Troy & Schwartz Attorneys-At-Law

In MidlevelU, Inc. v. ACI Information Group, Case No. 20-10856 (11th Cir. Mar. 3, 2021) (Pryor, J.), the Eleventh Circuit Court of Appeals addressed copyright infringement issues involving Internet technology.  The case originated in the Southern District Court of South Florida, a court which is likely to increasingly be the venue for “high tech” intellectual property cases as a result of the influx of technology companies to South Florida.  The case is of interest because: 1) it involved an implied license defense in the context of RSS feeds; and 2) the issue as to whether non-registered works could be considered in determining statutory damages for registered works.

Case Background

MidlevelU published a free blog designed to attract potential customers in the midlevel healthcare market. MidlevelU made the full text of its blog articles (instead of only headlines and article summaries) available in an RSS feed. ACI is a content aggregator that subscribed to the blog’s RSS feed. ACI copied and published more than 800 entries from MidlevelU’s blog by including those articles in a curated index of abstracts and full-text articles of academic blogs. ACI had no license agreement with MidlevelU.

After discovering the ACI’s activities, MidlevelU registered 50 of its most recent articles for copyright protection with the US Copyright Office. Registration of a copyrighted work is a prerequisite for a commencing a copyright infringement lawsuit in all federal courts since the Supreme Court’s March 2019 holding in Fourth Estate Public Benefit Corp. v. Wall-Street.com.   MidlevelU also sent ACI a cease-and-desist letter demanding that its content be removed from ACI’s index. ACI removed the content from the index and coded links to index entries for MidlevelU’s articles so that they would redirect to the MidlevelU’s website. Months later, MidlevelU discovered that, although its content was no longer available on the index website, it still appeared in the website repositories of university libraries. These entries credited ACI as the content’s publisher and directed visitors to view the blog’s full-text content in the “subscribers only” section of the blog aggregator’s (ACI’s) website.

MidlevelU sued ACI in the Southern District of Florida alleging copyright infringement of the registered articles. ACI asserted an implied-license defense.  Under the implied license doctrine, the alleged infringer argues that he had permission to use the copyrighted material even though there is no clear contract; a license may be implied where a judge or jury believes that the opposing parties would have made a contract if they turned their minds to it.  Copyright law has adopted a similar approach in terms of licenses to use a copyright work if it seems like the parties would have created a license under the circumstances. An implied license, if it exists, must, by definition, be non-exclusive because U.S. copyright law requires exclusive licenses to be in writing.

The 11th Circuit’s Holding

The Eleventh Circuit affirmed the district court’s grant of judgment as a matter of law against an alleged copyright infringer on its implied-license defense, finding that a blog operator’s publication of entire articles through a really simple syndication (RSS) feed does not give rise to an implied license without substantial evidence showing an intent to grant a license.  The decision is of interest because of its a discussion of Latimer v. Roaring Toyz, Inc. , a 2010 decision by the 11th Circuit, which set forth a test for establishing implied licenses in work-for-hire situations.  Relying on Latimer, the district court had concluded that ACI did not have an implied license.

The 11th Circuit found that the district court read Latimer too broadly by applying its holding outside of the work-for-hire context, but the Court nevertheless affirmed the district court’s decision because a jury could not have reasonably inferred from the evidence that the MidlevelU impliedly granted a license to ACI. The Court noted that it had never held that the Latimer test was the only way to prove an implied license. An implied license may arise from circumstances outside of work-for-hire situations: “Creating material at another’s request is not the essence of a license: an owner’s grant of permission to use the material is.”

ACI’s arguments to try and establish an implied license were found to be disingenuous because only when an owner clearly manifests consent to use copyrighted material is a non-exclusive implied license created.  Citing Field v. Google, Inc., a 2006 Nevada district court which involved copyright infringement allegations in the search-engine web crawler context, ACI argued that an implied license arose because the MidlevelU did not code its website to tell aggregators such as itself not to copy or display its content.  In other words, ACI blamed the blogger for not proactively warning aggregators to not copy or display content.

Without deciding whether Latimer was correctly decided, the 11th Circuit rejected ACI’s theory. The Court reasoned that although the ACI relied on a “web crawler” case, it failed to produce any evidence that it actually used a web crawler to collect the blog’s content. Rather, the evidence showed that ACI collected content by grabbing it through the blog’s RSS feeds.  “Implied permission to enter through a front door (web crawler) does not also imply permission to enter through a back window (RSS feed).”

Similarly, the Court found that MidlevelU’s affirmative steps to disseminate the full text of its articles through its RSS feed—rather than only summaries or headlines—did not give rise to an implied license. ACI failed to introduce evidence of, for example, an industry practice that would allow a jury to infer that disseminating content through an RSS feed without restrictions implies permission to copy and publish that content on another website.

The only evidence before the jury related to personal use of RSS-distributed content. This evidence constituted testimony that MidlevelU set up its RSS feed to make its content easier for readers to access, and testimony that RSS is used as an alternative to a web browser to read content—i.e., an RSS feed stores the articles received from a website, and a human then reads the articles through an RSS reader. The Court rather sarcastically explained that “[i]mplied permission to enter the front door to shop (read content through an RSS reader for personal purposes) does not imply permission to enter and throw a party (sell computer-generated summaries paired with [software] showing the full-text content).”

The Court also found that the district court did not err by instructing the jury that it could consider unregistered articles in its calculation of statutory damages for the registered works; the district court did not abuse its discretion by denying the aggregator’s motion for a new trial on the basis of the jury’s statutory-damages award; the district court did not err by failing to consult with the register of copyrights about the alleged fraud on the copyright office; and aggregator is not entitled to judgment as a matter of law on its fair-use defense.

Regarding the statutory damages award which totaled over $200,000, the 11th Circuit emphasized that the hundreds of unregistered blogs could be used to support a finding of willful infringement.   Regarding the court’s failure to consult with the register of copyrights, whether or not a district court must consult with the Register of Copyrights on a matter involving the defendant’s allegations of fraud on the copyright office, the process generally requires the district court to grant the defendant’s motion to submit the matter to the copyright office.

Finally, ACI’s actions over the years hardly constituted fair use.  The Fair Use Doctrine authorizes the copying of both published and unpublished works without obtaining permission under the following “guideline” scenarios:

• Connection with criticism or comment on the work.
• In the course of news reporting.
• For teaching purposes.
• As part of scholarship or research activity.

Defendants in Internet Copyright Infringement cases often allege Fair Use as a defense as did ACI.  Each situation is evaluated on a case-by-case basis. Here, the 11th Circuit stated that “[c]opying an entire work militates against Fair Use.”  Substantial copying occurred because ACI provided substantive access to its subscribers to the full text-content of the plaintiff’s blogs through iFrames.  MidlevelU at 29.

Comments

This case is a well-deserved win for the blogger.  The courts will continue to tackle copyright infringement against the backdrop of Internet technology which makes copyright infringement easier than ever before.  It is recommended that content creators register at least some of their works within 90 days of publication so that they will be the beneficiary of certain statutory benefits including statutory damages.  Here, the plaintiff chose statutory damages in lieu of having to prove actual damages (which can be extremely difficult to do) because she had met the 90 day window.   Otherwise, she would have had to prove her actual damages.  We presume she was also awarded attorney fees and costs at least to some extent as the statute allows if the 90 day window is met.   This decision also paves the way to use unregistered works to help establish a reasonable damages for infringement of registered works especially where the infringement was willful.

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

Intellectual property law is a complex area of the law.  Contact us for a complimentary consultation on protecting your inventions, creative works, brands, and proprietary information through patents, copyrights, trademarks and trade secrets or our litigation services involving intellectual property disputes.   We represent both individuals and business entities.  Our mission is to serve innovators and creators in protecting the fruits of their hard work and ingenuity through our Client Services Creed:  Conscientious, Rigorous, Energic, Empathetic, and Diligent legal services. 

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These days, Non-Disclosure Agreement (NDA) templates are readily available on-line, often free-of-charge, making them an attractive alternative for many.  The problem with these templates is they are not necessarily applicable to the contracting parties’ unique circumstances and/or do not properly anticipate dealings between the parties. A poorly drafted, one-size-fits-all NDA can make or break a patent-infringement case many years into the future.   These assertions are supported by the Dec. 7, 2020 decision in Sionyx, LLC v. Hamamatsu Photonics K.K. by the Court of Appeals for the Federal Circuit (CAFC).

In Sionyx, the CAFC concluded that the district court mistakenly concluded that it lacked authority to compel the transfer of ownership of foreign patents from Hamamatsu Photonics, K.K. (Hamamatsu) to Sionyx, LLC (Sionyx).  Moreover, the lower court abused its discretion in distinguishing between the U.S. and foreign patents at issue in the case. The CAFC affirmed the district court on most other issues, including that Hamamatsu breached its non-disclosure agreement (NDA) with Sionyx, and that Sionyx was entitled to co-inventorship and sole ownership of the U.S. patents, as well as damages and an injunction.

The decision is largely based on the NDA signed by the parties in 2006.  This blog discusses the decision and emphasizes that an NDA can have consequences years later.  As the decision demonstrates, had the NDA lacked certain wording, Sionyx may well not have prevailed.

Background

In 1998, Professor Eric Mazur and his student, James Carey, discovered a novel process for creating “black silicon.” The two inventors filed a provisional patent application on May 25, 2001, from which U.S. Patent 8,080,467 ultimately issued, among other patents. Four years later in 2005, the inventors founded Sionyx and met with Hamamatsu – a company that produces silicon-based photodetector devices – a year later.  The two companies entered into an NDA to share confidential information for the purpose of “evaluating applications and joint development opportunities of pulsed laser process doped photonic devices.”

The NDA stipulated that a party receiving confidential information “shall maintain the information in strict confidence for seven years after the expiration of the agreement, after which the receiving party may use or disclose the confidential information.”  Commentator’s emphasis. The NDA also said that the receiving party of confidential information acknowledged that the disclosing party claims ownership of the information and all patent rights “in, or arising from” the confidential information.  Commentator’s emphasis.   The NDA also required that all confidential information received must be returned within 30 days of the termination of the agreement.  The term of the NDA was three years.

Hamamatsu and Sionyx worked together for about two years, at which time Hamamatsu said it wished to develop its products alone. Surprisingly, Sionyx did not request the return of any confidential information from Hamamatsu.  Hamamatsu began developing its own products and emailed Sionyx in 2009 to alert the company that it would be releasing a new photodiode at an upcoming exhibition that it did not believe infringed Sionyx’s IP or breached the confidentiality obligations. Hamamatsu then filed Japanese patent applications for photodetector devices and later filed in several other countries, including the United States, claiming priority to the Japanese patents.

One of Simony’s customers alerted the company to Hamamatsu’s U.S. patents five years later, in 2014.  When discussions between the two company’s failed, Sionyx sued Hamamatsu in the District of Massachusetts for (1) breach of contract; (2) unjust enrichment; (3) infringement of the ’467 patent; and (4) the equitable relief to transfer the foreign to Sionyx and name Carey as an inventor.

District Court Declines to Transfer Foreign Patents

A jury found in favor of Sionyx, awarding almost $800K for breaching the NDA in February 2009, when it first referred to Sionyx’s confidential information in an internal report, and almost $600K in damages for unjust enrichment. The jury also found that Carey should be added as a co-inventor to the U.S. patents. At the post-trial motion stage, the district court then granted Sionyx sole ownership of the disputed U.S. patents, injunctions on Hamamatsu’s accused products practicing those patents and the ’467 patent, pre- and post-judgment interest on damages for breach of contract, and pre-judgment interest on damages for unjust enrichment. The court denied Sionyx’s motions for ownership of the disputed foreign patents because it was uncertain that it had jurisdiction to grant ownership of foreign patents and because Sionyx had failed to adequately identify the foreign patents for which it was requesting ownership.

Sionyx appealed the district court’s decision to refrain from transferring the foreign patents.  The CAFC agreed with Sionyx, holding that “the evidence that established Sionyx’s right to sole ownership of the Disputed (Hamamatsu) U.S. Patents also applies to the Disputed Foreign Patents.” The decision added:

As we discussed above with respect to the Disputed (Hamamatsu) U.S. Patents, we agree that the jury’s findings compel the conclusion that those patents arose from Sionyx’s confidential information and that Hamamatsu has not shown that it contributed [its own] confidential information entitling it to joint ownership. And because the Disputed U.S. Patents claim priority from Hamamatsu’s Japanese patent applications, the Japanese applications must be for the same inventions as the Disputed U.S. Patents. See 35 U.S.C. § 119(a). Thus, Hamamatsu’s Japanese patent applications and any applications claiming priority from the Japanese applications in other countries must also have arisen from Sionyx’s confidential information.

Simply put, the CAFC found that Hamamatsu’s Japanese and U.S. patents emanated from Sionyx’s confidential information which Hamamatsu became privy to under the terms of the 2005 NDA.  According to the court, Hamamatsu itself never provided its own confidential information to Sionyx, which might have justified joint inventorship of the patent with Cary as the jury had concluded.

Abuse of Discretion Standard

Accordingly, Sionyx was entitled to sole ownership of the Japanese applications and any foreign applications claiming priority therefrom. The CAFC further explained that “it is well established that courts have authority to compel parties properly before them to transfer ownership of foreign patents, just as they would any other equitable remedy,” since such an order is “an exercise of the court’s authority over the party, not the foreign patent office in which the assignment is made.” As such, the district court abused its discretion in distinguishing between the two groups of patents.

The CAFC denied Sionyx’s motion for fees under 35 U.S.C. § 285 on cross-appeal, declined to address the issue of willfulness, and affirmed the following findings by the district court: a) Hamamatsu breached the NDA; b) Sionyx is entitled to the damages and pre-judgment interest awarded by the jury, as well as post-judgment interest at the statutory rate for its breach of contract and unjust enrichment claims; c) Carey is a co-inventor of Hamamtsu’s U.S. Patents; Sionyx is entitled to an injunction prohibiting Hamamatsu from practicing its U.S. Patents for breach of the NDA; and d) Sionyx is entitled to an injunction prohibiting Hamamatsu from practicing its 467 patent.

Conclusions

The outcome may well have been different had the NDA not “directed” the ownership of all future patents emanating from Sionyx’s confidential information to Sionyx.   Furthermore, any resulting patent relying on confidential information emanating from both parties should have designated both Cary and an Hamamtsu inventor as joint inventors no matter where the patent applications were filed.  Inventorship does not, however, mean that the inventor(s) is also the owner(s) of the patent.  Generally, R&D and engineering personnel who work for companies assign any patent rights they may have over to their employer-company (e.g., Hamamtsu).  Or, where inventors establish a business entity, the inventors often assign their patent-related interests over to the company as part of their capital contribution.  (e.g., Sionyx).

As this case illustrates, an NDA can be a critical factor in determining patent (and other IP) ownership.  An NDA should be tailor-made for the particular situation at hand with particular emphasis on protecting the disclosing party which is often an individual inventor or a small start-up company.  Anticipate problems into the future since patents in particular can take several years to issue meaning that infringement lawsuits, patent ownership disputes, etc. may occur many years down the road.  It is also important that the disclosing party take steps consistent with protecting its confidential information upon early termination of the NDA or expiration by time.  For example, it is not clear why Sionyx did not insist on the return of all its confidential information when Hamamatsu indicated negotiations were over.

Take Home Points

1. Do not presume a generic NDA template will adequately protect your interests.  An NDA should reflect the parties’ particular situation and the nature of their business relationship under which confidential information may be disclosed.

2. Know and follow the procedures required of you and your company in the NDA as the Disclosing or Receiving Party.

Contact Susan at 305-279-4740 on matters related to your NDA to ensure it addresses potential scenarios consistent with the particular circumstances involving the contracting parties.   We are here to serve you and answer your questions related to intellectual property & business law in both transactional matters and litigation.  Check her reviews at AVVO.com where she has received Client’s Choice Badges for both 2019 and 2020.  She is a registered patent attorney.

WE THANK YOU FOR READING THIS BLOG AND HOPE YOU FOUND IT INFORMATIVE.  HOWEVER, THE CONTENT IS PROVIDED FOR INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE.

©2021

Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

(305) 279-4740

 Posted by Susan Dierenfeldt-Troy, Esq.

Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

Have a question on specimens for your filed trademark application after reading this blog? We can help ensure the specimens you file will meet the USPTO’s requirements so that your registration will actually issue if the other requirements are met. Our trademark law legal services include: prosecuting trademark applications;  representing clients before the Trademark Trial and Appeal Board; and representing clients in trademark infringement lawsuits.

 Call us at 305-279-4740 (Miami, Florida) for a complimentary consultation.

So your proposed trademark has met the USPTO’s two threshold requirements for registration:  1) there is no likelihood of confusion with existing registered marks; and 2) the mark is not merely descriptive or generic.  Nevertheless, the examining attorney has refused registration because the applicant’s provided specimens, required for demonstrating usage of the mark in commerce, do not meet the USPTO’s requirements.   This commentator has previously blogged on this topic and is doing so again because there seems to be a lot of confusion over the importance of specimens to the trademark registration process.

Indeed, as a trademark attorney, I have found that specimens are often the most misunderstood requirement for obtaining a registered trademark.  That’s why our firm’s trademark legal services involve advising clients about specimen requirements from the get go.  At times, we have advised clients to modify their specimens before we submit them to the USPTO in a 1A application.  For intent-to-use applications where specimens are not filed with the application but will be required if the mark receives a Notice of Allowance (a preliminary approval of a pending specimen) we work with clients to ensure that they will have suitable specimens commensurate with USPTO requirements for “goods” marks and “services” marks when the Statement of Use is filed.  This may include reviewing the Client’s website and recommending layout changes so “specimen” screen shots will meet the USPTO’s specimen requirements.  Additionally, we ensure that all submitted specimens clearly identify the applicant as the provider of the goods/services, another essential specimen requirement.

The specimen requirement is no joke.  Between Sept. 17 and Sept. 23, 2020, the Trademark Trial and Appeal Board (“Board”) affirmed the decisions by three USPTO examining attorneys who had all refused registration on unacceptable specimen grounds for three different trademarks.  All three applicants ended up spending a lot on legal fees only to be denied registration of their marks upon appeal.  The following summarizes the three decisions and the commentator’s practice tips.

The case: In re Iguana Yachts.    Here the mark was a “goods” mark with following description: “Boats; amphibious vehicles; professional boats, and professional amphibious vehicles in the fields of security, military rescue, and transport of goods and people.”  The submitted specimens comprised a banner, a business card, and a website extract with a “custom build quote form.”   The Board concluded that there was no evidence that the banner or business card were displayed or distributed at tradeshow, i.e. the specimens were not actually used in interstate commerce as point-of-sale displays.  Likewise, there was no evidence as to how the quote form was used to actually place orders on the website for the specified goods.  In essence, the provided specimen were mere advertisements.  Advertisements may be suitable for service marks but are never suitable for goods marks.

Practice Tip.   Ensure that a specimen submitted for a good(s) is not mere advertising.  If the specimen represents a point-of-sale display, a customer must have either the ability to buy the good right there or to be able to place an order for the good associated with the mark.  That is, the specimen must show how the mark is being used in interstate commerce by the applicant.  The mark must also be displayed prominently to ensure that a potential customer identifies the mark with the good.   Here, perhaps the website could have been easily amended to provide for a website-related point of sale display before the specimen was ever submitted to the USPTO.   All specimens must also specify the applicant as the provider of the goods/services.  This requirement is in keeping the trademark law’s focus on the consumer – the consumer has the right to know who is providing the good/service under the mark.

The case:  In re Charlie’s EnterprisesEnergy, LLC.     Here the slogan mark was for food goods:  “Peas, fresh; Vegetables, fresh.”  The specimen consisted of “[a] picture of the proposed slogan in use on a semi-trailer wrap.”  Additionally, the mark presented in the application did not match the display on the truck.   The applicant argued that the wrap was a form of packaging.   Indeed, packaging can serve as a goods specimen as long as it shows the mark AND the source of the goods, generally the manufacturer or distributor.  Here the Board held that a trailer wrap is not a common packaging for vegetables even though a trailer wrap may be a common way of displaying the mark associated with bulk goods (such as lumber).

Practice Tip.  Ensure that the submitted specimen is the type commonly used for the particular good.  Additionally, ensure that the specimen’s mark and the mark shown in the application are equivalent.  All specimens must also show the source of the goods as the following decision again demonstrates.   Perhaps this registration could have been saved if the trailer wrap had at least showed the applied-for mark in its entirety.  However, if the goods being transported were sealed in packages for sale at, e.g., a grocery store, a photo showing the packaging with the required info would likely have been accepted.

The case: In re Systemax, Inc.    This case involved the situation where the specimens submitted for a service mark application failed to show an association between the mark and the application’s recited services. The specified services were for “holding company service, namely, providing business management, business administration, and human resource management services to subsidiaries and affiliates.”  The applicant submitted copies of annual reports and website screen shots which failed to show an association between the mark and the recited holding company services.   As such, the Board agreed with the examining attorney and the mark was not registered.  This commentator notes that any website screen shot being submitted as a service mark specimen should clearly show the mark on each and every page where a description of the service is presented.  Additionally, the applicant, as the service provider, should be readily discernable.  Annual reports, invoices, business plans, and the like are not specimens for trademark registration services.

Practice Tip.  This case is a perfect example of how any thorough trademark attorney will first carefully review the applicant’s website before submitting any screenshots as specimens.  If deficiencies are found, the attorney should advise the client to amend the layout of the website and/or the content before screen shots are submitted as specimens.

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

May you and your loved ones stay safe & be well during these challenging times.

© 2020 by Troy & Schwartz, LLC

Posted by Susan Dierenfeldt-Troy, Esq.

Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

Intellectual property assets may comprise as much as 70% of an average company’s value according to the Harvard Business Review.  Not surprisingly, businesses large and small are concerned about: 1) protecting their intellectual property from theft or infringement and potential creditors; and 2) reducing their income taxes as part of an overall IP asset management strategy.  Intellectual property holding companies (IPHCs) became a popular means through which companies sought to protect their IP assets and reduce taxes by establishing a wholly-owned subsidiary whose purpose was only to control and own IP assets such as patents, copyrights, trademarks, trade secrets, and other proprietary information in the 1990s.

The IPHC, established by the parent company, does not itself use the IP it owns (e.g., by manufacturing and distributing a patented product).   Instead, the holding company licenses its IP rights to affiliated operating companies that handle the day-to-day business activities but do not themselves own any of the IP assets.  The holding company as the licensor then receives royalties from its licensee(s).    For example, say ZYX, Inc. owns a U.S. patent for a product it manufactures and sells under a registered trademark.  It has decided to form a Delaware IPHC, CBA, Inc., for holding its patent and registered trademark.  CBA, Inc., now as the IPHC, licenses the patent and registered trademark to ZYC, Inc. in return for a two percent royalty on the patented and trademarked product’s sales.  For states such as Delaware which does not charge income tax on royalties, the tax savings can be substantial. Additionally, ZYX, Inc. can likely take the royalty payment as a tax expense write-off.

States eventually figured out that holding companies were costing them a lot of money and the majority of them have enacted different types of reporting requirements for IPHCs to recover tax monies:  a) mandatory combined reporting (requiring companies to file a single comprehensive tax return for all of their subsidiaries when they calculate their taxes); b) add back statues (requires companies to add back any tax deductions they have taken for royalties paid to their IPHC); and c) the economic nexus approach wherein courts are tasked with finding if an economic nexis (a/k/a/ the Geoffrey rule after a 1993 South Carolina case involving Geoffrey, Inc. as the IHPC for the Toys “R” Us trade name) exists.  As such, IPHCs are not used as much as they were over a decade as a tax “shelter.”  Delaware, however, still continues to be an IPHC tax haven.

What about Florida?  Florida does have a corporate income tax but remains one of a handful of “corporate income” tax states that hasn’t adopted an add-back or combined reporting statute to try and reclaim lost tax revenue attributable to Florida IPHCs.  Furthermore, Florida IPHC law is complicated by the fact that only mining companies, by statute, must count royalties when calculating their income taxes.  For an excellent discussion on the politics surrounding the issue of Florida IPHC taxation see Florida Tax Laws and Intellectual Property by Jason Garcia, Florida Trend Magazine.

Despite the fewer taxation benefits now afforded by most states to IPHCs, IPHCs can still offer IP asset-protection benefits, for example by allowing a company to quarantine its intellectual property from claims brought against the operating companies.  For instance, in the event the affiliated operating company is sued, the separation of IP assets from the affiliate to an IPHC may well protect that property from potential judgments in a lawsuit.

Any business entity, including an IPHC should be structured in a manner that best fits the business model.  All business entities, whether a C-Corp, S-Corp, or Limited Liability Company have their own considerations which should be discussed with in attorney knowledgeable in IP asset protection. Any such IP transfer needs to be in writing and is generally executed as an assignment of rights document.  The assignment of any issued patent and registered trademarks and copyrights should be recorded with the United States Patent and Trademark Office and/or the U.S. Copyright Office.

Anybody considering forming an IPHC should of course understand the taxation requirements of the state where the IPHC entity will be formed.  Additionally, any IPHC owner needs to understand that infringement actions involving the IP owned by an IPHC may result in unintended consequences for the unwary.  For example, whether or not a plaintiff has standing to sue is a threshold question in any lawsuit.  For a patent infringement action, only patent owners or exclusive licensees have standing to sue for infringement.  A typical exclusive licensing agreement may not be “exclusive” for patent infringement purposes. That is, absent a provision within the exclusive licensing agreement that the patent licensee has the right to sue, the exclusive licensee may be found to have no independent right to sue.

Why is this important to an IPHC?  Because the IPHC may be able to obtain an injunction as the patent owner, but will be limited in its ability to seek lost profits as damages.   For example, a patent-holding IPHC normally does not manufacture or sell a product itself.  The IPHC thus suffers no lost profits damages as a result of any infringement of its patent and any recovery will likely be limited to reasonable royalty damages which are generally substantially lower than lost profits.  Rite-Hite Corp. v. Kelly Co., 56 F.3d 1538, 1553 (Fed. Cir. 1995).

As for non-exclusive patent licenses, the IPHC cannot claim lost profits and will be limited to an award of reasonable royalty damages.  However, non-exclusive patent licenses may provide the IPHC with additional opportunities to exploit its IP beyond just one licensee.

In the context of trademark rights, the IPHC holding company must have sufficient quality control over the goods/services provided under the licensed trademarks.  Failure to exercise sufficient quality control may create what is known as “naked licensing”, resulting in potential cancellation of the registered marks.  Click here for a previous blog on the ramifications of naked licensing.

Take Home Points:

1. Before setting up an IPHC, understand the tax laws of the proposed entity-formation state by consulting with a knowledgeable CPA or tax attorney.
2. Before setting up an IPHC, determine the best type of business entity by consulting with a knowledgeable IP asset protection attorney.
3. Ensure that the assignment of IP assets to the IPHC is done via a formal assignment agreement.
4. Ensure that an exclusive patent licensing agreement includes appropriate provisions giving the exclusive licensee the right to sue for patent infringement. Utilize the services of a knowledgeable IP licensing attorney.
5. For trademark licensing, ensure that the licensing agreement includes appropriate provisions allowing the IPHC to monitor the quality and goodwill of the licensed marks. As with patent-licensing agreements, utilize the services of a knowledgeable IP licensing attorney.

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

Call us for a complimentary consultation on IPHCs or IP-licensing or any of your IP legal needs at 305-279-4740.

May you and your loved ones stay safe & be well during these challenging times.

© 2020 by Troy & Schwartz, LLC

Background

This blog discusses the September 14, 2017 Florida Supreme Court’s holding in the consolidated cases of White v. Mederi Caretenders Visiting Services of SE Florida, LLC, et al. and Americare Home Therapy, Inc. v. Hiles.

A previous blog discussed Florida’s restrictive covenant statute which, when compared to similar statutes in other states, is generally quite favorable to businesses when it comes to the enforcement of non-compete agreements.  Many lawsuits involving Fla. Stat. 542.335 involve a former employee who has left the employment of the business and either started a competing business or has gone to work for a competitor.  Generally, the employee has signed a non-compete agreement as a condition for employment with his former employer.  The former employer may commence a lawsuit to prevent the former employee and his new employer from using information associated with the former employer’s  legitimate business interests.  Where the former employee goes to work for a competitor of the former employer, both the former employee and new employer are often named as co-defendants.

Under the Florida statute, a contract providing restrictions on competition must involve a legitimate business interest as defined by statute to be enforceable.  Fla. Stat. 542.335(1)(b).  Both of the above referenced cases involved employees who had worked for businesses that relied on home health referral sources cultivated through extensive personal marketing and relationship building with potential referral sources, primarily physician’s offices.  Section 542.335 does not specify home health referral sources as a legitimate business interest but does provide a non-exhaustive list preceded by the words “legitimate business interest includes but is not limited to:

1. Trade secretes as defined in s. 688.002(4);
2. Valuable, confidential business or professional information that does not otherwise qualify as trade secrets;
3. Substantial relationships with specific, prospective, or existing customers, patients, or clients;
4. Customer, patient, or client goodwill associated with:  a) An on-going business or professional practice, by way of trade name, trademark, service mark, or trade dress; b) A specific geographic location; or c) Specific marketing or trade area;
5. Extraordinary or specialized training.”

The Florida Supreme Court’s Analysis

In White/Americare the Florida Supreme Court engaged in statutory interpretation to conclude home health referral sources were indeed legitimate business interests for several reasons.  First, the legislature’s stated examples were meant to be just that – examples.  The list was never intended to be exhaustive as clearly indicated by the words “includes but is not limited too.”

Second, the Court refused to interpret the statute in such a way so as to exclude a claimed legitimate business interest in non-identifiable prospective patients.  The Court tellingly stated “[g]enerally, it is improper to apply espressio unius to a statute in which the Legislature used the word include.  This follows the conventional rule in Florida that the Legislature uses the word “including” in a statute as a word of expansion, not one of limitation.” Slip opinion at 13.

Third, the Court noted that for home health care companies (HHCs), there is an “indispensable relationship between referral sources and their undisputed legitimate business interests in relationships with patients protected by the statute”  Furthermore, the Court noted that referral sources are somewhat analogous to customer goodwill which is expressly protected by the statute.  Slip opinion at 20.  It is important to understand the home health referral sources generally do not involve identifiable patients although the home health referral sources will hopefully result in referred patients who then of course become identifiable.

In reaching its conclusion, the Court was careful to point out that the statute does not protect covenants whose “sole purpose is to prevent competition per se because such contracts are void against public policy.  Even under Florida law with its pro-business stance, the courts have held that “[f]or an employer to be entitled to protection,   ‘there must be special facts present over and above ordinary competition such that, absent a non-competition agreement, the employee would gain an unfair advantage in future competition with the employer.’ ”  White/Americare citing Passal v. Naviant, Inc., 844 So. 2d 792, 795 (Fla. 4^th DCA 2003).   Slip opinion at 21.

The statute also allows the courts to ameliorate any concern regarding overly restrictive covenants by commanding the courts to modify any non-competition agreement that is not reasonably necessary to protect the legitimate business interest and to grant only the relief necessary to protect such interests.  Fla. Stat. s. 542.115.  Here both non-competition agreements were limited to certain geographical areas – to the counties where the HHCs actually operated for a period of one year.

Conclusively, by finding for the HHCs, the Court was not expanding the reach of restrictive covenants to limit competition.  It was merely finding that the nature of an HHC-based business necessitates the classification of its referral sources as legitimate business interests.

Take-Home Points

After White/Americare, businesses may be able to more easily establish legitimate business interests to protect their interests in non-compete agreements where the alleged business interest is not specifically articulated by the statute.   The decision shows, however, that the analysis will be fact-specific, and that the agreement must still be reasonably tailored to cover a reasonable geographic area and time-frame.  The plaintiff will also need to be able to adequately explain why the subject matter is a legitimate business interest based on the nature of the business.

This commentator notes that the conduct of the employee in Hiles was particularly egregious with respect to her transferring of Americare’s confidential information, including patient information, to her personal e-mail account both before she even gave notice of her resignation and after she was let go a few days after giving notice to Americare prior to her notice’s specified “last day.”

Clearly the technology age has made the wrongful usage/theft of a business’s intellectual property and/or confidential information (intangible assets) easy.  It is up to businesses, no matter how small, to be proactive in protecting their intellectual property and confidential information from this wrongful usage.  As the White/Americare holding demonstrates for cases involving employees, a non-compete agreement does not always prevent problems after an employee resigns or is terminated.   Contact us to obtain a complimentary checklist of suggested steps to take to help protect your business’s intangible assets and thereby try to eliminate the need of future costly litigation to protect your business’s interests.

© 2017 by Troy & Schwartz, LLC

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