Category: Intellectual Property

Basic Guidelines for Protecting Company Trade Secrets

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Under the Uniform Trade Secrets Act (UTSA), “trade secrets” are generally defined as confidential proprietary information that provides a competitive advantage or economic benefit. Trade secrets are protected under the Economic Espionage Act of 1994 (EEA) at the federal level, and the vast majority of states have enacted statutes modeled after the UTSA (note that some jurisdictions, such as California, Texas and Illinois, have adopted trade secret laws that differ substantially from the UTSA; thus, businesses should research laws in the relevant jurisdiction(s).). Under the UTSA, to be protectable as a trade secret, information must meet three requirements:

i. the information must fall within the statutory definition of “information” eligible for protection;

ii. the information must derive independent economic value from not being generally known or readily ascertainable by others using appropriate means; and

iii. the information must be the subject of reasonable efforts to maintain its secrecy.

Trade secret theft continues to accelerate among U.S. companies, and can have drastic consequences. To combat this threat, Congress and certain state legislatures have recently enacted legislation to broaden trade secret protection. As a result, it is paramount that companies safeguard all proprietary information that may qualify as protectable trade secrets. This blog post explains some key trade secrets concepts, and offers pointers on how to identify and protect trade secrets.

(1) Determine Which Data Constitutes “Information”

The UTSA-type statutes generally define “information” to include:

Financial, business, scientific, technical, economic, and engineering information;

Computer code, plans, compilations, formulas, designs, prototypes, techniques, processes, or procedures; and

Information that has commercial value, such as customer lists or the results of expensive research.

Courts have similarly interpreted “information” to cover virtually any commercially valuable information. Examples of information that has been found to constitute trade secrets includes pricing and marketing techniques, customer and financial information, sources of supplies, manufacturing processes, and product designs.

(2) “Valuable” and “Not Readily Ascertainable” Information

To be protectable, information must also have “economic value” and not be “readily ascertainable” by others. Courts generally determine whether information satisfies this standard by considering the following factors:

Reasonable measures have been put in place to protect the information from disclosure;

The information has actual or potential commercial value to a company;

The information is known by a limited number of people on a need-to-know basis;

The information would be useful to competitors and would require a significant investment to duplicate or acquire the information; and

The information is not generally known to the public.

(3) Take Reasonable Measures to Maintain Secrecy

Businesses should implement technical, administrative, contractual and physical safeguards to keep secret the information sought to be protected. Companies should identify foreseeable threats to the security of confidential information; assess the likelihood of potential harm flowing from such threats; and implement security protocols to address potential threats. Examples of security measures might include restricting access to confidential information on a need-to-know basis, employing computer access restrictions, circulating an employee handbook that outlines company policies governing confidential information, conducting entrance interviews for new hires to determine whether they are subject to restrictive covenants with former employers, conducting exit interviews with departing personnel to ensure that the employee has returned all company materials and agrees to abide by post-employment obligations, encrypting confidential information, limiting access to confidential information through passwords and network firewalls, track all access to network resources and confidential information, restrict the ability to email, print or otherwise transfer confidential information, employ security personnel, limit visitor access, establish surveillance procedures, and limit physical access to areas that may have confidential information.

Conclusion

This blog post is intended to provide some broad guidelines to identifying and protecting company trade secrets. Most if not all companies have confidential information that may be protectable as a trade secret. But certain precautions need to be in place to ensure that the information is protectable. Because each company and situation is different, you should seek advice about your specific circumstances.

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New Data Breach Class Action has Two Million Plaintiffs

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Cyber breaches resulting in the release of personal identifiable information (PII) are increasingly common and now we are starting to see class action lawsuits filed as a result. In what will likely be the beginning of a wave of lawsuits filed as a result of cyber breaches, Schnucks Markets, operator of 100 supermarkets across the Midwest, recently removed a class action lawsuit filed against it to federal court stemming from a data breach that occurred in March in which 2.4 million credit card numbers were stolen.

The Class action complaint alleges Schnucks failed to properly and adequately safeguard its customer’s personal and financial data. In addition to common law negligence and disclosure, the plaintiffs allege a violation of the Illinois Personal Information Protection Act which requires a data collector of personal information to notify individuals in the most expedient manner possible and without unreasonable delay. The complaint alleges Schnucks waited over two weeks to notify its customers and then did so only through a press release as opposed to providing actual notice to individual consumers. Apparently Schnucks struggled to find the source of the breach and this delay may have continued to expose the PII of people who shopped at its stores.

cybercrime graphicSchnuck’s notice of removal to federal court states the grounds for removal include a class size of more than 100 people and damages at issue are greater than $5 million. Schnucks also explains that the data breach was the result of criminals hacking into its electronic payment systems at 23 stores. Further, during the relevant period, 1.6 million credit or debit card transactions took place at these stores. Schnucks calculates that 500,000 unique credit or debit cards were involved thus the putative class has at least 500,000 members.

Damages alleged by the plaintiffs include having their credit card data compromised, incurring numerous hours cancelling their compromised cards, activating replacement cards and re-establishing automatic withdrawal payment authorizations as well as other economic and non-economic harm. Given that data breaches are becoming increasingly common it is likely that there will be more lawsuits filed similar to Schnucks in the near future. Legal counsel experienced in cyber risk and insurance can assist retailers and insurance companies with handling such problems as they arise.

IP Law Summit – September 8-10 2013

The National Law Review is pleased to bring you information about the upcoming IP Law Summit.

IP Law Sept 2013

 

When: 8-10 September 2013
Where: The Ritz-Carlton, Amelia Island, FL, USA
The IP Law Summit will highlight the current challenges and opportunities through visionary conference sessions and keynote presentations delivered by your most esteemed peers and thought leaders from Americas leading corporations and mid-market organizations. The one-on-one meetings with leading service providers will offer vast expertise in the area of intellectual property law. All this, seamlessly integrated with informal networking opportunities over three days, will provide a unique interactive forum. Do not miss this opportunity to network; establish new connections, exchange ideas and gain knowledge.

U.S. International Trade Commission Grants Injunctive Relief on Standard Essential Patent

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The U.S. International Trade Commission has issued an exclusion order barring importation of certain older model Apple products for infringing a Samsung patent.  The case is significant because the infringed patent was standard essential and encumbered by a commitment to license on fair, reasonable and non-discriminatory terms.  Patent holders and potential defendants should carefully monitor further developments regarding the availability of injunctive relief for infringement of standard essential patents.

On June 4, 2013, the U.S. International Trade Commission (ITC) issued an exclusion order barring the importation and sale of several older model Apple iPhones and iPads for infringing a Samsung patent.  This in itself is unremarkable, as the patent laws permit patent holders to seek monetary and injunctive relief against anyone who infringes their patents, and injunctive relief is commonly granted to prevailing patent holders.  The ITC ruling is noteworthy, however, because the infringed patent was essential to the 3G standard and was subject to a fair, reasonable and non-discriminatory (FRAND) licensing commitment.  The ruling therefore runs counter to views expressed by the U.S. antitrust enforcement agencies to the effect that injunctive relief should be disfavored when dealing with FRAND-encumbered standard essential patents (SEPs), underscoring the growing debate as to the appropriate balance between the rights of SEP holders under the patent laws and antitrust policy.

In September 2012, the presiding administrative law judge (ALJ) ruled that Apple had not infringed any of the patents-in-suit, and that one of those patents was invalid.  Samsung and the staff attorney from the ITC’s Office of Unfair Import Investigations petitioned for review of the ALJ’s decision.  The ITC then requested public comment on its authority to issue an import ban (which is in essence injunctive-type relief) on products that infringe SEPs.  (Monetary damages are not awarded in ITC cases.)  After receiving a number of comments, the ITC issued its decision modifying the ALJ’s construction of certain terms in one of the patents and holding that, as modified, Apple had infringed the patent.  The ITC determined that two of the three remaining patents were not invalid, but also not infringed, and the final of those patents was both invalid and not infringed.  Based on the infringement of one of Samsung’s patents, the ITC issued an import ban with one commissioner dissenting on public interest grounds.

The case arose as part of the broader ongoing intellectual property disputes between Apple and Samsung over popular consumer electronics devices.  The matter has been submitted to the White House and U.S. Trade Representative for a 60-day presidential review period, but it has been decades since an administration overruled an ITC exclusion order.  If the administration does not reverse the decision, Apple can appeal the decision to the U.S. Court of Appeals for the Federal Circuit.

In a recent policy paper entitled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments,” the U.S. Department of Justice Antitrust Division and the U.S. Patent and Trademark Office argued that the ITC and the courts generally should not grant injunctive relief for infringement of SEPs.  The Federal Trade Commission argued the point even more forcefully in a statement submitted last year in ITC investigation 337-TA-752, In re Certain Gaming and Entertainment Consoles, Related Software, and Components Thereof, asserting that on the basis of its mandate to consider the public interest, the ITC should not issue exclusion orders related to FRAND-encumbered SEPs.  In support of their position, these agencies have advanced two principal arguments.  First, they assert that the fact that the patentee voluntarily agreed to license the patent on FRAND terms implies that money damages are a sufficient form of relief.  They therefore argue that if the patentee’s first priority was excluding others from using the patent, it would not have bound itself to FRAND terms or tried to secure the patent’s incorporation into a standard.

Second, the agencies argue that injunctive relief may enable patent “hold-ups” by SEP holders.  At the time a standard setting organization is deciding what technology to adopt, patentees often compete with one another as to whose technology will be adopted.  But once a standard is adopted and large investments are made based on that standard, sunk costs often make switching to a different technology or innovating around the patent prohibitively expensive.  Thus, a company wishing to have its patent incorporated into the standard typically must agree to license that patent on FRAND terms.  The antitrust agencies fear that SEP owners can use the threat of injunctive relief to extract above-FRAND royalties from rivals, and that these additional costs are likely to be passed on to consumers.  The agencies therefore argue that the public interest, which the ITC is charged with taking into account, counsels against exclusion orders in these circumstances.

On the other side of the ledger, SEP holders point out that when a patent holder agrees to license its patent on FRAND terms, it is only making a commitment about the terms on which it will grant a license, not surrendering any remedy afforded by the patent laws.  They go on to argue that the position staked out by the agencies places them in an untenable position because prospective licensees may not accept a proposed license on FRAND terms or may disagree with the SEP holder about whether the terms are, in fact, FRAND.  When a dispute arises over the terms on which a SEP will be licensed, patent holders have a legitimate interest in wanting to ensure their ability to pursue all remedies authorized under the patent laws.  These remedies afford patent holders the ability to protect their intellectual property rights and thereby promote innovation.  Making it more difficult to obtain injunctive relief on SEPs would diminish their incentive to invest in innovation, which is one of the fundamental objectives of the patent laws.

The recent ITC decision represents a clear win for SEP holders, but as noted above, it is subject to further review and possible appeal.  And in all events, the underlying policy debate will most assuredly continue.  As a consequence, it is incumbent both upon patent holders and potential defendants to continue to carefully monitor developments in evaluating the availability of injunctive relief in the context of SEPs.

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Round Up – Intellectual Property and Cyber Security Things You May Have Missed (Including Some Good Summer Cocktail Banter Material)

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Cyber Security Report – Earlier this year, Verizon released its 2013 Data Breach Investigations Report.  The report analyzes and presents data regarding the current state of various data breaches and network attacks.  Some of the results are surprising.

  •             92% of breaches are perpetrated by outsiders
  •             19% of breaches are attributed to state-affiliated actors
  •             76% of network intrusions exploit weak or stolen credentials
  •             66% took months or more to discover

Do Trademark Lawyers Matter? – An empirical study, published in the Stanford Technology Law Review, provided the results of a grueling analysis of 25 years worth of data from the United States Patent and Trademark Office records on whether being represented by a trademark attorney makes a difference in the likelihood of success in getting your mark registered.  The results?  YES!  It turns out that, overall, trademark applicants who are represented by an attorney are 50% more likely to have their marks registered.  The results are even more dramatic when an application faces an obstacle (e.g., an office action).  In those instances, applicants were found to be 68% more likely to proceed to publication when represented by counsel.  Perhaps its time for a national trademark lawyer appreciation day! (I’m not holding my breath).

Does Keyword Advertising Really Work?  eBay recently released a study, entitled “Consumer Heterogeneity and Paid Search Effectiveness: A Large Scale Field Experiment” which analyzed the effectiveness of eBay’s keyword advertising efforts.  So does keyword advertising really work?  Not so much.  According to the study, for well known brands (like eBay), new and infrequent users may be more influenced by keyword triggered advertisements.  But more experienced searchers and otherwise loyal brand users are not influenced by the ads.  When eBay stopped its keyword advertising, almost all of the traffic lost from the absence of the ad was picked up in the native search results.  It’s important to note, however, that this study was focused on a single well known brand.  The results may be quite different for other brands or for less well known brands.  Moreover, the study says nothing about the use of a trademark by a competitor as a keyword to drive traffic to the competitor’s website.

Marketing Your Mobile App – The FTC has released guidelines for mobile app developers when advertising their software.  The plain language guide is very high level, but does include some helpful tid bits to remember.  Highlights include:

  • Advertising is everything a company tells a prospective buyer about its app (whether its in the formal ad campaign or in other communications).
  • Don’t bury key disclosures in “dense blocks of legal mumbo jumbo” or behind hyperlinks.
  • Build in privacy by design, including principles used in selecting default settings.
  • If you change your privacy policy, you need to get user’s consent.  Merely editing the language of the policy isn’t enough.

Effective Disclosures in Digital Advertising – The FTC also released guidelines for online advertising.  This new guidance focuses on the peculiarities and challenges associated with online advertising.  Where this adds new value is in its analysis and detail (with examples!) of the following areas:

  • Proximity and Placement – where disclosures have to be placed to be effective
  • Hyperlinks – including proper labeling and placement
  • Prominence – including use of size, color and graphics
  • Distractions – risks from graphics, sounds and links that may distract from disclosures
  • Multimedia – use of audio and video

Attack on “Happy Birthday” Copyright.  Salon.com reported yesterday that a class action suit has been filed to attack the copyright in the popular birthday celebration tune.  According to the report, the lawsuit was prompted by a documentary uncovering evidence that the song was originally published as early as 1893 and that the current copyright is based on a 1924 publication date which grants the work 95 years of copyright protection.  Based on my count, there’s only about 6 years left in the alleged copyright to begin with.  Hopefully the lawsuit gets resolved before then.

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Handbags and High-Heeled Shoes: Recent Trademark Disputes in the World of Fashion

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When Paul Simon first sang about “diamonds on the soles of her shoes” in the 1980’s, he was apparently more fashion forward than we realized.  Less than a decade later, in the early 1990’s, the fashion house of Christian Louboutin began selling women’s high-fashion designer footwear displaying a distinctive red, glossy sole on the bottom of high-heeled shoes. Legend has it, Louboutin came up with the idea when he painted red nail polish on a pair of women’s shoes because they “lacked energy.”  These shoes soon became highly sought after by celebrities and consumers of haute couture everywhere.

Louboutin federally registered its red-colored sole for footwear as a trademark with the U.S. Patent and Trademark Office in 2008. In 2011, Louboutin sought to enforce those rights by suing Yves Saint Laurent for selling red shoes that displayed red soles. In its Resort 2011 collection, the American branch of YSL featured purple, navy, green…and red shoes that all had soles of matching color. Louboutin took exception to the red-soled shoes and tried to stomp out YSL’s allegedly infringing activity.

At the district court level, a New York judge ruled against Louboutin’s request that YSL be enjoined from selling red-soled shoes. On appeal in September of 2012, the U.S. Court of Appeals for the Second Circuit expressly held that Louboutin could protect its iconic red-soled shoes, except when the entire shoe itself is red.  Therefore, YSL was allowed to continue selling its monochromatic red shoes. Both parties have claimed victory and the case was dismissed in December.

The defendant in a case brought by Coach, Inc., and recently decided, did not fare quite so well. In 2010, Coach sued the owner of the Southwest Flea Market located in Memphis, Tennessee for contributory trademark infringement, claiming he knew, or should have known, that some of the vendors at the flea market were selling counterfeit Coach Handbags and other infringing products. Prior to filing suit, Coach had sent letters to the defendant, putting him on notice of the infringement. Even after the filing of the suit, multiple raids were conducted at the flea market, and more than 4,600 counterfeit Coach products were seized.

In the case pending in the U.S. District Court for the Western District of Tennessee, the magistrate judge granted summary judgment to Coach in 2012, ruling that the owner of the flea market was contributorily liable for the infringement, and the jury awarded Coach more than $5 million in damages. The case was appealed and last month the U.S. Court of Appeals ruled, for the first time ever, on the question of whether the owner of a flea market can be held liable for contributory trademark infringement. The answer was a resounding “yes”, as the court upheld the lower court’s ruling and the $5.04 million damage award. In its ruling, the court admonished the flea market owner for engaging in “ostrich-like behavior”, willfully ignoring the infringing activities occurring at the market, showing that the high price of fashion applies not just to the cost of the merchandise, but also to not respecting the trademarks by which that merchandise is known.

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Supreme Court – Being Unanimous Appears to be Part of the Justices’ DNA

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On June 13, 2013, the U.S. Supreme Court unanimously decided in Association for Molecular Pathology v. Myriad Genetics, Inc. that naturally occurring DNA segments are not patent eligible because they are products of nature and merely isolating such segments does not change their status for patent eligibility. However, complementary DNA (cDNA) is patent eligible because it is not naturally occurring.

Isolated DNA sequences – patent ineligible

In the third opinion since 2010 dealing with the scope of patent eligibility,1 the Court found that Myriad’s claims directed towards isolated DNA segments fell “squarely within the law of nature exception.” Slip op. at 13.  Myriad discovered an “important and useful gene, but separating that gene from its surrounding genetic material is not an act of invention.” Slip op. at 12. The Court rejected the idea that isolation of DNA segments requires severing of chemical bonds, which creates a non-naturally occurring molecule. While Myriad may have expended a significant amount of research effort to discover the location of the genes of interest, effort alone does not render such subject matter patentable.

For landmark Supreme Court decisions regarding patent eligibility, please click here.

cDNA sequences – patent eligible

The Court noted that cDNA differs from isolated DNA segments and does not present the same obstacles for patent eligibility. Notable distinctions, according to the Court, are that cDNA’s creation results in an exons-only molecule, which is not naturally occurring. While acknowledging that the nucleotide sequence of cDNA is dictated by nature, the Court focused on the fact that creation of cDNA “unquestionably creates something new.” Slip op. at 17. cDNA is distinct from the DNA from which it was derived, and thus is not a product of nature. However, the Court noted that, in some instances, such as a very short segment of DNA having no intervening introns, the cDNA may be indistinguishable from the DNA. In such a situation, that cDNA is not patent eligible.

What the Court did not decide

The Court was careful to note that its decision did not implicate method claims, patents on new applications based on discoveries related to specific genes, or patentability of DNA in which the order of naturally occurring nucleotides has changed. Thus, the eligibility of methods of manipulating DNA, applications of knowledge learned from DNA segments, and manipulations of DNA sequences are questions still on the table.

Standing

An additional interesting aside is the Court’s approach to the declaratory judgment standing issue. The Court, in footnote 3, simply indicates that under all of the circumstances presented, the MedImmune standard had been met. Whether this opens the door to additional declaratory judgment actions in the future is uncertain.

Impact

This decision will likely not have a devastating impact on the patent portfolio of genetic diagnostic companies. These companies typically focus more on patents directed towards multi-gene products, methods, and cDNAs than on claims directed to isolated DNA sequences to protect their genetic tests. Nevertheless, should a company seek to assert a patent with claims directed to isolated DNA sequences, such an assertion will now be subjected to summary judgment motions based on the patent ineligibility of such claims.

In the long term, however, today’s decision will likely have a big impact on businesses engaged in developing chemical and biological therapeutics, with patents directed to isolated naturally occurring compounds. The Court has held that merely separating a segment of DNA from its natural surrounding is “not an act of invention.” How such analysis could be applied in the chemical and pharmaceutical arts remains to be seen. The Court’s opinion likely will be used to attack chemical and pharmaceutical patents directed towards naturally occurring compounds like proteins, antibodies, and other naturally occurring biomolecules. Whether such patents fall within chemical compositions or focus on the chemical changes, which result from isolation that the Court has suggested may be patentable, will likely be determined on a case by case basis.

Lastly, in an era of ever polarizing politics, it is fascinating to see that this decision, like most other recent U.S. Supreme Court decisions involving patents,2 is a 9-0 decision.  All of the current justices unanimously agree on what is the appropriate scope of patent eligibility.

1 Bilski v. Kappos, 130 S. Ct. 3218 (2010) and Mayo Collaborative Services v. Prometheus Lab., Inc., 132 S. Ct. 1289 (2012) are two unanimous U.S. Supreme Court decisions dealing with the patent eligibility of method claims.

2 See Bilski v. Kappos, 130 S. Ct. 3218(2010); Mayo v. Prometheus, 132 S. Ct. 1289(2012); Caraco Pharm. Lab., Ltd. v. Novo Nordisk A/S, 132 S. Ct. 1670 (2012); Kappos v. Hyatt, 132 S. Ct. 1690 (2012); Bowman v. Monsanto Co., No. 11-796 (2013).

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Costco Claims Tiffany & Co. is Generic Re: Trademark Infringement and Genericide

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One of the biggest threats to a brand owner is genericide, whereby widespread usage of a mark in the marketplace causes the term to be considered by the public to be a generic term for a particular product rather than a source identifier. Some well-known examples of marks which became generic over time in certain jurisdictions are “aspirin” and “escalator”. When genericide occurs, a mark can no longer function as a trade mark, as it ceases to identify a particular source or to distinguish the origin of the product from competing products. Once a mark has become generic, the law deems it available for all parties to use and the now-former brand owner no longer has exclusive rights to it.

The threat of genericide is something that brand owners work very hard to try and avoid, since the result would be that they no longer have a trade mark.  Similarly, if a mark has become generic, third parties have the right to use it.  Therefore, a claim that a particular mark has become generic is a defense to an allegation of trade mark infringement.

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The general test for whether a designation has become generic is whether the public believes that such designation connotes the generic name of a product or a brand indicating the source of the product. This issue will soon be considered by the courts in a lawsuit initiated by Tiffany & Co against Costco.

In the lawsuit, Tiffany accused Costco of trade mark infringement and false advertising, objecting to Costco’s offering of rings which were promoted as “Tiffany diamond engagement rings”. Rather than deny Tiffany’s accusations, Costco took an aggressive defensive position, claiming that a “Tiffany setting” is generic for an engagement ring setting comprised of multiple slender prongs extending upward from a base to hold a single gemstone. Costco further alleged that although a design called a “Tiffany setting” may have started out as a trademark, frequent third-party use had caused it to become genericide. As part of its counterclaims, Costco claimed that certain of Tiffany’s trade mark registrations are invalid. Not surprisingly, Tiffany has vehemently objected to Costco’s claims of genericide. The legal battle is just getting underway but this matter will be one that is highly publicized and closely monitored.

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“Lawfully Made Under This Title” – The New, Global Reach of U.S. Copyright Law’s “First Space” Doctrine

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The U.S. Copyright Act grants a copyright owner certain exclusive rights, including the right to distribute copies by sale or other transfer of ownership. 17 U.S.C. § 106(3). But while these exclusive rights are extensive, they are not limitless. Section 109(a), for one, sets forth the “first sale” doctrine:

“Notwithstanding the provisions of section 106(3), the owner of a particular         copy…lawfully made under this title…is entitled, without the authority of the copyright      owner, to sell or otherwise dispose of the possession of that copy.” 17 U.S.C. § 109(a).

In effect, Section 109(a) exhausts the distribution right by permitting the owner of a particular copy to dispose of that copy as she wishes.

Notably, however, the first sale doctrine is itself qualified in that it only applies to copies “lawfully made under this title.” 17 U.S.C. § 109(a) (emphasis added). That this language applies to copyrighted works made and distributed in the U.S. is clear enough. A more difficult question is to what extent the first sale doctrine applies to works produced and/or acquired abroad.

The U.S. Supreme Court partly addressed Section 109(a)’s reach in Quality King Distributors, Inc. v. L’anza Research International, Inc., 523 U.S. 135 (1998). In Quality King, the copyrighted works were manufactured in the U.S., but first sold abroad at prices 35% to 40% less than identical U.S. products. Some of the discounted foreign products were then imported back into the U.S. and sold to unauthorized retailers. The copyright owner sued alleging violation of the Copyright Act’s importation provision, 17 U.S.C. § 602(a)(1) (then §602(a)), which makes importation of a copyrighted work without the authority of the copyright owner an infringement of the distribution right. The Supreme Court, however, found that the first sale doctrine exhausts the copyright owner’s right to prohibit importation of U.S. produced works first sold abroad. In other words, the owner of a copy of a U.S. produced work acquired abroad is free to bring that copy into the U.S. without fear of retribution from the copyright holder.

Because Quality King involved only U.S. produced works – which are unquestionably “lawfully made under” the Copyright Act – the Court had no need to consider any broader implications of Section 109(a). And so, the reach of the first sale doctrine in connection with works manufactured abroad remained in doubt after Quality King.

As a graduate student in California, Supap Kirtsaeng (“Kirtsaeng”) learned that publishers often sell their U.S. textbooks for substantially more than the identical books in Thailand. Seeing an opportunity, Kirtsaeng had friends purchase textbooks in Thailand and mail them to the U.S. where he sold them on EBay. By this simple arbitrage, Kirtsaeng generated roughly $900,000 before one the publishers, John Wiley & Sons, Inc. (“Wiley”), sued.

Wiley claimed that Kirtsaeng’s unauthorized importation of the foreign-produced textbooks violated Wiley’s distribution right via the Copyright Act’s importation prohibition. Unlike in Quality King, however, Wiley argued that the first sale doctrine did not exhaust its rights because its foreign version textbooks were produced and distributed entirely outside the U.S., and thus were not “lawfully made under [the U.S. Copyright Act],” as required by Section 109(a).

Kirtsaeng countered that “lawfully made under this title” merely means “made in accordance with U.S. copyright law,” i.e., made without infringing copyright. According to Kirtsaeng, because Wiley had authorized the production and distribution of its foreign produced textbooks, they were “lawfully made under [U.S. copyright law]” and thus the first sale doctrine applied. In other words, Kirtsaeng argued, Section 109(a) works a global exhaustion of the copyright holder’s distribution right.

The Supreme Court found – after considerable discussion of statutory construction and the common law history of the “first sale” doctrine – that the phrase “lawfully made under this title” has no geographic significance. Rather, the first sale doctrine applies to copies of works that are lawfully made anywhere in the world. Thus, Section 109(a) effects a global exhaustion of the Copyright Act’s distribution right and the lawful owner of any lawfully made copy, wherever produced and wherever acquired, is free to bring that copy into the U.S. and dispose of it as she wishes.

The Court’s non-geographical interpretation of the first sale doctrine likely will have far reaching effects.

On the one hand, organizations such as libraries, used book dealers, and museums view the Kirtsaeng ruling as a victory because it clarifies that they will not have to seek permission from copyright holders to lend or sell their books or display their artwork acquired from foreign sources. Additionally, the Court’s majority believes its holding will protect the right of American consumers to resell a broad range of foreign produced products that contain copyrighted software.

On the other hand, in the Digital Age, where it is easy to shop for, purchase and ship products globally, Kirtsaeng will greatly limit a copyright holder’s ability to maintain geographic price disparities, as historically necessitated by regional economics. Consequently, one effect of Kirtsaeng may be a trend toward global price equilibration, at least for internationally interchangeable products, such as books. Some goods, however, such as technology products, may be less affected by Kirtsaeng, where various regulations outside of copyright law tend to make the products less internationally fungible.

Kirtsaeng may also foretell a rise in leases or rentals. By its terms, Section 109(a) extends first sale protection to the “owner of a particular copy.” 17 U.S.C. § 109(a) (emphasis added). Lessees are unprotected. So, a copyright holder can circumvent the effects of Section 109(a) by renting works to its customers. In the Internet age, where a myriad of products can be delivered, consumed, and deleted digitally, rental rather than sale may be an attractive way for some industries to protect current regional pricing structures.

Moreover, the Kirtsaeng decision may have implications for the exhaustion doctrine under U.S. patent law. Similar to the first sale doctrine, the exhaustion doctrine limits a patent owner’s exclusive rights in a particular item upon the first authorized sale. In 2005, the Federal Circuit Court of Appeals explained that the exhaustion doctrine only applies to the first sale in the U.S. because the U.S. patent system “does not provide for extraterritorial effect.” Fuji Photo Film Co., Ltd. V. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed. Cir. 2005). Kirtsaeng, however, casts that reasoning in doubt. While the Supreme Court recently denied certiorari in a case that would have reexamined the exhaustion doctrine, it is widely expected that the Federal Circuit will at some point revisit the issue in light of Kirtsaeng.

Finally, in the wake of Kirtsaeng, one would expect certain rights holders to pressure Congress to rewrite Section 109(a). After Quality King, copyright holders were successful in getting the House to pass a proposed amendment that would have limited Section 109(a) to copies authorized for distribution in the U.S. This proposed “domestic exhaustion” amendment, however, ultimately died in reconciliation. Only time will tell whether copyright holders could ultimately prevail to blunt the impact of Kirtsaeng.

Evolving into the Digital Age: Protecting Intellectual Property

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While society has evolved from an Industrial to an Information Age over the last hundred years, we’re now operating in a Digital world where technological innovations and intellectual property reign supreme. This fast-moving digital environment–including web, mobile and social media–requires a proactive stance on developing and protecting digital innovations as the global marketplace becomes even more competitive and organizations run the risk of losing critical innovations as others move quickly to steal ideas if the opportunity exists.

While digital strategy is driven largely by marketing or IT departments, every digital asset of the company is and should be treated and protected as an intellectual asset, but today these assets are  often overlooked.  Consider the long list of marketing or IT developments at your company.  Everything from user interfaces, apps, social networking functions, personalization options on web pages, subscriber perks, wi-fi offerings, e-commerce solutions, bridging offline and online experiences and new products and services related to digital activity result in digital assets that an organization deploys.  But, are you taking the next step to protect them or leaving them out in the open to steal?  Worse, are you infringing on someone else’s intellectual property (IP)?   

Innovations at Lightening Speed – Are You Giving It Away?

Today, digital assets can be protected by utility patents, design patents, copyright law and trademark law. Typically, as these innovations occur at such a rapid pace, they are not captured and translated into protected digital assets.  Further, as the use of digital strategies is exploding and the creation of digital assets is a relatively new concept, most organizations have yet to build a formal business case and required methodology for protecting these assets.  Compounding the issue, much of the innovation work is done in collaboration with outsourced vendors in marketing and IT, often in a vacuum, so there isn’t a legal or other IP advocate to even ask the question: “Should we protect this?”.  Finally, much of the technology used to develop these innovations is often open sourced which creates an additional layer of confusion and often one that the legal team won’t touch.

The world is beginning to change in response to protecting their digital assets.  Patent trolls have largely emerged in the digital and technology space attacking companies from Starbucks to Cisco for wi-fi offerings, web functionality and what was previously considered open territory for marketers and web designers. And, these trolls are finding loopholes and great financial gains. Today, the trolls monitor major innovative initiatives by world-class organizations and copy and develop their own innovations around successful ones, improve them, and then ultimately file a new patent for it.  And then in a crazy twist, they send these same organizations a cease and desist letter and ask for a license fee.  Why aren’t organizations protecting these same assets to defend themselves and even use them as additional sources of revenue?

Building and Protecting a Digital IP Portfolio

Most companies need to start by identifying the pipeline of ideas and then turn the right ideas into valuable assets.  The innovation pipeline of digital assets is likely already alive and well in most organizations but they aren’t tapping into it.  So, the first step in building a Digital IP Portfolio is to audit where that innovation is occurring.  Understand when it is outsourced to vendors and assess whether it should be retained, shared or given away.  Once you know where the innovation is occurring, it’s time to funnel it into an IP evaluation pipeline.  At that juncture, an IP business strategy team (comprised of IP strategy experts, IP lawyers, business managers, IT managers and marketers) can evaluate its potential use and strength.  Is it a good defense play against trolls or other competitors?  Is it something you can license to others?  Is it something you just want to ensure you have and your competitors don’t? By assigning values and business goals to all of these assets, you can then channel them into a protection process with budgets and clear return on investment goals.

And, the importance of having a multi-disciplined approach cannot be overstated.  Generating valuable digital assets is not just a legal or IP function, it requires understanding and contribution from other facets of the company that can identify value proposition and weigh in on risk/reward.  Digital is new and evolving and critical thinking about its value proposition is essential. Many digital assets are not worth protecting if it won’t last beyond the next fad.  But others are.  That’s why Facebook, Google, Adobe and others have become some of the top patent filers in the world.  They file for much more than just devices and consider every innovation a potential asset both offensively and defensively.

Once digital assets are channeled into protection they can then be redistributed back out to spur innovative thinking and evaluate licensing or leverage potential.  While many companies don’t see themselves as technology companies, they are quickly becoming so with their digital platforms.  From retailers to entertainment and consumer goods, soon all companies will be a digital or technology company to some extent.  If you don’t own and protect those assets, someone else will and use it against you.  The time is now for savvy IP and technology professionals to identify an untapped resource – their digital assets.

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