Tag: Ninth Circuit

Apple Smartwatch Antitrust Case Survives, Showing ‘Freedom of Design’ is Not Absolute

Judge Cites ‘Associated’ Anticompetitive Conduct Claims

It’s a case that challenges the limits of the “freedom of design” usually enjoyed by companies accused of product design changes alleged to harm competition. Ordinarily, a design change is not the kind of conduct that runs afoul of the antitrust laws, but on March 21, U.S. Judge Jeffrey S. White from the Northern District of California denied Apple Inc.’s motion to dismiss an antitrust case brought against it by AliveCor Inc. The suit alleges that Apple unlawfully maintained its monopoly in the market for heart rate analysis apps by updating WatchOS, the Apple Watch operating system on which AliveCor’s heart rate analysis app runs. (AliveCor, Inc. v. Apple Inc., No. 21-cv-03958-JSW, N.D. Calif.).

Heart rate analysis apps analyze the user’s heart rate in real time using a sensor close to the user’s wrist and determine whether the user’s heart rate is normal or irregular. The app runs constantly while the device is worn and alerts the user when a situation arises requiring an ECG recording and medical analysis. AliveCor also sells an electrocardiogram-capable wrist band for the Apple Watch and related WatchOS software that analyzes reading from the band. AliveCor claims that its products—the ECG-wristband hardware and software and its heart rate analysis app—“helped change the perception of the Apple Watch from an accessory to a personal health monitoring tool.”

AliveCor calls its heart rate monitoring app “SmartRhythm.” According to AliveCor, when sales of SmartRhythm took off Apple was inspired to announce an update to WatchOS with its own heart monitoring app designed to exclude AliveCor from the U.S. market for WatchOS heart rate analysis apps.

SmartRhythm works by using data from the Apple Watch’s heart rate algorithm. According to the complaint, Apple’s update to WatchOS altered the heart rate algorithm in a way that prevents third-party developers from being able to detect heart rate fluctuations and irregularities. As a result of these changes, SmartRhythm could not provide accurate heart rate analysis, and AliveCor removed it from the market.

Consequently, Apple is a monopolist in the WatchOS heart rate analysis app market, which AliveCor claims Apple is maintaining with exclusionary design changes to WatchOS, in violation of Section 2 of the Sherman Act, California’s Unfair Competition Law, and Section 17200 of California Business and Professions Code.

The court denied Apple’s motion to dismiss AliveCor’s monopolization claim in what it characterized as the “[single brand] aftermarket for WatchOS apps.” Applying the factors enumerated by the court in Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1044 (9th Cir. 2008), the court found that the WatchOS app aftermarket was wholly derivative from the primary smartwatch market, the alleged restraint applied only to the aftermarket, Apple’s aftermarket power was not obtained through contract terms reached in the primary market, and that competition in the smartwatch market does not discipline anticompetitive practices in the WatchOS app aftermarket. Accordingly, the court ruled that AliveCor’s market definition met the Newcal standards for a “single product” relevant market.

Apple argued that a company that improves a product to the benefit of consumers does not violate antitrust laws “absent some associated anticompetitive conduct,” citing the leading “freedom of design” case of Allied Orthopedic Appliances Inc. v. Tyco Health Care Group LP, 592 F.3d 991, 998-99 (9th Cir. 2010). The court quoted the holding of Allied: “If a monopolist’s design change is an improvement, it is necessarily tolerated by the antitrust laws, unless the monopolist abuses or leverages its monopoly power in some other way when introducing the product.”

Apple argued that its update to WatchOS was purely a design change that benefitted users, with no associated anticompetitive conduct. It observed that AliveCor hadn’t established that consumers use Apple’s app instead of some third-party app, or that Apple rejected any third-party apps, or that no other third-party heart apps are available to Apple Watch users. But the court rejected those arguments, noting that Apple failed to provide any legal authority that would require such allegations.

Apple ignored AliveCor’s allegations that Apple abused or leveraged its monopoly power “in some other way” by changing its heart rate algorithm to make it effectively impossible for third parties to inform a user when to take an ECG. AliveCor contended that Apple’s updated heart rate algorithm, which was pushed out to all earlier Apple Watch models, did not improve user experience. Its purpose was to prevent third parties from identifying irregular heart rates and offering competing apps based on that data. “These allegations present the type of ‘associated conduct’ that makes product design changes cognizable under antitrust law. Plaintiff’s allegations plausibly establish that Apple’s conduct was anticompetitive,” Judge White held. A case management conference set for May 20.

Commentary

It is truly difficult to see how some separate, “associated” conduct by Apple other than its design change to WatchOS violates Section 2. It seems more straightforward to consider the design change itself to be a cognizable anticompetitive act. It may be time to drop the fiction maintained in Allied v. Tyco that design changes are “never” antitrust violations unless accompanied by some “other” conduct. Here, Apple has created the market itself in the form of an OS platform used by millions of consumers who depend on it to access all manner of competing complementary products. Under those circumstances, it should be uncontroversial to hold a platform operator liable under the antitrust laws for design changes that exclude competitors or foreclose participants from the market, without indulging in the fiction of “associated” conduct.

Article By Jonathan Rubin of MoginRubin

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

© MoginRubin LLP

So You Wanna Play with Copyright? “Joyful Noise” Ostinato Isn’t Original Expression

The US Court of Appeals for the Ninth Circuit affirmed a district court’s order vacating a jury award of damages for copyright infringement and granting judgment as a matter of law, explaining that the musical work alleged to have been copied did not qualify as an original work of authorship but consisted only of “commonplace musical elements.” Marcus Gray PKA Flame et al. v. Katheryn Elizabeth Hudson PKA Katy Perry et al., Case No. 20-55401 (9th Cir. Mar. 10, 2022) (Clifton, Smith, Watford, JJ.)

Key Definitions:

  • A musical scale is a sequence of musical notes or tones by pitch.
  • A subset of seven notes is called the minor scale and can be referred to with alphabetic names (A, B, C, etc.) or scale degrees (1, 2, 3, etc.).
  • An ostinato is a repeating musical figure (for example, 3-3-3-3-2-2).

In 2007, Marcus Gray (Flame) purchased an ostinato and used it in the song “Joyful Noise.” The song was released in 2008. While “Joyful Noise” did not achieve significant commercial success or airtime, it received millions of views online. In 2013, American singer-songwriter Katy Perry created “Dark Horse,” which was a hit, resulting in her performance at the Super Bowl halftime show in 2015.

The “Joyful Noise” ostinato consists of notes, represented as 3-3-3-3-2-2-2-1 and 3-3-3-3-2-2-2-6, whereas Dark Horse’s ostinato contains 3-3-3-3-2-2-1-5. Both have a uniform rhythm and equal note duration in time.

Plaintiffs sued Perry and her co-defendants for copyright infringement. Plaintiffs presented circumstantial evidence that the defendants had a reasonable opportunity to access “Joyful Noise” and that the ostinatos in both songs were substantially similar. Plaintiffs did not present direct evidence that Perry and the others had copied elements of the song, instead relying on testimony from their expert musicologist, Dr. Todd Decker.

Decker testified that the ostinatos were similar in many aspects, but he also testified that there was no single element that caused him to believe the ostinatos at issue were “substantially similar” when viewed “in isolation.” The jury also heard testimony from Perry’s expert, who disagreed altogether that the ostinatos were substantially similar.

The jury found that the defendants had a reasonable opportunity to hear “Joyful Noise” before composing “Dark Horse,” that the two songs contained substantially similar copyrightable expression and that “Dark Horse” used protected material from “Joyful Noise.” The jury found the defendants liable for copyright infringement and awarded $2.8 million in damages. The district court vacated the award and granted judgment as a matter of law to defendants, concluding that the evidence at trial was legally insufficient to show that the “Joyful Noise” ostinato was a copyrightable original expression. The plaintiffs appealed.

The Ninth Circuit explained that because the plaintiffs did not present any direct evidence that the defendants copied the “Joyful Noise” ostinato, they were required to show that the defendants had access to the work and that the ostinatos were substantially similar.

The Ninth Circuit began with its analysis of the “substantially similar” prong, employing a two-part test having “extrinsic” and “intrinsic” components. The Court noted that while it must refrain from usurping the jury’s traditional role of evaluating witness credibility and weighing the evidence, the extrinsic test requires that the Court ensure that the evidence of objective similarities between two works is legally sufficient to serve as the basis of a copyright infringement claim, regardless of the jury’s views. The Court explained that the substantial similarity test focuses on the protectable elements standing alone and disregards non-protectable elements.

To be a protectable element under copyright law, the “Joyful Noise” ostinato had to qualify as “original expression.” Based on the trial record, the Ninth Circuit found that the “Joyful Noise” ostinato consisted entirely of commonplace musical elements, and that the similarities between the two ostinatos did not arise out of an original combination of these elements. Without original expression, no element identified by Flame was individually copyrightable. For example, the Court noted that “the fact that Joyful Noise and Dark Horse both make use of sequences of eight notes played in an even rhythm is a trite musical choice outside the protection of copyright law.”

Finding the evidence presented at trial legally insufficient to establish that the musical elements were individually copyrightable, the Ninth Circuit determined that the jury’s verdict finding defendants liable for copyright infringement was unsupported by substantial evidence. Thus, the Court affirmed the trial court’s grant of judgment as a matter of law.

Article By Jodi Benassi of McDermott Will & Emery

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

© 2022 McDermott Will & Emery

What You Don’t Know Can’t Hurt You: SCOTUS Rules Inadvertent Legal Errors Cannot Overturn Copyright Infringement Decisions

“No harm, no foul.” That was the message the U.S. Supreme Court delivered Feb. 24 in ruling that a copyright infringement verdict should not have been overturned because of inaccurate information in the copyright registration asserted. The Court’s 6-3 opinion vacates a Ninth Circuit decision that threw out an infringement verdict on the ground that the registrant should have known the law regarding filing multiple works within one registration, a practice referred to as group registrations.

In Unicolors Inc. v. H&M Hennes & Mauritz LP, a jury found that Unicolors’ fabric pattern copyrights were violated and the district court entered judgment for H&M to pay nearly $800,000 for selling jackets that infringed on Unicolors’ copyrights.  H&M moved for judgment as a matter of law that Unicolor’s copyright registration was invalid because for group registrations, all works in the applications must be published “in the same unit of publication.”  Unicolor released some of the garments containing the protected patterns to private customers, and released the others to the public at a different time.  Thus, the asserted registration did not technically satisfy the requirements.  The district court denied H&M’s motion and found that safe harbor provision of the Copyright Act allows for innocent mistakes of fact and law.  In this case, Unicolor was not aware that all works in a group registration had to be published “in the same unit of publication.”

The Ninth Circuit overturned this ruling, siding with H&M that Unicolors’ copyright registration was invalid because of legal errors in the application, saying a safe harbor provision for copyright registration errors only applies to factual mistakes, not unintentionally misreading the law. Justice Stephen Breyer, writing for the majority, pushed back on this idea:

“In our view, however, §411(b) does not distinguish between a mistake of law and a mistake of fact. Lack of knowledge of either fact or law can excuse an inaccuracy in a copyright registration,” he wrote.

Justice Breyer also noted that many copyright applicants are often “novelists, poets, painters, designers, and others without legal training” and said Congress never intended to make it more difficult for those non-attorneys to successfully apply for a copyright. “Given this history, it would make no sense if §411(b) left copyright registrations exposed to invalidation based on applicants’ good-faith misunderstandings of the details of copyright law,” he said.

The Supreme Court’s decision is s a victory for creators’ rights and provides some peace of mind for those creators filing copyright applications without the assistance of an attorney.  However, this decision will focus discovery on whether any errors in a registration—be them factual or legal—were made “with knowledge that [the error] was inaccurate.”

Copyright © 2022 Womble Bond Dickinson (US) LLP All Rights Reserved.
For more articles about the U.S. Supreme Court, visit the NLR Litigation section.

Cannabis and District Courts: Are Those Courthouse Doors Closed Too?

We have written many times over the past few years about how the bankruptcy courts are off-limits to state-legalized cannabis businesses.  This past year brought no new relief to the cannabis industry, and the doors to the bankruptcy courts remain shut.  Are the other federal courts off-limits as well?  A recent district court decision from the Southern District of California sheds some light on this issue, and indicates that the district courts are at least partially open to participants in legal cannabis businesses.

Factual Background

The facts of Indian Hills Holdings, LLC v. Frye are relatively straightforward.  Plaintiff Indian Hills Holdings (“IHH”), Construction & Design Professional Corp. (“CDP”) and its principal Christopher Frye (“Frye” and, together with CDP, the “Defendants”) entered into a contract whereby IHH paid Defendants to purchase Cultivation “Adult” Extreme Cubes (the “Cubes”).  Defendants in turn contracted with ICT Centurion Investments, LLC (“ICT”) to purchase the Cubes.   The Cubes were marketed as a “fully integrated growing container system” used in indoor cannabis cultivation.  When ICT sold the Cubes to another party, Defendants were unable to deliver the Cubes to IHH.  Defendants refused to return the money, and IHH sued, asserting breach of contract, unjust enrichment and fraud claims.

A default judgment was entered against CDP for failing to respond to IHH’s complaint.  Frye, however, filed a motion to dismiss the complaint, arguing in part that IHH did not have standing to bring its claims.  Noting that Frye only “cursorily” raised the standing issue and that the “issue is a complex one”, the court reframed Frye’s argument as follows:

  • The contract is illegal under the Controlled Substances Act, 21 U.S.C. §§ 801, et seq.(the “CSA”);
  • Federal district courts will not enforce contracts that violate federal law;
  • Because federal district courts will not enforce contracts that violate federal law, IHH lacks an “actionable injury”; and
  • Because IHH lacks an actionable injury, the district court does not have subject matter jurisdiction.

Legal Analysis

The court began its analysis by considering whether the parties’ contract violated the CSA.  Section 863(a) of the CSA makes it unlawful to sell or offer for sale “drug paraphernalia,” which is defined to include “any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing … a controlled substance.”  Because the Cubes are used to grow cannabis, and because cannabis is a controlled substance, the sale of the Cubes would seemingly violate section 863(a) of the CSA.  However, the CSA contains an exemption, whereby section 863 does not apply to any person authorized by state law to manufacture, possess or distribute drug paraphernalia.  California allows the manufacturing of drug paraphernalia, which would include the Cubes.  As a result, the court wrote that the contract “may fall within the CSA exemption.” Additionally, the court noted that the U.S. Department of Justice has declined to enforce the CSA’s prohibition on the sale of marijuana when the marijuana is bought or sold in accordance with state law.  For these reasons, the court concluded that enforcing the parties’ contract would likely neither violate the CSA nor public policy.

While the contract may be legal, the court still had to consider whether assuming jurisdiction over the dispute would result in a violation of federal law.  After all, federal courts will not assume jurisdiction over a dispute where the court will be required to order a legal violation.  The question therefore became whether a plausible remedy existed for IHH that would not require the court to order such a legal violation.   The court held that it could fashion a remedy without violating the law by simply awarding IHH monetary damages.  A judgment for money damages, unlike an award of specific performance, would not result in IHH obtaining the Cubes and growing cannabis.  Instead, the result would be a return of the monies paid by IHH to Defendants for the Cubes.  The court’s ruling was consistent with prior cases involving state-legalized cannabis business, where the courts found ways to provide relief without violating the CSA.  E.g., Polk v. Gontmakher, 2021 U.S. Dist. LEXIS 53569 (W.D. Wash. Mar. 22, 2021) (noting that “recent case law involving cannabis-related business contracts does not espouse an absolute bar to the enforcement of such contracts”); Mann v. Gullickson, 2016 U.S. Dist. LEXIS 152125 (N.D. Cal. Nov. 2, 2016) (court may consider breach of contract claim arising from sale of cannabis business when “it is possible for the court to enforce [the] contract in a way that does not require illegal conduct”).

Takeaways

As the legalized cannabis industry continues to grow and develop, market participants will undoubtedly need access to courts.  The bankruptcy courts remain off-limit, thus requiring distressed cannabis businesses and their creditors to turn to state-law insolvency proceedings (e.g., assignments for the benefit of creditors; receiverships).  To those in the industry, it may be a welcome relief to know that at least some federal district courts have made themselves available to these parties and that these courts thus far have shown a willingness to adjudicate disputes arising from the cannabis industry.  However, any party seeking their day in federal court needs to ensure that they are not asking the court to grant relief that would violate federal law, including the CSA.  This means that while money damages should be available, specific performance of the contract is likely off the table.

Article By Mark A. Salzberg of Squire Patton Boggs (US) LLP

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

© Copyright 2022 Squire Patton Boggs (US) LLP

EPA’s Stormwater General Permit is Safe. Does it Matter?

A Colorado-based NGO has dropped its 9th Circuit lawsuit challenging EPA’s Multi-Sector General Permit for stormwater discharges associated with industrial facilities.

On one hand, this is a victory for EPA which apparently offered nothing to settle the case before the NGO threw up its hands.

On the other hand, the General Permit is only applicable in Massachusetts, New Hampshire and New Mexico, the three states that have not been delegated the authority to issue such a permit (as well as tribal lands and other lands not subject to state jurisdiction).

Why did the NGO bring this suit to begin with?  Did it hope that the Biden Administration EPA would, when push came to shove, do something dramatically different than the Trump Administration EPA?

Whatever the reason, the NGO has apparently concluded that the current law and permit give it plenty of grounds to bring suits over stormwater discharges in the 9th Circuit and elsewhere.  There are already several such imaginative suits pending on the west coast.

Are the regulators in Massachusetts less able to issue and enforce stormwater permits than than their colleagues in 47 other states?  The answer is of course not.  They are completely able and more able than most.  And they already have authority under state laws and regulations that are broader in their reach than the federal law.

But the Massachusetts legislature has stood in the way, apparently because it doesn’t want to bear the costs of regulating in this area borne by 47 other states.  Uncertainty and the threat, if not the actuality, of litigation has been the unfortunate result of this dereliction for the regulated community, including the municipalities in which we live.

We deserve better.

“The Center for Biological Diversity (CBD) is dropping its legal challenge to EPA’s industrial stormwater general permit that sought stricter regulation of plastics pollution after settlement discussions were unfruitful, according to an attorney familiar with the litigation.“

Article By Jeffrey R. Porter of Mintz

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

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

9th Cir. Upholds Antitrust Jury Verdict Against Chinese Telescope Company [PODCAST]

Court affirms evidentiary rulings on market definition and overcharges. Agrees evidence supported verdict for collusion and attempted monopolization.

The Ninth Circuit Court of Appeals this month upheld judgment in favor of Optronic Technologies, Inc., finding there was sufficient evidence that Chinese telescope manufacturer, Ningbo Sunny Electronic (“Sunny”), conspired with a competitor in the U.S. consumer telescope market to allocate customers, fix prices, and monopolize the telescope market in violation of federal antitrust laws (Optronic Technologies, Inc., v. Ningbo Sunny Electronic Co., Ltd., No. 20-15837, 9th Cir. 2021). Ninth Circuit Judge Ronald M. Gould wrote the opinion.

California-based Optronic, known commercially as Orion Telescopes & Binoculars, sued Sunny in November 2014. Orion alleged Sunny violated Sherman Act Sections 1 and 2 by conspiring to allocate customers in the telescope market and conspiring to fix prices or credit terms for Optronics in collusion with Suzhou Synta Optical Technology. Orion further alleged Sunny’s 2014 acquisition of independent manufacturer, Meade, violated Section 7 of the Clayton Act. Orion alleged that Sunny engaged in these anticompetitive acts to force Orion out and further monopolize the telescope market.

A California jury found in favor of Orion on all counts and awarded the company $16.8 million in damages, which the district court trebled to $50.4 million. The district court also ordered injunctive relief, directing Sunny to supply Orion and Synta’s Meade on non-discriminatory terms for five years, and not to communicate with Synta about competitively sensitive information.

Rulings on key elements of plaintiff’s economic evidence affirmed.

Sunny appealed on several grounds, including two that challenged key elements of the plaintiff’s expert economic evidence. The jury had found Sunny liable for attempted monopolization and conspiracy to monopolize in violation of Section 2, which makes it unlawful for any person to monopolize or attempt or conspire to monopolize any relevant market. Sunny argued on appeal that the evidence could not support a Section 2 verdict because Orion’s economist failed to define a relevant market. In particular, Sunny claimed the expert did not examine the cross-elasticity between substitute products in the market or perform a SSNIP test, the standard analysis used to delineate the outer boundaries of a relevant market.

The appeals court found these contentions lacked merit. The plaintiff’s economist had testified that the relevant product market was the market for telescope manufacturing services. The purpose of the SSNIP test is to determine whether the relevant market is drawn too narrowly and should be expanded to include potential substitutes. But because no other manufacturing capacity can substitute for telescope manufacturing services, wholesale purchasers of telescopes cannot turn to other manufacturers to fulfill orders. Without substitutable manufacturers, a SSNIP test boils down to whether new manufacturers would enter the market fast enough to make an increase in price unprofitable for a hypothetical monopolist, which they could not. As a result, the court held that the economist reasonably could forgo performing a SSNIP analysis.

Sunny also challenged the economist’s estimate of anticompetitive overcharges that could not directly be observed. Neither the “benchmark” nor “before-and-after” estimation methods were available. Therefore, to develop a measure of damages, the plaintiff’s expert presented two different methods of estimating the overcharges. In the first method, the expert collected data on cartel overcharges from the economic literature on markets with structures and conditions similar to telescope manufacturing. The average of those overcharges was then used as an estimate of the overcharge resulting from defendants’ collusion. As a check on this estimate, the economist also submitted a theoretical Cournot equilibrium model of market prices based on assumptions drawn from the record in the case. The two methods yielded similar and consistent results. Affirming the admissibility of the expert’s damages estimates, the appellate court found the expert’s report and testimony “were sufficiently tied to the facts of this case such that the district court properly admitted this evidence.”

In rebuttal, the defendant’s economist testified to the high sensitivity of the assumptions used in the plaintiff’s theoretical model. Interestingly, defendants were not permitted to submit their own estimate of damages for the first time on rebuttal, so the defendants’ expert had to limit her testimony to the sensitivity of the model without the ability to show the jury any resulting alternative estimate of the anticompetitive overcharge. The appeals court affirmed the trial court’s limitation on the defendants’ rebuttal expert.

Price fixing and a larger scheme.

Sunny also argued that Orion failed to present sufficient evidence to support Orion’s Section 1 claims. Section 1 prohibits unreasonable restraints of trade. Horizontal price fixing and market allocation are per se unreasonable and support Section 1 liability without regard to any purported justification or defense. The Ninth Circuit noted that Orion offered evidence that Synta executives encouraged Sunny’s purchase of Meade, an acquisition that was part of a larger scheme by Sunny and Synta to jointly control the telescope manufacturing market, even though federal regulators had already prohibited such a combination. The court also declined to upset the jury’s finding that Sunny conspired with a Synta subsidiary to fix prices and credit terms to Orion, a per se violation of Section 1.

“If you break it, you buy it.”

Finally, it is notable that the appellate court affirmed the award of damages accruing after September 2016, when the defendant and Synta took their last steps to eliminate Meade, and Synta entered a Settlement and Supply Agreement with Orion. The court held that, even if the conspiratorial acts of Sunny and Synta ended in 2016, Orion could still recover post-2016 damages “because it continued to suffer economic harm from the harm to competition caused by the illegal concerted activity.” Thus, where collusion causes a durable change in market structure or sets the pattern of a continuing collusive practice, it is no defense that the conspirators may have ceased engaging in concerted action.

The rule adopted by the Ninth Circuit in Optronics is clear: “[W]here an antitrust plaintiff suffers continuing antitrust injuries from anticompetitive changes to market structure that arose from a proven antitrust violation, we hold that the violation may be a material cause of that injury, and so recovery of damages is permitted, even after the last proven date of the violative conduct. This rule accords with the common-sense principle that ‘if you break it, you buy it.’”

Welcomed clarity.

The Ninth Circuit’s opinion brings welcomed clarity on several points. It demonstrated that plaintiffs need not perform a SSNIP test where market-specific circumstances define a market’s outer boundary. For claimants facing the need to estimate unobservable anticompetitive overcharges, it affirms an ingenious method for arriving at a reasonable and reliable estimate. And, for past conspiracies with continuing anticompetitive effects, the decision announces the common-sense principle that a defendant “remains liable for the continuing injuries suffered by plaintiffs from the structural harm to competition that its unlawful scheme brought about.” Put simply, this is a well-articulated decision by a capable panel that adds precision and certainty to antitrust.

Edited by Tom Hagy for MoginRubin LLP

© MoginRubin LLP

For more articles on 9th Circuit decisions, visit the NLR Litigation section.

Ninth Circuit Rejects Ex-Tinder Employee’s Attempt to Avoid Arbitration

The Ninth Circuit Court of Appeals has ruled that an ex-Tinder employee must arbitrate her claims against her former employer and cannot pursue her claims in court, even though her claims arose before she executed an arbitration agreement. In reaching this decision, the Ninth Circuit not only enforced the broad language of the parties’ arbitration agreement, but also held that a unilateral modification clause (granting the employer the right to make changes to the agreement) does not, in and of itself, render an arbitration agreement unenforceable. Elizabeth Sanfilippo v. Match Group LLC et al., Case No. 20-55819, 2021 U.S. App. Lexis 29263 (9th Cir. Sept. 28, 2021).

In this case, the chronology of events is important to understanding how this lawsuit arose.  In September 2016, Tinder hired the plaintiff as a brand manager.  According to the plaintiff, in mid-2017 and January 2018, she complained to human resources about sexual harassment by her coworkers and supervisors. During that same time period, in July 2017, Tinder was acquired by Match Group, Inc. After acquiring Tinder, Match Group sent its employees a mandatory arbitration agreement. The plaintiff signed the agreement and continued to work for Match Group until Match Group discharged her in March 2018. The plaintiff sued in California state court for sexual harassment and retaliation.  The case was removed to federal court at which point Match Group successfully moved to compel arbitration. The plaintiff appealed, arguing that the arbitration agreement (1) is unenforceable, and (2) does not cover her claims, which predated the agreement.

On appeal, the Ninth Circuit held the arbitration agreement was enforceable and applicable to the plaintiff’s sexual harassment allegations, even though the plaintiff did not sign the agreement until after her claims arose. In ruling for Match Group, the court highlighted the broad nature of the arbitration agreement’s language that required arbitration for “all claims and controversies arising from or in connection with [the plaintiff’s] application with, employment with, or termination from the Company.” In enforcing the agreement, the court noted that the agreement’s reference to “all claims and controversies” arising out of the plaintiff’s employment necessarily included her claims that predated the arbitration agreement.

Moreover, the Ninth Circuit was not swayed by the fact that the arbitration agreement included a provision that allowed Match Group to modify the terms of the agreement unilaterally. While the court recognized that such a provision could be substantively unconscionable, it explicitly discussed how Match Group had not actually modified the agreement but was rather seeking to enforce the agreement as written. But the court went even further in enforcing the agreement. In addition to upholding the agreement, the Ninth Circuit determined that even if it assumed that a provision permitting unilateral modifications by the employer is substantively unconscionable, such a provision alone does not render the entire agreement unenforceable. Therefore, even taking the plaintiff’s argument as true, the agreement, as a whole, was still enforceable.

The Ninth Circuit’s decision is encouraging for employers seeking to enforce their arbitration agreements for a few reasons. First, the court made clear that a unilateral modification clause will not, in of itself, render the agreement unenforceable. Second, the court  enforced the broad language in the employer’s arbitration agreement and compelled arbitration of claims that pre-date the execution of the agreement.

Co-authored by Spencer Ladd.

Jackson Lewis P.C. © 2021

Iced Out: Use of Ice Cube’s Image and Catchphrase Was Not Endorsement

Rapper and actor O’Shea Jackson, professionally known as Ice Cube, lost his day in court (for now) on claims of false endorsement against trading platform Robinhood because he failed to plausibly allege that Robinhood’s use of his image and catchphrase implied endorsement.  Robinhood had published a newsletter on its website “Robinhood Snacks” which featured an article discussing market corrections for technology stocks with an alteration of Ice Cube’s lyric and catchphrase “Check yo self before you wreck yourself”—here, “Correct yourself before you wreck yourself”—along with the below image of Ice Cube from Are We Done Yet? (2007):

In response, Ice Cube filed a complaint in the U.S. District Court for the Northern District of California, alleging that Robinhood’s article falsely implied that he had endorsed Robinhood and its services.  He claimed false endorsement under the Lanham Act as well as misappropriation of likeness and unfair competition under California law.  Robinhood filed a motion to dismiss the complaint for lack of standing and a motion to strike the state law claims under California’s Anti-SLAPP statute as protected speech.

As noted by the court, to establish standing a plaintiff must demonstrate an “injury in fact,” meaning the plaintiff suffered “an invasion of a legally protected interest” that is “concrete and particularized” and “actual or imminent, not conjectural or hypothetical.”  Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).  Citing Waits v. Frito-Lay, Inc., 978 F.2d 1093, 1110 (9th Cir. 1992), the court further held that “a celebrity whose endorsement of a product is implied through the imitation of a distinctive attribute of the celebrity’s identity, has standing to sue for false endorsement” under the Lanham Act.

While the court acknowledged that a celebrity could establish standing under Waits, Robinhood argued that Ice Cube failed to plausibly plead (1) his celebrity status, (2) he was deprived of compensation, and (3) use of his identity and catchphrase implied endorsement.

In ruling on the motion to dismiss, the court found that Ice Cube sufficiently pleaded celebrity status.  It discredited Robinhood’s argument that Ice Cube lacked such status because he relied on his music in the 1980s and movies in the 1990s.  The court questioned why Robinhood would have used Ice Cube’s image and catchphrase in the first place if he had no status as a celebrity.  The court also found that Ice Cube robustly alleged he had commercialized his celebrity status and therefore adequately pleaded economic injury.

In the end, however, the court held that Ice Cube did not plausibly plead that the use of his likeness or catchphrase suggested he endorsed Robinhood’s products.  Although Ice Cube cited Robinhood’s other celebrity endorsements from rappers Nas and Jay-Z, the court found those endorsements were irrelevant.  It also contrasted Robinhood’s use of his likeness and catchphrase with other cases cited by Ice Cube, which all involved explicit endorsements.  Furthermore, without explaining the distinction, the court noted that the article was part of a newsletter, not an “advertisement” as Ice Cube claimed, and that under such circumstances no other court had found standing.  Thus, the court concluded that Ice Cube lacked standing because “he did not allege how Robinhood’s use of his identity created the misapprehension that the plaintiff sponsored, endorsed, or is affiliated with Robinhood.”

Although the court granted Robinhood’s motion to dismiss, it allowed Ice Cube to amend his complaint, which he amended and refiled on July 6, 2021.   Whether Ice Cube has now plausibly pleaded endorsement remains to be seen.

The case is Jackson v. Robinhood Markets, Inc., No. 21-CV-02304-LB (N.D. Cal. June 15, 2021).

© 2021 Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
For more articles on trademark misappropriation, visit the NLR Communications, Media & Internet section.

Don’t Count Your Lamborghinis Before Your Trademark is in Use

The US Court of Appeals for the Ninth Circuit affirmed a grant of summary judgment, finding that a trademark registrant had alleged infringement of its trademark without having engaged in bona fide use of the trademark in commerce, as required by the Lanham Act. The Court found no material issue of fact as to whether the registrant had used the mark in commerce in a manner to properly secure registration, and the alleged infringer therefore was entitled to cancellation of the registration. Social Technologies LLC v. Apple Inc., Case No. 320-15241 (9th Cir. July 13, 2021) (Restani, J., sitting by designation)

This dispute traces back to a 2016 intent-to-use US trademark application filed by Social Technologies for the mark MEMOJI in connection with a mobile phone software application. After filing its application, Social Technologies engaged in some early-stage activities to develop a business plan and seek investors. On June 4, 2018, Apple announced its own MEMOJI software, acquired from a third party, that allowed users to transform images of themselves into emoji-style characters. At that date, Social Technologies had not yet written any code for its own app and had engaged only in promotional activities for the planned software.

Apple’s MEMOJI announcement triggered Social Technologies to rush to develop its MEMOJI app, which it launched three weeks later (although system bugs caused the app to be removed promptly from the Google Play Store). Social Technologies then used that app launch to submit a statement of use for its trademark application in order to secure registration of the MEMOJI trademark. The record also showed that over the course of those three weeks, Social Technologies’ co-founder and president sent several internal emails urging acceleration of the software development in preparation to file a trademark infringement lawsuit against Apple, writing to the company’s developers that it was “[t]ime to get paid, gentlemen,” and to “[g]et your Lamborghini picked out!”

By September 2018, Apple had initiated a petition before the Trademark Trial & Appeal Board to cancel Social Technologies’ MEMOJI registration. Social Technologies responded by filing a lawsuit for trademark infringement and seeking a declaratory judgment of non-infringement and validity of its MEMOJI registration. When both parties moved for summary judgement, the district court determined that Social Technologies had not engaged in bona fide use of the MEMOJI trademark and held that Apple was entitled to cancellation of Social Technologies’ registration. Social Technologies appealed.

Reviewing the district court’s grant of summary judgment de novo, the Ninth Circuit framed its analysis under the Lanham Act’s use in commerce requirement, which requires bona fide use of a mark in the ordinary course of trade and “not merely to reserve a right” in the mark. The issue on appeal was whether Social Technologies used the MEMOJI mark in commerce in such a manner to render its trademark registration valid.

The Ninth Circuit then explained the Lanham Act’s use in commerce requirement, which requires “use of a genuine character” determined by the totality of the circumstances (including “non-sales activity”), and explained that mere adoption of a trademark, without bona fide use in commerce, in an attempt to reserve rights for the future, is insufficient to establish rights in the mark. The Court reviewed supporting case law, distinguishing between cases where mere promotional activities or internal sales were determined not to constitute use in commerce, and cases where continuous use of a mark as a business name, in public relations campaigns, in sales presentations and in media coverage together sufficiently established bona fide use in commerce. The Court explained that looks for “external manifestation” and “sufficiently public use” to warrant trademark protection.

On the facts of the case before it, the Ninth Circuit found that the record evidence clearly demonstrated that Social Technologies’ use of the MEMOJI mark had not been bona fide use in commerce. With respect to its activities prior to Apple’s June 2018 MEMOJI announcement (which included no software code, the unsuccessful solicitation of investors, and no “association among consumers between the mark and the mark’s owner”), there was not sufficient use to entitle Social Technologies to trademark protection. The Court found that Social Technologies failed to put forward evidence that its admittedly rushed release of the software following Apple’s 2018 announcement was for a genuine commercial purpose warranting trademark protection, rather than mere “token use” in an attempt to reserve a right in the mark.

Affirming the district court’s grant of summary judgment, the Ninth Circuit concluded that Social Technologies did not engage in bona fide use of the MEMOJI trademark in commerce, that its registration was invalid, and that Apple was entitled to cancellation of Social Technologies’ MEMOJI registration.

© 2021 McDermott Will & Emery
For more articles on IP law, visit the NLR

SBA Rulemaking and Guidance Challenged in Federal Lawsuits in Connection with PPP Loan Guidance

The Coronavirus, Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law by the President on March 27, 2020. Title I of the CARES Act, named “Keeping American Workers Employed and Paid” by Congress, appropriated $659 billion for loans guaranteed by the Small Business Administration (“SBA”) under the Paycheck Protection Program (“PPP”).

Section 1114 of the CARES Act instructs the SBA to issue regulations “to carry out this title and the amendments made by this title” within fifteen days and without regard to the usual notice requirements, which the SBA did in the form of Frequently Asked Questions (the “FAQs”). 15 U.S.C. §§ 9001(1), 9012.

While ostensibly intended to clarify uncertainty in the CARES Act, two recent federal lawsuits challenge certain rulemaking and guidance promulgated by the SBA. The question before the courts is whether such rulemaking and guidance is a lawful interpretation of the CARES Act or, as the plaintiffs argue, amounts to illegal rulemaking.

Agencies are prohibited by the Administrative Procedures Act from taking action “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C. § 706(2)(C). The validity of an agency’s interpretation of a statute is reviewed by a court using the two-step framework outlined in the landmark case, Chevron, U.S.A., Inc. v. Natural Res. Defense Council, Inc., 467 U.S. 837 (1984). The first question reviewed in the Chevron analysis is, “whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842–43.

The plaintiffs argue that certain elements of the SBA guidance did not give effect to the unambiguously expressed intent of Congress and, as a result, are unlawful and unenforceable.

DV Diamond Club of Flint v. SBA

DV Diamond Club of Flint LLC (“DV Diamond”) is a strip club in Flint, Michigan, which feared that it would be denied a PPP loan by lenders as a result of guidance from the SBA that is not consistent with the CARES Act. DV Diamond’s initial complaint, dated April 8, 2020, was amended on April 17, 2020 to add forty-one new co-plaintiffs (collectively with DV Diamond, the “Plaintiffs”), each of which claims to operate a legal sexual oriented business which meets the eligibility requirements under the CARES Act. The Plaintiffs argue that the CARES Act is unambiguous as to what businesses are eligible for PPP loans and the SBA, therefore, has no right to assert additional eligibility requirements or disqualifiers. See DV Diamond Club of Flint, LLC v. U.S. SBA, 20-cv-10899, 2020 U.S. Dist. LEXIS 82213, at *27 (E.D. Mich. May 11, 2020).

The U.S. District Court for the Eastern District of Michigan (the “District Court”) issued an injunction in favor of the Plaintiffs, noting that Congress unambiguously stated that the SBA may not exclude from eligibility for a PPP loan guarantee a business that met the CARES Act’s size standard for eligibility. Id. at *27.

The District Court agreed with the Plaintiffs that, “under step one of Chevron that the PPP Ineligibility Rule conflicts with the PPP and is therefore invalid.” Id. at *42.

“Congress provided temporary paycheck support to all Americans employed by all small businesses that satisfied the two eligibility requirements—even businesses that may have been disfavored during normal times.” Id. at *4-5.

The Sixth Circuit Court of Appeals denied the SBA’s motion for a stay of the injunction, holding that the relevant factors, including the Plaintiff’s likelihood success, weighed in favor of the Plaintiff. DV Diamond Club of Flint, LLC v. SBA, No. 20-1437, 2020 U.S. App. LEXIS 15822, at *8 (6th Cir. May 15, 2020).

Zumasys, Inc. v. SBA

Zumasys and two affiliated companies (collectively, “Zumasys”) received PPP loans but are concerned that they may subsequently be deemed ineligible as a result of “improper, and legally impermissible, underground regulation” promulgated by the SBA. (Zumasys, Inc. v. U.S. SBA et al., Dkt. No. 20-cv-008511, Dkt. 1 (the Zumasys Complaint) ¶ 58.)

Zumasys claims to have acted in reliance on the CARES Act by obtaining—and spending—what they expected to be forgivable PPP funds under the terms of the CARES Act rather than furloughing or terminating their employees. Subsequently, guidance set forth in questions 31 and 37 of the SBA’s Frequently Asked Questions, according to Zumasys, might require their loans to be repaid. Zumasys claims that being forced to repay their loans will place them in a worse financial position than had it never sought the PPP funds.

The SBA’s “credit elsewhere” test, which requires a borrower to demonstrate that the needed financing is not otherwise available on reasonable terms from non-governmental sources, was expressly excluded as an eligibility requirement to obtain a PPP loan by Congress. Zumasys alleges, however, that the FAQs “purport to re-impose the “credit elsewhere” requirement in contravention of” the CARES Act. (Id. ¶ 66.)

As a result, in an argument similar to that made by DV Diamond and its co-plaintiffs, Zumasys asserts that the FAQs “are not in accordance with the law and exceed Defendants’ authority under the CARES Act,” and asks that the SBA should be enjoined from enforcing them by the court. (Id.)

Subsequent to the filing of the Zumasys lawsuit, on May 13, 2020, the SBA issued guidance in question 46 in the FAQs that any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

While this development, on its face, would seem to alleviate the concerns of Zumasys, a great deal of uncertainty remains for borrowers in connection with the guidance that has been released by the SBA since the passing of the CARES Act into law. Furthermore, there is no guarantee that subsequent guidance from the SBA will not contradict the guidance currently being relied upon, and in FAQ 39 the SBA noted that it will review all loans in excess of $2 million and in subsequent rulemaking it noted that with respect to a PPP Loan of any size, the “SBA may undertake a review at any time in [the] SBA’s discretion.”

Conclusion

The challenges by DV Diamond, Zumasys and other plaintiffs will hinge on whether or not the applicable courts determine that the guidance issued by the SBA is inconsistent with the unambiguously expressed intent of Congress.

To the extent that borrowers and applicants continue to believe that problematic discrepancies exist between the law and guidance being delivered by the SBA, and the SBA subsequently determines that a borrower is ineligible for a PPP loan or forgiveness of such loan, the courts may in the future be called upon again to apply the Chevron analysis to the SBA’s actions in connection with the PPP.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of Sills Cummis & Gross P.C.

© Copyright 2020 Sills Cummis & Gross P.C.
For more on SBA’s PPP loans, see the National Law Review Coronavirus News section.