such an analysis, the plaintiff must offer proof of likelihood of confusion by U.S. consumers as a result of the defendant’s extraterritorial infringing activities.  The majority’s statement that such a test would open the floodgates for confusion by the lower courts in applying the Lanham Act is thus misplaced.  Instead, the majority’s conduct-focused test on remand is improper because that test “is not supported by either the Lanham Act or this Court’s traditional two-step extraterritoriality framework.”

In reaching its conclusion, the Court did not rely on its decades-old previous decision on the Lanham Act’s extraterritorial reach in Steele v. Bulova Watch Co. Inc., 344 U.S, 280 (1952). That case involved both domestic conduct by a U.S. citizen and the likelihood of domestic confusion.  The Steele case involved a San Antonio, Texas resident who purchased unfinished Bulova watches and took them to Mexico for finishing.  When he learned that Bulova had not registered its mark in Mexico, he obtained a Mexican trademark which was later cancelled by the Mexican trademark agency.  His watches, sold in Texas and Mexico, were of inferior quality.

The Steele Court held that, “[w]here as here, there can be no interference with the sovereignty of another nation (because the defendant no longer had a Mexico-registered trademark), the District Court, in exercising its equity powers, may command persons properly before it to cease or perform acts outside its territorial jurisdiction.”

The Supreme Court in Abitron noted that the Steele and Abitron cases involve a different set of facts; in Steele, the plaintiff’s “in commerce” conduct within the U.S. was clear.  Even so, unfortunately, the Abitron decision now seemingly immunizes all trademark infringement that originates abroad regardless of whether that infringement (“the conduct”) also causes adverse effects (a damaging result”) in the U.S.   The various circuit courts of appeal had relied on Steele v. Bulova to develop different tests for applying the Lanham Act extraterritorially.  Will these courts now need to reevaluate their tests in light of the Arbitron decision?

Moreover, the Arbitron decision arhttps://www.law.cornell.edu/uscode/text/15/1125guably misses the Lanham Act’s point: that the focus should be on whether consumer confusion (the result) ultimately occurs in the U.S., not whether the defendant’s use (the conduct) was abroad or domestic.  SCOTUS in essence has established a bright-line test, overturning over 60 years of jurisprudence from the various circuits since Steele.  If the defendant’s use in commerce occurs abroad, then no claim can seemingly now be made under Abitron.  Yet with our global economy, the possibility of extraterritorial infringement has increased dramatically including promoting the importation of counterfeit goods into the U.S.  Abitron, as a foreign infringer, may not have intended that its problematic goods ever end up in the U.S., but some did as the district court case found.

The Act’s Section 1125(b) does cover importation of imported counterfeit goods (goods marked or labeled in contravention of the provisions of Section 1125(b) wherein such goods are not to be imported into the U.S. and may be seized by customs and border patrol.  The port of Miami alone seizes millions of dollars of counterfeit goods on an annual basis.  Obviously, the manufacture of such goods is an extraterritorial activity.  But here, the Act clearly is intended to prevent a U.S. effect from happening in the first place.   Unfortunately, foreign counterfeiting of major U.S. brands continues to be a significant problem particularly in the areas of electronics, pharmaceuticals, and fashion.  The Arbitron opinion may well make it more difficult for U.S. companies to enforce their trademarks and stem the flow of counterfeit goods into the U.S. (which happened with Arbitron’s counterfeit products as the jury found) when such items make it past customs and border control.

Conclusions

After Abitron, trademark registration strategies even by smaller companies should consider the possibility of registration in appropriate foreign jurisdictions.  For example, had Hetronic had an Austrian registered mark or an EU registered mark, it would have had an action for trademark infringement in Austria or any EU member country where the infringement occurred.   Please also see the take home points presented at the beginning of this blog.  Contact Susan at 305-279-4740 for a complimentary consultation on international trademark registration strategy.  We liaise with law firms abroad to protect our clients rights on an international basis.

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.

© 2023 by Troy & Schwartz, LLC

Introduction

Intellectual property assets (patents, copyrights, trade secrets, and trademarks) can be sold, assigned, or licensed by the IP’s owner.   For companies, IP ownership issues may arise where steps are not taken to ensure that any IP created by or developed by an employee or independent contractor will belong to the company or hiring party.   Such issues could have a devastating effect on the company under a variety of scenarios as discussed below.  As such, every employee of a company should be required to sign a confidentiality and IP assignment agreement as a condition for employment.  Such an agreement obligates the employee to keep confidential the proprietary information of the business, both during employment and after the employment ends.  The agreement also ensures that any inventions, ideas, creations, business plans, logos, brands, trade secrets, copyrightable works, or services developed within the scope of his/her employment during the term of employment belong to the company and not the employee.

Similarly, all independent contractors should be required to sign a confidentiality/non-disclosure agreement.  If their efforts on the company’s behalf could result in an IP asset(s), the independent contractor should also be required to sign an IP assignment of rights agreement.   Examples  of IP-related works often developed by independent contractors are: APPs, software programs, prototypes, formulations, websites and logos.

Of all the four types of IP, ownership issues involving copyrights are arguably the most misunderstood as the result of the copyright law’s work made for hire doctrine as defined in 17 U.S.C. § 101.

Copyright Ownership as the Result of a Work Made For Hire

Copyright law may seem deceptively simple compared to patent and trademark law especially with regards to the registration process.  Where copyright law can get particularly complicated for the unwary, however, is in the area of copyright ownership.  Under U.S. law, the creator or author of the work is the owner of the copyright.  But what happens if the work was created by and employee in the scope of his/her employment or by an independent contractor who was hired or commissioned to create the work?

Regarding an employer-employee relationship, the work is generally treated as a work made for hire wherein the employer (and not the employee) is deemed the author and owner of the work.  The forms for federal registration of a copyrightable work include a section addressing ownership secured on the basis of a work made for hire.

Regarding an independent contractor relationship, the work may qualify as a work made for hire providing two conditions are met pursuant to the Copyright Act (Act).  First, the work must fall into one of the nine enumerated types of works specified in the Act.  Second, the independent contractor and the hiring party must have also both signed an agreement agreeing that the work to be created is a work made for hire.  If both of these two requirements are met, the hiring party is deemed as the owner of the work created by the independent contractor.

Note the difference between works made for hire by an employee versus those made by an independent contractor.  In the latter case, the type of works qualifying as work made for hire are limited by statute and a written assignment agreement is required for all such “statutorily” defined works made for hire.

What happens if the work created by the independent contractor does not fall into one of the nine enumerated types of works in the Act?  An assignment of rights agreement executed by the independent contractor will be required for the hiring party to “honestly” claim copyright ownership as the claimant in a copyright registration application.

Why the Distinction Between and Employee and an Independent Contractor Is Important

Take the scenario of software developers who are often hired as independent contractors by startup companies.   Software can be copyrighted, but software is not one of the enumerated types of works qualifying as a work made for hire work by Independent Contractors.  Therefore, even with a written agreement stating that the software is a work made for hire, the hiring company will not actually own the copyright to the developed software under the Act even though the software developer (independent contractor) was paid to create the software.   That is, the software developer may well still be the owner of the software despite the work made for hire agreement.   On the other hand software development companies such as Microsoft Corporation that have employees dedicated to developing software are the owners/authors of any copyright-related rights in the software under the work made for hire doctrine.   See the U.S. Copyright Office Records for Microsoft Corporation’s registered copyrights where Microsoft is listed as the author of the work as the result of an employer work made for hire.

Copyright ownership issues as they relate to independent contractors may remain hidden and then arise: 1) when a business is being sold and the sale involves intellectual property (IP) assets such as copyrights; 2) in a copyright infringement lawsuit; 3) or a business is being evaluated by venture capitalists or other investors or is involved in an M&A transaction.    The buyer of IP assets will want assurance that the IP assets are indeed owned by the seller so that they may be effectively assigned to the buyer by a written instrument signed by the seller and the buyer.   A deal could fall through if the seller cannot prove to the buyer’s satisfaction that it – the seller – is the owner of the copyrights and therefore has the right to transfer ownership to the buyer.

As for a copyright infringement lawsuit, standing is a requirement for bringing a lawsuit, namely that the plaintiff is the true copyright owner.   A defendant in a copyright infringement lawsuit may be able to use “lack of ownership” as a defense if the work was created by an independent contractor and the work does not qualify as a work made for hire under the Copyright Act.  That is, ownership remains vested in the independent contractor and plaintiff does not own the copyright it claims is being infringed under the law.  The author of this blog has successfully used lack of ownership of the registered work as grounds for dismissing a copyright infringement lawsuit.

As for scenario #3, the buyer’s due diligence team will also be looking for these agreements with employees and/or independent contractors to ensure that the copyrights (and all of the company’s IP) is owned by the company.

Ensuring the Legally Sufficient Transfer of a Copyright by an Independent Contractor

What steps can be taken to ensure the proper transfer of copyright-related rights from an independent contractor?  Where the work(s) to be created clearly fall into one of the nine enumerated classifications specified within the copyright statute, the  hiring company should require the independent contractor to sign an agreement wherein the work(s) to be created is designated as a work made for hire with all associated copyright-related rights belonging to the hiring party.  This agreement should be executed by both the company and the independent contractor before work on the project commences.

Copyright ownership can also be transferred by an assignment of rights.  For her clients, the author includes an assignment of rights provision within all work made for hire agreements with independent contractors as a precaution to cover the situation where the created work may be found to not qualify as a work made for hire after all.  Thus, if for whatever reason the work should not qualify as a work made for hire because, e.g., it does not fall into one of the nine enumerated categories, the hiring party would still own the copyright as the result of the independent contractor’s assignment of rights to the hiring party.   17 U.S.C. § 201(d)(1).  Any such assignment needs to be clear as to the rights being conveyed and the nature of the underlying works.     For a good discussion of how important an assignment of rights provision may be where the work made for hire conveyance by an independent contractor fails, see Capital Concepts, Inc. v. Mountain Technology Corp., et al., WL 6761880 (W.D. Va. 2012).  In our software development example, the assignment agreement should also state that the independent contractor is assigning any and all patent and trade secret rights to the company since software may also qualify for these types of IP protection.  That is, the company/individual hiring an independent contractor needs to ensure that it is the owner of all potential IP rights emanating from the independent contractor’s work.

We are proud of the legal services we provide to our business and entrepreneurial clients on all matters related to intellectual property law including trademark law.  Contact us at 305-279-4740 to discuss any questions related to IP including ownership questions.   

Troy & Schwartz, LLC

Attorneys-at-Law

Miami, Florida  (305) 279-4740

Where Legal Meets Entrepreneurship™

This blog is for informational purposes only and does not constitute legal advice.

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