Category: International Law

Beware OFAC in a Time of Sanctions

On Monday, April 25, 2022, the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”) announced a settlement with Toll Holdings Limited (“Toll”), an Australian freight forwarding and logistics company, with respect to Toll’s originations and/or receipt “of payments through the U.S. financial system involving sanctioned jurisdictions and persons.” Toll, which is not an American entity, and is neither owned by Americans nor located in the U.S. or any of its territories, was involved in almost 3000 transactions where payments were made in connection with sea, air, and rail shipments to, from, or through North Korea, Iran, or Syria, AND/OR involving the property of a person on OFAC’s Specially Designated Nationals and Blocked Persons List. OFAC did not have direct jurisdiction over Toll, BUT because the payments for Toll’s freight forwarding and logistics services flowed through U.S. financial institutions, Toll “caused the U.S. financial institutions to be engaged in prohibited activities with … sanctioned persons or jurisdictions.”

Each OFAC violation can be the basis of civil sanctions. Here the 2853 violation would have supported the imposition of civil sanctions totaling over $826 million. Toll was “happy” to settle OFAC’s enforcement action for $6 million. OFAC found that the Toll violations were “non-egregious,” in part due to the rapid growth of Toll after 2007 through acquisitions of smaller freight forwarding companies. OFAC noted that by 2017 Toll had almost 600 invoicing, data, payment, and other systems spread across its various units. OFAC also noted that Toll did not have adequate compliance procedures and procedures in place and did not attend to those issues until an unnamed bank threatened to cease doing business with Toll because Toll was using its U.S. dollar account to transact business with sanctioned jurisdictions and/or persons. OFAC took note of Toll’s voluntary self-disclosure, well-organized internal investigation, and extensive remedial measures.

OFAC traces its origins to the War of 1812, when the then Secretary of the Treasury imposed sanctions on the United Kingdom in retaliation for the impressment of American sailors. The Treasury Department has had a special office dealing with foreign assets since 1940 (and the outbreak of World War II), with statutory authority found in the Trading With The Enemy Act of 1917 (as World War I raged), and a series of federal laws involving embargoes and economic sanctions. OFAC received its current name as part of a Treasury Department order on October 15, 1962 (contemporaneous with the Cuban missile crisis).

The Toll settlement reflects the growing use by OFAC of public enforcement against foreign businesses for “causing” violations by involving U.S. payment systems. The use of U.S. dollars in any part of a transaction will typically involve the U.S. financial system, directly or indirectly – that subjects the entirety of the transaction to U.S regulatory jurisdiction, including that of OFAC. The Toll settlement evidences OFAC’s increasing willingness to exercise its expansive jurisdiction over foreign businesses, even those involving primarily extraterritorial transactions — for example, the increase in OFAC sanctions of foreign businesses seen as facilitating the Russian invasion of Ukraine.

Foreign businesses must give serious and continuing attention to having substantial policies and procedures in place to insure compliance with U.S. sanctions and, thereby, to avoid OFAC enforcement actions. Companies can start by reviewing OFAC’s Framework for Compliance Commitments and implementing the recommendations there. In addition, all parties to a transaction should be screened against sanction lists (OFAC’s, and also those of the U.K. and E.U.). Companies should consider adopting preventive measures, not only to deter violations, but also to demonstrate a vigorous compliance program.  Similarly, these issues MUST be considered as part of any merger or acquisition (as the Toll experience suggests).Finally, all counterparties, including financial intermediaries, should be evaluated for potential sanction list issues. Otherwise, a foreign business may have to “pay the Toll” for its shortcomings.

Experienced American business lawyers may prove helpful in designing and/or evaluating the compliance programs of non-U.S. companies.

Article By Peter D. Hutcheon of Norris McLaughlin P.A.

For more financial legal news, click here to visit the National Law Review.

©2022 Norris McLaughlin P.A., All Rights Reserved

Implications of the Use of the Defense Production Act in the U.S. Supply Chain

What owners, operators and investors need to know before accepting funds under the DPA

There has been an expansion of regulations related to Foreign Direct Investment (FDI) in both the United States and abroad. Current economic and geopolitical tensions are driving further expansion of FDI in the U.S. and elsewhere.

Whether by intent or coincidence, the Foreign Investment Risk Review Modernization Act (FIRRMA) regulations that took effect February 13, 2020, included provisions that expanded the Committee on Foreign Investment in the U.S. (CFIUS) and FIRRMA based upon the invocation of the Defense Production Act (DPA) – such as with President Biden’s recent Executive Order evoking the DPA to help alleviate the U.S. shortage of baby formula.

As background, the U.S. regulation of foreign investment in the U.S. began in 1975 with the creation of CFIUS. The 2007 Foreign Investment and National Security Act refined CFIUS and broadened the definition of national security. Historically, CFIUS was limited to technology, industries and infrastructure directly involving national security. It was also a voluntary filing. Foreign investors began structuring investments to avoid national security reviews. As a result, FIRRMA, a CFIUS reform act, was signed into law in August 2018. FIRRMA’s regulations took effect in February 2020.

It is not surprising that there are national security implications to U.S. food production and supply, particularly based upon various shortages in the near past and projections of further shortages in the future. What is surprising is that the 2020 FIRRMA regulations provided for the application of CFIUS to food production (and medical supplies) based upon Executive Orders that bring such under the DPA.

The Impact of Presidential DPA Executive Orders

The 2020 FIRMMA regulations included an exhaustive list of “critical infrastructure” that fall within CFIUS’s jurisdiction. Appendix A to the regulations details “Covered Investment Critical Infrastructure and Functions Related to Covered Investment Critical Infrastructure” and includes the following language:

“manufacture any industrial resource other than commercially available off-the-shelf items …. or operate any industrial resource that is a facility, in each case, that has been funded, in whole or in part, by […] (a) Defense Production Act of 1950 Title III program …..”

Title III of the DPA “allows the President to provide economic incentives to secure domestic industrial capabilities essential to meet national defense and homeland security requirements.” This was arguably invoked by President Trump’s COVID-19 related DPA Executive Orders regarding medical supplies (such as PPEs, tests and ventilators, etc.) and now President Biden’s Executive Order related to baby formula (and other food production).

Based on the intent of FIRRMA to close gaps in prior CFIUS coverage, the FIRRMA definition of “covered transactions” includes the following language:

“(d) Any other transaction, transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent the application of section 721.”

Taken together, the foregoing provision potentially gives CFIUS jurisdiction to review non-U.S. investments in U.S. companies covered by DPA Executive Orders that are outside of traditional M&A structures. This means that even non-controlling foreign investments in U.S. companies (such as food or medical producers) who receive DPA funding are subject to CFIUS review. More significantly, such U.S. companies can be subject to CFIUS review for a period of 60 months following the receipt of any DPA funding.

As a result of DPA-related FDI implications, owners, operators, and investors should carefully assess the implications of accepting funding under the DPA and the resulting restrictions on non-U.S. investors in businesses and industries not historically within the jurisdiction of CFIUS.

Article By David Vance Lucas of Bradley Arant Boult Cummings LLP

For more administrative and regulatory legal news, click here to visit the National Law Review.

© 2022 Bradley Arant Boult Cummings LLP

Are You Ready for the UK Plastic Packaging Tax?

The plastic packaging tax (the ‘Tax’) came into force on 1 April 2022, with UK businesses that produce or import plastic packaging components in quantities of 10 or more tonnes per year affected. However, despite already being in force, research conducted by YouGov, on behalf of Veolia, has found that a high proportion of retail and manufacturing businesses (77% of those surveyed) are still not aware of the Tax.

As businesses gain increased awareness, the Tax is likely to receive a mixed reception. Whilst most would support the Government’s aim of increasing the use of recycled content in plastic packaging components, the Tax comes at a time when 92% of manufacturers and 90% of importers are reporting increased costs. With the introduction of the Tax, those businesses that have not already passed these increased costs on to customers will likely do so, meaning that the Tax may unintentionally add to the cost of living in the UK. This is compounded when one considers that the Tax came into force just five days before the controversial increase in national insurance contributions.

To manage increased costs and to ensure compliance with the law, businesses should pay close attention to the rules of the Tax.

© Copyright 2022 Squire Patton Boggs (US) LLP
For more articles on international laws, visit the NLR Global section.

Law Firms Respond to Russia’s Invasion of Ukraine: How the Legal Industry & the Public Can Help

On February 21, 2022, Russian President Vladimir Putin ordered ground troops into the eastern Ukrainian provinces of Donetsk and Luhansk. Invading under the guise of establishing independence for the region on February 24, Russia started bombing key points of interest around the country, including the capital city of Kyiv. At the time of writing, the skirmishes remain ongoing, with Russia expanding its invasion force as the days go on.

The ramifications of Russia’s war are widespread. In Ukraine, infrastructural damage is considerable, an estimated 2 million civilians are evacuating or have been driven from their homes. The death toll remains uncertain at this time, but the Ukrainian health ministry estimates that hundreds of citizens have been killed as a result of the violence. Globally, financial markets are in a state of rapid flux, seeing huge rises in inflation, a strained supply chain and plummeting stock prices.

Law firms in the United States and abroad have responded to the conflict by offering pro bono services in anticipation of resultant legal complications and organized means by which money can be donated to Ukrainian humanitarian efforts.

How Have Law Firms Responded to Russia’s Invasion of Ukraine?

In some instances, firms have also closed offices in Ukraine to protect workers, and severed ties with Russian businesses. Law firms that have closed offices in Ukraine include Dentons, CMS and Baker McKenzie, which have closed offices in Kyiv.

“Dentons has established a taskforce to monitor and manage the crisis situation, with a primary focus on protecting our people,”  Tomasz Dąbrowski, CEO of Dentons Europe, told the National Law Review. “We are in regular contact with our team in Kyiv and are providing our colleagues and their families with any possible assistance, including transport, relocation and accommodation assistance in the neighboring countries. Furthermore, we have seen a wave of kindness and generosity from our people across Europe, who have volunteered to provide accommodation in their homes for Ukrainian colleagues.  Furthermore, in addition to the financial support our Firm is providing to our Ukrainian colleagues, we have also received financial donations from around the world to help them resettle.”

Many law firms have announced they are closing offices in Russia, including Squire Patton Boggs, Latham & Watkins Freshfields Bruckhaus Deringer, Akin Gump Strauss Hauer & Feld and Morgan Lewis & Bockius, among others. Norton Rose Fulbright announced March 7 that they are winding down their operations in Russia and will be closing their Moscow office as soon as they can, calling Russia’s invasion of Ukraine “increasingly brutal.”

“The wellbeing of our staff in the region is a priority. We thank our 50 colleagues in Moscow for their loyal service and will support them through this transition.”

Norton Rose Fulbright said they “stand unequivocally with the people of Ukraine,” and are taking steps to respond to the invasion.

“Some immediate actions are possible and we are taking them. We are not accepting any further instructions from businesses, entities or individuals connected with the current Russian regime, irrespective of whether they are sanctioned or not. In addition, we continue to review exiting from existing work for them where our professional obligations as lawyers allow. Where we cannot exit from current matters, we will donate the profits from that work to appropriate humanitarian and charitable causes,” the statement read. “We are working with our charitable partners in every region to raise funds to help the people of Ukraine, as well as providing pro bono support to those Ukrainians and others who are being forced to relocate.”

Law firms have also stepped forward to offer pro bono assistance to those affected by the Russian invasion of Ukraine.

Law Firms Offering Pro Bono Assistance to Ukraine

Akin Gump Partner and Pro Bono Practice leader Steven Schulman explained how the legal industry is collaborating and working to provide assistance:

“So what we often do in these crises, we will self organize, [and] say who’s a point person who knows what’s going on, and then we will share information so that again, we’re lightening the load on the legal aid organizations.”

Another law firm offering assistance to Ukraine is  Covington & Burling, which the country hired to help pursue its claim against  Russia at the International Court of Justice (ICJ). Specifically, Ukraine asked the court to order Russia to halt its invasion. Covington filed a claim on behalf of Ukraine to the ICJ.

Nongovernmental organizations (NGOs) are providing emergency aid in Ukraine, as well as in neighboring countries, such as Poland, Hungary, Slovakia and Romania to help people displaced by the war as they come across the border, Mr.Dąbrowski said. These organizations are providing food, water, hygiene supplies and other necessities, and urgent psychological counseling. Specific NGOs on the ground in Ukraine include Mercy Corps, Fight for Right, Project HOPE, Hungarian Helsinki Committee, and  Fundacja Ocalenie, among others.

However, NGOs need cash donations in order to keep providing aid. Mr.Dąbrowski detailed what pro bono work Dentons is doing, and how the firm is supporting NGOs:

“Our Positive Impact team is in touch with numerous NGOs and lawyers from our firm to identify opportunities for pro bono legal advice, mainly in the countries which share a border with Ukraine.  We are already working with NGOs in Poland and Hungary which are helping Ukrainian refugees displaced by the war. We are assisting with issues related to employment law, contracts, establishment of charitable foundations, etc… We are also in discussions with an international relief agency which is looking to set up operations within Ukraine.

While men between the ages of 18 and 60 are currently prohibited from leaving Ukraine, as of March 10, 2022, the conflict has created one of the largest refugee crises within the last few decades.

“We have activated our registered charitable foundation to collect donations from our people around the world to support Ukrainian families – and particularly children –  displaced by the war, including some of our own people from Kyiv.  So far, our colleagues from around the world have donated or pledged close to €300,000,” Mr.Dąbrowski said. “We have already distributed €60,000 of that to eight NGOs in Poland, Hungary and Romania, which are providing emergency aid, food and water, hygiene supplies, transportation, medical and psychological care, shelter and schooling to Ukrainian civilians fleeing from the war”

Concerns with immigration and refugee asylum is the next expected complication. In the short-term, the Department of Homeland Security is prioritizing Temporary Protected Status (TPS) designations for those already in the U.S.

For the public, there are a number of actions to take to support Ukrainians. However, those wishing to help should make sure to do their research before making any donations in order to ensure the funds end up in the right hands.

How Can Members of the Public Help Ukraine?

Possible scam organizations and outreach programs are common during international crises, so it’s important to know the signs of fraudulent charities. Some best practices for providing support include:

  • Giving directly to an organization rather than through shared donation links on social media

  • Being wary of crowdfunding efforts

  • Doing a background check on an organization and its donation claims using Charity Watch, Give.org, and Charity Navigator.

Some examples of charitable organizations focused on Ukraine relief include:

Informational resources for those affected are provided below:

Conclusion

Law firms and the public alike have stepped up to offer assistance and financial help to those most affected by the Russian invasion. Law firms cutting ties with Russian businesses and closing offices in Russia shows that the legal industry is standing behind Ukraine as the conflict continues to escalate.

In upcoming coverage, the National Law Review will be writing about how law firms are helping clients handle Russian sanctions, as well as the immigration implications of refugees displaced by the war in Ukraine.

*The quotes and input of interviewees reflect the latest information on the Russian invasion of Ukraine as of March 7, 2022. Readers can find the latest legal news from around the world on The National Law Review’s Global Law page.*

Article By Chandler Ford, Jessica Scheck, and Rachel Popa of the The National Law Review / The National Law Forum LLC

Copyright ©2022 National Law Forum, LLC

New, Immigration-Friendly Mission Statement for USCIS

USCIS has changed its mission statement again – this time to adopt a more immigration-friendly stance.

In 2018, USCIS, under the Trump Administration, changed its mission statement to align with President Donald Trump’s focus on enforcement, strict scrutiny, and extreme vetting. The statement did not emphasize customer satisfaction, i.e., the satisfaction of petitioners, applicants, and beneficiaries. The change in emphasis was stark and did not go unnoticed. Instead, the mission statement focused on protecting and serving the American people and ensuring that benefits were not provided to those who did not qualify or those who “would do us harm ….” The 2018 statement did not speak of the United States as a “nation of migrants” and it focused on efficiency while “protecting Americans, securing the homeland, and honoring our values.”

The new 2022 USCIS mission statement reflects President Joe Biden’s belief that “new Americans fuel our economy as innovators and job creators, working in every American industry, and contributing to our arts, culture, and government.” Accordingly, he has issued executive orders directing the various immigration agencies to reduce unnecessary barriers to immigration. The 2022 mission statement also reflects President Biden’s directions and USCIS Director Ur M. Jaddou’s “vision for an inclusive and accessible agency.” Director Jaddou “is committed to ensuring that the immigration system . . . is accessible and humane . . . [serving] the public with respect and fairness, and lead with integrity to reflect America’s promise as a nation of welcome and possibility today and for generations to come.”

According to Director Jaddou, USCIS will strive to achieve the core values of treating applicants with integrity, dignity, and respect and using innovation to provide world-class service while vigilantly strengthening and enhancing security. On February 3, 2022, Director Jaddou, along with her deputies, briefed the nation on the agency’s efforts to improve service at USCIS. The leaders of the agency made clear that USCIS knows it must continue to eliminate backlogs, cut processing times, reduce unneeded Requests for Evidence and interviews, eliminate inequities in processing times across service centers and improve the contact center, among other things, to achieve its goals. Using streamlining and technological innovation, USCIS hopes to make itself much more consumer-oriented.

Article By Forrest G. Read IV of Jackson Lewis P.C.

For more immigration legal news, click here to visit the National Law Review.

Jackson Lewis P.C. © 2022

FBI and DHS Warn of Russian Cyberattacks Against Critical Infrastructure

U.S. officials this week warned government agencies, cybersecurity personnel, and operators of critical infrastructure that Russia might launch cyber-attacks against Ukrainian and U.S. networks at the same time it launches its military offensive against Ukraine.

The FBI and the Department of Homeland Security (DHS) warned law enforcement, military personnel, and operators of critical infrastructure to be vigilant in searching for Russian activity on their networks and to report any suspicious activity, as they are seeing an increase in Russian scanning of U.S. networks. U.S. officials are also seeing increased disinformation and misinformation generated by Russia about Ukraine.

The FBI and DHS urged timely patching of systems and reporting of any Russian activity on networks, so U.S. officials can assess the threat, assist with a response, and prevent further activity.

For more information on cyber incident reporting, click here.

Even though a war may be starting halfway across the world, Russia’s cyber capabilities are global. Russia has the capability to bring us all into its war by attacking U.S. government agencies and companies. We are all an important part of preventing attacks and assisting others from becoming a victim of Russia’s attacks. Closely watch your network for any suspicious activity and report it, no matter how small you think it is.

Article By Linn F. Freedman of Robinson & Cole LLP

For more cybersecurity legal news, click here to visit the National Law Review. 

Copyright © 2022 Robinson & Cole LLP. All rights reserved.

China’s Supreme People’s Court Rules No Accounting for Profit for Joint Patent Ownership

In decision no. （2020）最高法知民终954号 dated November 25, 2021, China’s Supreme People’s Court ruled that if the co-owners of a patent or patent application right do not make an agreement on the exercise of the right and one of the co-owners independently practices the patent,  the other co-owner cannot claim the distribution of the proceeds from the separate practicing of the patent on the grounds of co-ownership of the patent right.

 

 

 

 

 

The appellant, the First Affiliated Hospital of Wenzhou Medical University 温州医科大学附属第一医院 (hereinafter referred to as Wenzhou Hospital) and the appellee Shenzhen Huilistong Information Technology Co., Ltd. 深圳市汇利斯通信息技术有限公司 (hereinafter referred to as Huilistong Company) were involved in a patent infringement litigation for CN Patent No. ZL 201210235924.0 entitled “a self-service terminal used in the lobby of a hospital.”

Wenzhou Hospital asserted that it co-owns the involved patent with Huilistong. Without its permission, Huilistong Company violated the rights of Wenzhou Hospital by practicing the patent involved in the case, and requested an order for Huilistong Company to stop the infringement and destroy inventory of infringing products and compensate Wenzhou Hospital for economic losses of 2.5098 million RMB and reasonable expenses for rights protection of 116,400 RMB.

The Shenzhen Intermediate People’s Court of Guangdong Province held that Huilistong Company could independently practice the patent involved in the case in accordance with the law, which does not constitute an infringement of the patent right of Wenzhou Hospital.

Wenzhou Hospital appealed to the Supreme People’s Court. The Supreme People’s Court made a determination on the issue of “allocation of royalties,” and on September 24, 2020, it rejected the appeal and upheld the original judgment.

The Supreme People’s Court explained that Article 15 of the Patent Law stipulates that if the co-owners of the patent right have an agreement on the exercise of the right, such agreement shall prevail. If there is no agreement, the co-owners may practice the patent alone or permit others to implement the patent by way of ordinary licensing; if the patent is permitted to be practiced by others, the royalties collected shall be distributed among the co-owners.

Except for the circumstances specified in the preceding paragraph, the exercise of joint patent application rights or patent rights shall obtain the consent of all co-owners.

Therefore, without the consent of the co-owner of the patent, the co-owner of a patent may directly obtain economic benefits through the co-owned patent in two ways: first, to separately practice the co-owned patent, and second, to license others to exploit the patent in the way of ordinary license, and only in the latter circumstance may there be a requirement for distributing the profits to the co-owners, but under the circumstance of independent exploitation, there is no such requirement.

In this case, Wenzhou Hospital claimed that some of the self-service registration integrated machines involved in this case were marked with such words as the joint research and development by Huilistong Company and the hospital involved in this case. However, this does not prove that Huilistong Company licensed the hospital involved in this case to use the patent involved, and there was no evidence in this case that the hospital involved in this case paid any patent licensing fee to Huilistong Company.

Therefore, the claim of Wenzhou Hospital for sharing the economic proceeds obtained by Huilistong Company from the exploitation of the patent at issue was not valid.

Wenzhou Hospital separately claimed that, according to the provisions of the civil law on the sharing of proceeds by the co-owners with respect to the co-owned property, Wenzhou Hospital also had the right to share the economic proceeds obtained by Huillistong Company from the implementation of the patent in question.

In response, the Supreme People’s Court held that, although Article 78 (2) of the General Principles of the Civil Law of the People’s Republic of China provides that “a co-owner enjoys the rights and assumes the obligations over the co-owned property,” this provision is a general provision on the co-owned property, and the aforesaid provision of the Patent Law falls under the special provisions on the distribution mechanism of the rights and interests of all co-owners under the circumstance of co-ownership of patents, and the special provisions of the Patent Law shall prevail.

Therefore, the Supreme People’s Court ruled for Huilistong Company.

The full text of the decision is available here (Chinese only).

© 2021 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

International Air Travelers Entering the United States Must Have a Negative COVID-19 Test

Effective Jan. 26, 2021, all air passengers traveling to the United States will be required to get a viral test for current infection within the three days before their flight to the U.S. is scheduled to depart, and provide written documentation of their laboratory test results (paper or electronic copy) to the airline. In lieu of a negative test result in that timeframe, the passenger may provide documentation of having recovered from COVID-19 in the past three months and proof of having been cleared for travel by a licensed health care provider or health official.

How Will This Rule Be Enforced?

Airlines will be required to confirm the negative test result for all passengers (or documentation of recovery from COVID-19) before they board. Therefore, if a passenger cannot provide documentation of a negative test or recovery, or chooses not to take a test, the airline is required to deny boarding to the passenger.

A negative test result must be provided to the airline in order to return by air travel to the United States. All travelers must plan to allow for testing and receipt of laboratory test results when planning return travel to the United States.

Travelers may also be required to produce written documentation (either paper or electronic copy) of their test results upon request to any U.S. government official or a cooperating state or local public health authority.

Who Does the Testing Requirement Pertain To?

The testing requirement applies to all air travelers bound for the U.S., including U.S. citizens and is required for all airline passengers ages two and older. Even those individuals who already have received the COVID-19 vaccine must provide evidence of a negative COVID-19 test for travel.

NOTE: The rule does not apply to passengers on flights from the U.S. Virgin Islands and Puerto Rico, since those are U.S. territories.

Which Type of Test Do I Need?

Passengers will need to provide results from an antigen test or PCR (viral antigen or nucleic acid

amplification test). Antibody test results will not be accepted, because the test results must rule out current COVID-19 infection.

For those individuals who have recovered from COVID-19, they can provide documentation of having recovered from COVID-19 in the past three months (they can bring evidence of their previous positive test result, with proof that they have been cleared for travel by a licensed health care provider or health official).

Where Can I Get Tested in a Foreign Country?

Look for guidance from airlines, hotels, tourism bureaus and health care providers when booking travel.  Many countries post their current COVID-19 protocols and guidance for international travelers needing to be tested, as well.

How Long Will This Rule Be In Effect?

The rule is in place indefinitely, and likely will remain in place until the coronavirus surge has subsided or other controls are in place.

Additional CDC Recommendations

As always, the CDC also continues to advise travelers to also get tested again three to five days after arrival in the U.S. and to stay at home for seven days post-travel to help slow the spread of COVID-19 within U.S. communities.

© 2020 Dinsmore & Shohl LLP. All rights reserved.
For more, visit the National Law Review Coronavirus News section.

Ongoing Challenges for Fashion Brands in Germany – Legal Issues with Style Names Revisited

Using first names as style names to assist consumers in distinguishing between certain items, styles or washes within a collection is a widespread practice in the fashion industry. Compared to numerical identifiers, names may trigger emotions and are much easier to remember. Style names may be used in manifold ways, e.g. on labels sewn in the inside of garments, hangtags and boxes or in advertising material such as catalogues and offers on the internet. What many companies do not realize is that the use of style names involves legal risks. Many names are already registered as trademarks, which may give rise to trademark conflicts.

Germany has become a popular venue for disputes involving style names in recent years. Only comparatively few claims are raised by actual competitors, though. Rather, there are trade mark owners trying to benefit from the peculiarities of German civil procedure and trade mark law by monitoring the market for possibly infringing style names in order to collect legal fees and damages. In many cases, such claimants will threaten to sue other companies in the distribution chain, including retailers, in order to put pressure on the fashion company to settle regardless of the merits.

In this blog post, we would like to raise awareness for the legal issues involved with style names in Germany and address ways how best to deal with them.

Trade Mark Infringing Use or Mere Model Designation?

According to European case law, the owner of a trade mark may oppose the use of a sign identical with the trade mark for goods identical with those for which the trade mark is registered only if such use is liable to adversely affect one of the functions of the trade mark, in particular its essential function of guaranteeing to consumers the origin of the goods.

Whether a style name is perceived by consumers as enabling them to distinguish that product from those of a different origin, rather than being used as a reference to differentiate between a fashion company’s own styles, may give rise to considerable debate. In fact, many style names have over time become renowned brands – such as Gucci’s “Jackie” or Mulberry’s “Alexa”. Correspondingly, the case law of the German instance courts on whether the use of a sign as a style name constitutes trade mark infringing use has not been uniform. As German law allows for forum shopping, trade mark owners would usually seek the assistance of the courts in Hamburg and Frankfurt, which regularly assumed that style names are understood by the relevant public as an indication of origin and thus as (secondary) trade marks.

Notably, cease and desist letters are often sent by companies which do not manufacture or supply clothing or accessories, or at the very least are not known for this, but rather hold trade marks and engage in enforcing their rights to collect attorney fees and damages. Such right holders will usually not let a party “off the hook,” unless it issues a formal cease and desist declaration (with a contractual penalty clause, as is common practice under German law) and makes a payment to settle the case amicably. To increase pressure, these claimants will threaten to interfere with the fashion company’s distribution system by sending warning letters and/or suing commercial customers.

Guidelines by the German Federal Court of Justice

As at least some courts took an extremely right-holder-friendly approach, such cases were until recently hard to defend. Prospects of defense have improved, however, thanks to the judgments of the German Federal Court of Justice in “SAM”[1] and “MO”[2].

In these decisions, the Federal Court of Justice clarified that the use of a distinctive and non-descriptive sign as a style name does not in itself allow the conclusion that the sign is used as a trade mark. The fact that the style name is perceived as an indication of origin must be positively determined every single time. On that basis, the Court established some general guidelines for assessing whether a style name is used as a trade mark in an individual case:

  • First names used by several manufacturers as style names or particularly common first names – As followed from the Court’s previous case law[3], such names may be understood by the public as mere model designations. It could not be concluded from this, however, that less common first names are always understood as an indication of origin.
  • Directly affixed to the product – The public will typically see an indication of origin when a sign is directly affixed to the product, e.g. on a label sewn in the inside of the waistband or on a leather piece attached on the outside of the waistband.
  • Use on hangtags – The printing of a style name on hangtags attached to the garment could also be understood as an indication of origin under the circumstances.
  • Use in sales offers, e.g. in catalogues or on the internet – If the sign is used in a sales offer, e.g. in a catalog or on the internet, the offer as a whole and the character of the sign must be considered. If it can be assumed that the style name is well known, there is a strong argument in favor of using it as a trade mark, regardless of the further circumstances. Even if the style name is not known, use as a trade mark can be assumed, in particular if the style name is used in direct connection with the manufacturer’s or umbrella brand. In addition, an eye-catching emphasis speaks for use as a trade mark.

Comments

As usual, the devil is in the detail. Whilst it is relatively clear that use of a style name on the product can often be assumed as trade mark use, recent decisions by the courts[4] illustrate that in advertising every single detail of the offer has to be taken into consideration. This includes the overall layout of the offer and the relationship of the sign in suit to the manufacturer’s or umbrella brand and further article designations such as price, size, product description and delivery modalities. Nevertheless, the guidelines developed by the German Federal Court of Justice open up considerable room for argument.

As far as preventive measures are concerned, for fashion companies using hundreds or even thousands of style names, worldwide trade mark clearance is not always an option in view of the considerable costs involved. As soon as it crystallizes that a style name may become important for the company’s business, it is worth protecting it by trade mark registrations. In addition, compliance with a few simple rules when using style names based on the German Federal Court of Justice’s guidelines can minimize the risk of objections significantly.

[1] BGH, judgment of 7 March 2019, case I ZR 195/17 – SAM.

[2] BGH, judgment of 11 April 2019, case I ZR 108/18 – MO.

[3] Cf. BGH, judgment of 19 December 1960, case I ZR 39/59 – Tosca; BGH, judgment of 20 March 1970, case I ZR 7/69 – Felina-Britta; BGH, judgment of 26 November 1987, case I ZR 123/85 – Gaby.

[4] See, for example, Frankfurt Court of Appeals, judgment of 13 August 2020, case 6 U 94/17 – MO; Frankfurt Court of Appeals, judgment of 1 October 2019, case 6 U 111/16 – SAM; Hamburg Court of Appeals, judgment of 28 November 2019, case 5 U 65/18 – Rock Isha; Hamburg Court of Appeals, judgment of 19 December 2019, case 3 U 191/18 – MYMMO MINI.

© Copyright 2020 Squire Patton Boggs (US) LLP
For more articles on intellectual property, visit the National Law Review intellectual property law section.

The Naked Truth About Trademark Cancellation: Only Harm, No Proprietary Interest Required

The US Court of Appeals for the Federal Circuit determined that a contracting party that contractually abandoned any proprietary interest in a mark may still bring a cancellation action if it can “demonstrate a real interest in the proceeding and a reasonable belief of damage.” Australian Therapeutic Supplies Pty. Ltd. v. Naked TM, LLC, Case No. 19-1567 (Fed. Cir. July 24, 2020) (Reyna, J.) (Wallach, J., dissenting).

Australian sold condoms with the marks NAKED and NAKED CONDOMS, first in Australia in early 2000, then in the United States in 2003. Two years later, Australian learned that Naked TM’s predecessor had registered a trademark NAKED for condoms in September 2003. Australian and Naked TM communicated by email regarding use of the mark for a few years. Naked TM contended that the parties reached an agreement; Australian disagreed and said no final terms were agreed upon. Australian filed a petition to cancel the NAKED trademark registration. Ultimately, and after trial, the Trademark Trial and Appeal Board (TTAB) concluded that Australian lacked standing because it had reached an informal agreement that Naked TM reasonably believed was an abandonment of any right to contest Naked TM’s registration of NAKED. Thus, the TTAB found that Australian lacked a real interest in the proceeding because it lacked a proprietary interest in the challenged mark. Australian appealed.

The Federal Circuit reversed. First, the Court clarified that the proper inquiry was a matter of proving an element of the cause of action under 15 USC § 1064 rather than standing. The Court explained that, contrary to the TTAB’s conclusion, “[n]either § 1064 nor [its] precedent requires that a petitioner have a proprietary right in its own mark in order to demonstrate a cause of action before the Board.” Assuming without deciding that the TTAB correctly determined that Australian had contracted away its rights, the Court found that fact irrelevant. Ultimately, even though an agreement might be a bar to showing actual damages, a petitioner need only show a belief that it has been harmed to bring a petition under § 1064.

The Federal Circuit found that Australian had a reasonable belief in its own damage and a real interest in the proceedings based on a history of two prior applications to register the mark, both of which the US Patent and Trademark Office rejected on the basis that they would have created confusion with Naked TM’s mark. The Court rejected Naked TM’s argument that Australian’s abandonment of those applications demonstrated there was no harm, instead concluding that Australian’s abandonment of its applications did not create an abandonment of its rights in the unregistered mark. Moreover, as a prophylactic rationale, the Court explained that Australian’s sales of products that might be found to have infringed the challenged registration also create a real interest and reasonable belief in harm.

Judge Wallach dissented. Although he agreed that the TTAB erred by imposing a proprietary-interest requirement to bring suit under § 1064, he disagreed that Australian properly demonstrated an alternative, legitimate interest—i.e., a belief of damage with a reasonable basis in fact. Judge Wallach would have given dispositive weight to the agreement between Australian and Naked TM in which Australian supposedly gave up any right to contest Naked TM’s rights in the mark NAKED.

Practice Note: Ultimately, although the majority and dissent disagreed about how to apply the law to the facts, Australian Therapeutic Supplies stands as a firm reminder that something less than a proprietary interest is required in order to challenge a trademark registration. How much less is a fact-specific inquiry.

© 2020 McDermott Will & Emery

For more on trademark cancellation, see the National Law Review Intellectual Property law section.