Trademark Ownership Determined by Priority of “Lawful” Use

Case: CreAgri, Inc. v. USANA Health Sciences, Inc., No. 05-15305 (9th Cir. Jan. 16, 2007)

The One Sentence Summary: Only lawful use of a mark will enable a party to establish trademark ownership through priority of use.

What They Were Fighting About: The Plaintiff, CreAgri, Inc., used the mark “Olivenol” to sell a dietary supplement containing a beneficial antioxidant, hydroxytyrosol. Olivenol’s label, however, misidentified the amount of hydroxytyrosol actually contained within the supplement, in violation of the Food, Drug, and Cosmetic Act’s (“FDCA”) labeling requirements. USANA Health Sciences, Inc., the Defendant, starting using the mark “Olivol” sometime after the Plaintiff’s first use of Olivenol. The Plaintiff argued that Olivol infringed its mark because the two marks were confusingly similar. Central to the Plaintiff’s infringement claim was its assertion that it owned the “Olivenol” trademark through priority of use.

Federal Circuit Holdings:

• The court found that the Plaintiff’s prior use of its mark did not establish priority because its use was an unlawful violation of the FDCA’s labeling requirements. The court held that only lawful use of a mark in commerce enables a party to establish ownership through priority of use.
• The court explained its rationale as two part: First, it would be absurd to grant rights to a party pursuant to the government’s law by virtue of that party violating the government’s law. Second, “to give trademark priority to a seller who rushes to market without taking care to carefully comply with the relevant regulations would be to reward the hasty at the expense of the diligent.”
  
  

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Patentee's Concession of Privity Barred Second Suit Against Customers under Doctrine of Claim Preclusion

Case: Transclean Corp. v. Jiffy Lube Int'l, Inc., No. 06-1077 (Fed Cir. January 18, 2007)

The One Sentence Summary: The Federal Circuit affirmed summary judgment for customers who asserted that plaintiff Transclean, who had previously recovered damages for infringement from the manufacturer of the product at issue, was barred under the doctrine of claim preclusion from also suing them for damages, where Transclean had repeatedly conceded that the customers were in privity with the manufacturer.

What They Were Fighting About: Transclean first successfully sued the manufacturer of an automatic transmission fluid changing machine for infringement; it then sued the customers who bought the infringing machines, seeking a "reasonable royalty." After summary judgment was granted for the customers on those claims under the doctrine of claim preclusion, Transclean appealed.

Federal Circuit Holdings:

• In bringing a second suit, this time against the customers, Transclean had relied on a prior case, Birdsell v. Shaliol, 112 U.S. 485 (1884), which had held that a patentee who recovers only nominal damages against the manufacturer of an infringing product could later sue users of the product. Transclean claimed it had been unable to collect on the judgment against the manufacturer, obtained in the first lawsuit.
• The Federal Circuit found that Transclean's argument ignored a separate issue of claim preclusion, which is whether, having failed to sue the users in the first suit, Transclean was barred by the doctrine of claim preclusion from bringing a second suit on those claims. It cited prior cases holding that a plaintiff bringing two separate actions against two tortfeasors who are jointly responsible for the same injury runs the risk the court will find a sufficient relationship between the parties that the second action is barred by claim preclusion.
• The Federal Circuit further observed that Birdsell and related cases only addressed the issue of full compensation, without considering when and how claim preclusion may arise in second suits.
• The Federal Circuit next determined that Eighth Circuit law applied, because the issue (whether Transclean was bound by its repeated statements that the users were in privity with the manufacturer) was not peculiar to patent law.
• Reasoning that if the parties were in privity, it would follow that the second suit involves the same cause of action as the first, the Federal Circuit then reviewed the procedural history, which contained repeated admissions by Transclean that the parties were in privity. Thus, while ordinarily manufacturers and customers are not so closely related, and their litigation interests not so alligned, that a patentee's suit against one precludes a second suit against the other, here Transclean's tactical concession of the issue resolved the question.
• The Federal Circuit therefore concluded that Transclean was bound, under the doctrine of judicial estoppel, by its concession that the parties here were in privity. The trial court had accepted the admission, and the defendants relied on it during the trial and appellate phases of this litigation. In so finding, it concluded that judicial estoppel could apply to both factual and legal assertions.
• Finally, the Federal Circuit also reversed an award of damages against a group of defendants who had defaulted, reasoning that claim preclusion would also preclude Transclean from recovering against these defendants.
  
  

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Columbia Pictures Prevails in Charlie's Angels Royalty Case

Case: Wagner v. Columbia Pictures Indus. Inc., No. B184523 (Cal. 2d App. Dist. January 8, 2007)

The One Sentence Summary: The California Court of Appeal affirmed summary judgment in favor of Columbia Pictures holding that Robert Wagner was not entitled to net profits from the Charlie's Angels movies under an earlier agreement relating to the Charlie's Angels television series.

What They Were Fighting About: Robert Wagner individually and as a trustee of his children's trusts sued Columbia Pictures claiming that he and the trusts were entitled to share in the net profits from the Charlie's Angels movies under an agreement with Spelling-Goldberg Productions ("SGP") relating to the 1970's Charlie's Angels television series. Under the agreement with SGP, Wagner and Natalie Wood (his then wife) were entitled to 50 percent of the net profits SGP received as consideration "for the right to exhibit photoplays of the [Charlie's Angels] series and from the exploitation of all ancillary, music and subsidiary rights in connection therewith." Wagner contended that the phrase "in connection therewith" meant he was to share in ancillary or subsidiary rights which bore any connection to the television series, not just "photoplays of the series." Columbia, who purchased the rights to the television series from SGP and separately purchased the motion picture rights to the series from the heirs of the show's writers, took the position that the phrase "in connection therewith" modified "the right to exhibit photoplays of the series" such that only the net profits received by exercising SGP's rights to exhibit photoplays of the series were included in the agreement with Wagner. The trial court agreed with Columbia and granted summary judgment in its favor concluding that the agreement did not entitle Wagner and the trusts to share in the profits from the movies. Wagner appealed.

Appellate Court Holdings:

• The California Court of Appeal affirmed summary judgment in favor of Columbia Pictures concluding that the agreement between Wagner and SGP was unambiguous in describing the (limited) circumstances under which Wagner was entitled to share in the net profits from the motion pictures.
• Wagner made several arguments in support of his position that the "subsidiary rights" provision in the contract with SGP for the television series entitled him to 50 percent of the net profits from the two Charlie's Angels movies produced and distributed by Columbia Pictures. First, he introduced evidence of the history underlying the negotiations of the contract for the Charlie's Angels television series to show he was entitled to share in net profits derived from the exploitation of ancillary or subsidiary rights which bore any connection to the television series.
• Prior to the development of the Charlie's Angels television series, Wagner and his wife Natalie Wood ("Wagners") entered into an agreement with SGP to star in a television movie-of-the-week, "Love Song." During the course of the negotiations of that agreement, the Wagners pushed for language in the contract that made clear they were to participate in "all revenues from all sources" relating to "Love Song." Various rounds of negotiations ensued over the precise definition of net profits, with SGP's counsel acknowledging at one point that the Wagners were to receive "income from any and all sources" and assuring them that the (then draft) agreement "so states." In the final "Love Song" contract net profits were defined as the net of "all monies received by Producer as consideration for the right to exhibit the Photoplay, and exploitation of all ancillary, music and subsidiary rights in connection therewith." This language was identical to the definition of net profits in the subsequent Charlie's Angels contract. Because the "Love Song" agreement was intended to give the Wagners a one-half share in the net profits received by SGP "from all sources" without limitation and the Charlie's Angels contract was based on that agreement and defined net profits in identical language, Wagner argued that the Charlie's Angels contract should be interpreted as providing the Wagners with a 50 percent share in SGP's income "from all sources" including the Charlie's Angels motion pictures produced by Columbia.
• Not so, explained the Court. "The problem with Wagner's extrinsic evidence is that it does not explain the contract language, it contradicts it." The Court noted that under the Parol Evidence Rule, extrinsic evidence is not admissible to contradict express (i.e. unambiguous) terms in a written contract. The Court remarked that even if the parties to the Charlie's Angels contract may have intended for the Wagners to share in the net profits from all sources, the parties simply "did not say so in their contract."
• Wagner next argued that he and the trusts were entitled to share in the profits from the movies because SGP acquired the motion picture rights to Charlie's Angels by exploiting its rights as producer to exhibit photoplays of the series. Again, the Court disagreed.
• Under copyright law, the script for the television series pilot was a "work made for hire" giving SGP absolute rights to exploit the series in other media, except as otherwise provided by contract. A provision of the writers’ contract with SGP incorporated a collective bargaining agreement between the producers and the Writers Guild. Under the “separated rights” provision of the Writers Guild collective bargaining agreement, the writers of the Charlie's Angels television series retained the right to exploit the material for certain purposes, including making a motion picture. While SGP owned the copyright to Charlie's Angels and held the exclusive film television rights in the literary material (i.e. the right to exhibit photoplays of the series), it held the separate right to generate motion pictures based on the series in trust for the writers. Had the writers offered the movie rights for sale within five years from the date they delivered the teleplay for the series to SGP, the producer (SGP) would have had a right of first refusal. Columbia produced sufficient evidence to convince the Court that SGP never acquired the motion picture rights from the writers. (Had that occurred, Wagner would have had a possible claim based on the “subsidiary rights” language of the agreement with SGP.) Because Columbia purchased the film rights on the open market from the heirs of the writers of the television series (after SGP's right of first refusal expired), the film rights were not acquired by SGP by exploiting its right to exhibit photoplays of the series and thus were not "ancillary" to the television series.

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Supreme Court Holds That Patent Licensee in Good Standing Can Rely on Threat of Litigation for Article III Case or Controversy Standing

Case: MedImmune, Inc. v. Genentech, Inc., (U.S. Supreme Court, Case No. 05-608 1/9/07)

The One Sentence Summary: The Supreme Court (with only Justice Thomas dissenting) held that subject matter jurisdiction under the Declaratory Judgment Act exists even though the petitioner-licensee, MedImmune, continued performance under its license with Genentech.

What They Were Fighting About: After its patent issued, Genentech sought royalty payments per an existing license with MedImmune. MedImmune filed for declaratory relief that the patent was invalid and unenforceable, and that its drug did not infringe Genentech's patent. The district court dismissed the declaratory judgment action, finding no subject matter jurisdiction because MedImmune had made royalty payments (albeit under protest) and so there was no actual case or controversy, and the Federal Circuit affirmed. The Supreme Court reviewed to determine whether a patent licensee in good standing can establish an Article III case or controversy in a private action.

Supreme Court Holdings:

• The Court (with Justice Scalia delivering the opinion) first resolved Genentech's claim that MedImmune was not claiming noninfringement, and that it did not seek interpretation of the contract (or had waived its contract claim), discounting both arguments based on the language in the operative complaint and in the briefs. With regard to the waiver argument, the Court observed that MedImmune's decision to devote only a few pages of its brief to the contract claim did not suggest waiver, but rather recognition that the argument would likely be futile.
  
• Reviewing the history of the Declaratory Judgment Act, the Court noted that initial doubts about its compatibility with Article III case or controversy requirements were resolved in Aetna Life Ins. Co. v. Haworth, 300 U.S. 227 (1937), where the Court held that "case or actual controversy" refers to the type of "Cases" or "Controversies" justiciable under Article III. It further noted that later cases had not clearly distinguished which declaratory judgment actions satisfied Article III and which did not. Thus, while this controversy would clearly be justiciable had MedImmune stopped making royalty payments, its continued adherence to the contract (rather than risk an injunction, treble damages and attorney fees) left the issue unclear because there was no threat of imminent harm.
  
• Looking to declaratory actions against the government, the Court recognized that courts did not require plaintiffs to risk liability in order to bring a legal challenge, such as to the constitutionality of a law. For example, in Steffel v. Thompson, 415 U.S. 452, 480 (1974), then-Justice Rehnquist had written in his concurrence, "the declaratory judgment procedure is an alternative to pursuit of the arguably illegal activity."
  
• Cases applying the Declaratory Judgment Act where the plaintiff brought an action to avoid threatened enforcement by a private party are much more rare. However, lower federal courts and state courts interpreting state declaratory judgment acts requiring an actual case or controversy had long accepted jurisdiction in such cases.
  
• In a prior decision with similar facts, Altvater v. Freeman, 319 U.S. 359 (1943), the Court held that the licensees continued payment of royalties did not make the dispute hypothetical, because the royalties were paid under protest, and under compulsion of an injunction decree obtained in an earlier case. The only alternative would have been to defy the injunction and risk treble damages. Thus, where payments made are involuntary or the exaction is coercive, a case or controversy exists that creates a right to challenge the legality of the claim. However, the Federal Circuit had distinguished Altvater in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004), on the ground that it involved the compulsion of an injunction.
  
• The Supreme Court did not find this distinction compelling. In Altvater, as here, the parties risked actual and treble damages, and that decision relied on that fact as a basis for finding an actual case or controversy. In fact, the Altvater decision did not even mention government sanctions, such as contempt (it had also relied on treatise language recognizing that threatened injury to business could be as coercive as other forms of coercion supporting common law actions).
  
• The Court further rejected Genentech's argument that the parties effectively settled their dispute by MedImmune entering into the license agreement (which Genentech argued was akin to insurance, such that immunity from suit was part of the license bargain). First, it found this argument irrelevant to the issue of infringement. Moreover, it refused to equate MedImmune's promise to pay royalties on patents that have not been found invalid with a promise not to seek a holding of invalidity.
  
• It also rejected the argument that one cannot both continue accepting the benefits of a contract while challenging its validity inapplicable, because MedImmune was not repudiating the contract, but rather asserting that, properly interpreted, the contract allowed it to challenge the patents, and did not require payment of royalties because the patents at issue did not cover its products and were invalid.
  
• Finally, the Court refused to affirm the dismissal on discretionary grounds, because the District Court's and Federal Circuit's dismissals were not discretionary, but based on Federal Circuit precedent.
  
• Justice Thomas, in dissent, characterized MedImmune's claim as "seeking an advisory opinion about an affirmative defense it might use in some future litigation," and concluded that based on his reading of precedent, there was no actual case or controversy. He further argued that "coercion" could not be based on voluntarily accepted contractual obligations.
  
  

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E-Discovery Rules Shelved for California Courts

An article in today's San Francisco Recorder reports that the California Judicial Council has decided to wait on proposed changes on California's Rule of Court 212 that would have required the parties to meet and confer on electronic discovery. The Judicial Council is reportedly waiting to see the experience of the federal courts with new e-discovery changes to the Federal Rules of Civil Procedure that went into effect on December 1, 2006.


The Recorder article is available here (subscription required).

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Federal Circuit Clarifies Intent Requirement For Inducing Infringement

Case: DSU Med. Corp. v. JMS Co., Ltd., No. 04-1620, 05-1048, 05-1052 (Fed. Cir. 12/13/06)

The One Sentence Summary: The en banc Federal Circuit clarified that liability for inducing patent infringement requires knowledge of the patent and intent to cause infringement, not just intent to cause acts constituting infringement.

What They Were Fighting About: The Federal Circuit affirmed a judgment of infringement against defendant JMS on a patent infringement claim involving patents for mechanisms that prevent accident needle sticks. The panel also affirmed the jury's conclusion that certain claims were invalid as obvious. The decision also includes en banc consideration and affirmance of the holding that defendant ITL did not contributorily infringe because it did not intend to cause others to infringe.

Federal Circuit Holdings:

• The panel affirmed the trial court's grant of summary judgment of non-infringement on several claims based upon the claim construction that a claim for a guard “slidably enclosing” a needle assembly required that the needle be enclosed within the assembly. The panel agreed with the district court that the terms "assembly" and "enclosing" indicated that the needle must be part of the patented invention. Because the accused product did not contain a needle but rather was a mechanism for locking around a needle, several of the claims were not infringed by the stand alone product.
• The panel affirmed the claim construction of the term "slot" as not requiring any particular thickness. This was confirmed by the specification and the prosecution history. Based upon this holding, the closed shell configuration of the infringing product when sold with a needle infringed certain claims of the patent as a matter of law.
• The panel affirmed the district court's denial of a new trial on the jury's verdict of non-infringement by defendant ITL. ITL had manufactured and supplied the accused product outside of the United States. The accused product infringed only in the closed configuration and ITL had only put the guards in a closed configuration in Malaysia and not in the United States. Thus, the contributory act of infringement as to these sales did not occur in the United States as required by 35 U.S.C. § 271(c). Moreover, as to units of the accused product that were sold in an open shell configuration without a needle enclosed, there was no evidence before the jury that these units were ever put in an infringing, closed shell configuration in the United States. Accordingly, the district court properly denied the motion for new trial.
• The Federal Circuit also issued an opinion en banc to clarify conflicting precedents as to the intent required for inducing infringement. The decision affirmed the holding in Manville Sales Corp. v. Paramount Systems, Inc., 917 F.2d 544 (Fed. Cir. 1990), that "The plaintiff has the burden of showing that the alleged infringer's actions induced infringing acts and that he knew or should have known his actions would induce actual infringements." This requires a showing that the accused infringer actually knew of the patent. The mere possibility that others will infringe a patent is not enough, specific intent and action to induce infringement must be proven. The Federal Circuit held that the district court properly instructed the jury as to the state of mind requirement.
• The panel held that the district court properly denied the motion for a new trial on the issue of inducement to infringe. The jury had evidence that although ITL knew of the patent, it had obtained opinions from attorneys that there was no infringement. This evidence supported the jury's verdict that there was a lack of the necessary specific intent to induce infringement.
• The panel rejected the argument that the jury had improperly failed to award price erosion damages. The panel noted that the lost profits award from the jury did not state what elements were part of the award, and it would be speculation to say that the jury had failed to award any component for price erosion. The panel also found that the jury had evidence as to the start of the date of the contract as to when plaintiff became the exclusive licensee and therefore was entitled to damages.
• The panel affirmed the district court's Daubert ruling that excluded an expert's opinion on the hypothetical existence or hypothetical terms of a contract between plaintiff and a buyer of needle guards. Plaintiff had attempted to prove that the infringing needle guards interfered with a contract with a major purchaser of needle guards, and that the purchaser had thereby ended a long term relationship with plaintiff and had continued to buy later noninfringing products from the defendant. The expert's opinion was properly rejected by the district court because his accelerated market entry theory was based upon hypothesized contracts in hypothesized markets that lacked sound economic grounding. Although damages analysis requires hypothetical reconstruction of a "but for" market place, that reconstruction must include some footing in economic principle. Moreover, the lost profits analysis failed to account for the market entry of an acceptable noninfringing substitute. Thus, the testimony was properly excluded.
• The panel rejected defendant's challenge to the lost profits award from the jury, finding that substantial evidence supported the jury award and that it was not grossly excessive or monstrous or based on speculation or guesswork.
• The panel upheld the jury's verdict finding certain claims to be obvious. There were elements of the claims in the prior art cited and evidence of adequate motivation to combine those references.
• The trial court acted properly in referring a jury question on hindsight back to the jury with an instruction that the jury review the jury instructions on invalidity. Referring the jury back to the instructions that had been accepted by the parties was within the court's wide discretion in responding to a jury's questions.
  
  

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