USPTO: There's a New Sheriff in Town

On August 7, 2009, President Obama's nominee David Kappos was sworn in as the new Director of the United States Patent and Trademark Office. Mr. Kappos has a long and distinguished career in intellectual property, having once served as Vice President and Assistant General Counsel for IBM, where he was responsible for management of that company's extensive global patent and trademark portfolio. He takes over management of an Office that had become well-known for a significant backlog and is also the center of much controversy and litigation regarding various rules issued by the former Director.

At the time of Mr. Kappos's confirmation, the USPTO was defending the validity of a number of controversial and sweeping changes to the Office's patent practice which were ostensibly meant to streamline and simplify patent practice. Though the rules at issue were never fully enacted (since enactment was stayed during litigation over same), one of Mr. Kappos's first major acts as Director was to issue a new rule withdrawing the highly-controversial rule changes that were in litigation. This action cleared the way for the USPTO to refocus resources and efforts toward management of the Office and to work on development of new rules that would be more acceptable to the users of USPTO services, namely inventors and trademark owners, and that would streamline the process of obtaining intellectual property protection and bring goods and services to the market.

Though the final form of many new rules is still on the horizon, Mr. Kappos recently outlined some of the items the Office intends to focus on with respect to trademark practice. Mr. Kappos indicated that the USPTO will continue its trademark IT system modernization project. Ultimately, the Office hopes to provide applicants, registrants and their counsel with real-time access to trademark files and even the ability to manage USPTO dockets online. Such functionality could considerably ease trademark practice before the USPTO.

In addition, since Mr. Kappos took the helm, the USPTO has redesigned and revamped its website, including many of the document and application-filing interfaces. Though the changes to date have been rather minor, the Director stressed that the Office will work closely with the Trademark Public Advisory Committee to further develop and refine USPTO website functionality.

On the substantive side of trademark practice, Mr. Kappos indicated the Office may likely issue new rules in response to the recent decision in Bose Corp. v. Hexwave Inc. addressing the question of fraud on the Trademark Office and may also review how that ruling would apply to use-based trademark applications and declarations of use. The Director also indicated the Office may likely re-evaluate statement of use requirements and sufficiency of specimens in the context of intent-to-use applications identifying multiple goods within a single class. As with the website issues, the Director has pledged to work with the parties most impacted by any new rules or decisions in this area—trademark registrants, owners and practitioners.

Finally, in August, President Obama signed legislation authorizing the Director of the USPTO to shift revenues received from trademark application filings to fund internal patent practice operations. Though Director Kappos has indicated he would "prefer not to use" such funds for internal costs, the ability of the Director to tap this source of revenue to fund operations could minimize or eliminate potential PTO down-sizing which, in the end, would aid in the overall streamlining of the Office, since decreases in staff and examiners could be held to a minimum.

It appears that Mr. Kappos intends to shake things up at the USPTO. By rescinding the sweeping rules instituted by his predecessor and committing to re-evaluate and revamp both patent and trademark practices before the Office, a new era may be near and the Office may be able to create policies and practices that better mirror the market realities faced by inventors and trademark owners and to embrace available technologies to streamline the process. The Office appears on the verge of shifting from an agent of delay and expense to a catalyst in the process of obtaining patent and trademark rights.

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Surviving the Plague: Federal Circuit Finds No Inequitable Conduct in Procuring AstraZeneca's Quetiapine (Seroquel®) Patent

In AstraZeneca Pharmaceuticals LP v. Teva Pharmaceuticals USA, issued September 25, 2009, the Federal Circuit upheld the District Court's finding of no inequitable conduct in the prosecution of US Patent No. 4,879,288 ("the '288 patent"). The '288 patent has survived what Federal Circuit judges call a "plague" on US patents—allegations of inequitable conduct (wrongdoing) which may be easily pled, but not easily dismissed.

In the present case, Teva alleged that AstraZeneca misled the Examiner during prosecution of the '288 patent by disclosing data only on prior art compounds that would help but not hinder prosecution. The Federal Circuit found that AstraZeneca's submission of data relating to closest prior-art compounds satisfied its duties to the USPTO during prosecution. AstraZeneca's selective submission and omission of data relating to other structurally-similar compounds was not inequitable conduct in procuring the '288 patent.

As inequitable conduct was the only issue on appeal, Teva Pharmaceuticals issued a press release on September 25, 2009, stating it expects to market quetiapine compositions after the expiration of the '288 patent. The '288 patent covers AstraZeneca's antipsychotic drug "Seroquel" (active ingredient: quetiapine), having 2008 sales in excess of $4.4 billion.

Summary of the case

AstraZeneca alleged infringement of the '288 patent by generic drug makers Teva Pharmaceuticals and Sandoz, Inc. (collectively, "Teva"), in response to the generic companies' ANDA filings for approval to sell generic quetiapine compositions in the United States. AstraZeneca moved for summary judgment against Teva's assertions that the '288 patent was unenforceable due to inequitable conduct; the District Court found for AstraZeneca, and Teva appealed to the Federal Circuit.

The '288 patent discloses that antipsychotic drugs typically cause undesired, involuntary movements, and that quetiapine is atypical in that it causes fewer and less intense involuntary movements (see, e.g., US Patent No. 4,879,288 column 1 lines 41-68 and Example 9). Claim 1 of the '288 patent is directed to a compound having the chemical structure of quetiapine, a dibenzothiazepine having a piperazine ring N-substituted with –CH2CH2OCH2CH2OH. During prosecution of the '288 patent, the Examiner rejected claims to quetiapine as obvious in view of two prior-art compounds the Examiner identified as the structurally-closest prior art – "Schmutz X" and "Horrom" – where Schmutz X was N-substituted with –CH2CH3, and Horrom was a chlorinated diazepine. The Examiner required submission of data comparing atypical properties of quetiapine with Schmutz X and Horrom to overcome the rejection.

In response, AstraZeneca submitted a declaration with already-existing internal data comparing quetiapine with Horrom, noting that quetiapine caused atypical side effects and Horrom did not. The declaration also advised that internal data was not readily available regarding Schmutz X, and that generating such data would be very expensive. However, the declaration submitted that prior-art compound Schmutz B (N-substituted with –CH2CH2OH) was structurally closer to quetiapine (–CH2CH2OCH2CH2OH) than Schmutz X (–CH2CH3), and provided data to show that quetiapine caused atypical side effects and Schmutz B did not. The declaration also volunteered that another compound, Schmutz A (a chlorinated compound having an N-substituted –CH3 group on the piperazine ring), did not provide antipsychotic effects, emphasizing that structurally-similar compounds did not necessarily provide the same pharmacological results. The Examiner accepted the substitution of Schmutz B for Schmutz X as the closest prior art and allowed claims to quetiapine to issue to grant.

To prove inequitable conduct, a challenger must show a patent applicant (1) misrepresented material information (2) with an intent to deceive the USPTO. Teva alleged that AstraZeneca misrepresented material information because the substitution of Schmutz B for Schmutz X, the omission of data relating to other structurally-similar compounds, and the selective submission of data regarding Schmutz A were meant to lead the Examiner away from data AstraZeneca knew would be or could be damaging to its quetiapine application.

In considering the issue, the Federal Circuit decided that Schmutz B was, in fact, structurally more similar to quetiapine than Schmutz X, and that a reasonable examiner would have accepted AstraZeneca's substitution of Schmutz B for Schmutz X as the structurally-closest prior art. AstraZeneca's omission of data relating to other structurally-similar compounds and selective disclosure of information relating to Schmutz A were therefore not material misrepresentations because the Examiner and applicant reasonably identified and focused on the closest prior art, and found that structural similarities or differences were not determinative of typical or atypical side effects. The Court also noted that Teva did not show that AstraZeneca had data for Schmutz X and withheld it, and that Teva did not present its own evidence that Schmutz X is an atypical antipsychotic agent; whether these circumstances would have altered the Court's opinion is not clear from the record.

Teva also alleged AstraZeneca intended to deceive the Examiner during prosecution of the '288 patent by not preparing and submitting data on Schmutz X and other compounds, and by submitting information on Schmutz A. The Federal Circuit held that an intent to withhold data on structurally similar compounds is not an intent to deceive, particularly where plausible reasons are given for withholding information:

an applicant would not know how much of its research must be filed with the PTO, although of no interest to the Examiner, or run the risk of wrongdoing no matter where the line is drawn.

Overall, AstraZeneca's disclosure of comparative information regarding the structurally-closest prior-art compounds was enough to satisfy duties imposed by the USPTO on a patent applicant. AstraZeneca's selective submission and omission of data relating to other structurally-similar compounds was not seen as materially misrepresenting information to, or intending to deceive, the USPTO examiner.

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ICANN Gains Independence

The Internet Corporation for Assigned Names and Numbers (ICANN), the body responsible for managing the core mechanisms of the internet, has recently gained some independence from the US control. ICANN was originally created in 1998 through a Memorandum of Understanding between the US Department of Commerce and ICANN with the purpose of transitioning management of the Domain Name System (DNS) from the US government to the global community. Although ICANN is a private not-for-profit organization where policies are developed from the bottom up, through global constituencies often representing competing interests, it was ultimately accountable only to the US government. At the end of September, the Department of Commerce allowed the last MOU to expire, thereby declaring that ICANN is mature enough to move on to the next stage of its global development. However, the US has retained some minimal control through a new agreement called an Affirmation of Commitments.

The Affirmation of Commitments commits ICANN to remaining a private not-for-profit organization, but declares that ICANN is independent and not controlled by any one entity. It further commits ICANN to reviews performed by the entire multi-stakeholder global community, such as constituencies representing registries, registrars, registrants, trademark owners, and other commercial and non-commercial interests. The agreement is intended to be long-standing and gives ICANN some autonomy. However, it also reaffirms the role of the Government Advisory Committee, which is a key participant in selecting the membership of the review teams. Rather than ICANN being reviewed by just the US government, under the new relationship, these reviews will be developed by an international committee of parties representing over 100 countries around the world, with the US government still having a seat at the table. All of these reviews will also be submitted for public comment, thereby creating accountability to the full international community.

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ICANN Approves Local Language Domain Names for Country-Code Top-Level Domains

ICANN is moving forward with plans to allow country-code Internationalized Domain Names (IDNs). IDNs are domain names displayed in a language-specific, non-Latin script or alphabet, such as Chinese, Russian, Arabic, or Hebrew. The inclusion of country-code IDNs in the domain name system will enable countries and territories to offer domain names in their native languages to the more than 60 percent of internet users who are not English speakers. This change will also allow users of languages based on right-to-left scripts or users of languages based on non-alphabetic scripts, such as Mandarin Chinese, to participate.

The IDNs will initially be available as ccTLDs, such as .рф (Cyrillic for .RF or Russian Federation), if the IDN is based on non-Latin script(s) that are considered official in the corresponding country or territory. The registries will only be available to the governments and administrators of countries and territories listed in the ISO 3166-1 standard, or their designated representatives. After the requester for an IDN registry has been approved, the domain names will be available to the public for registration. It is anticipated that the first IDN registrations will become available in the middle of 2010, with each registry providing its set of rules and guidelines for registrations. While some countries may give existing ccTLD holders rights to the new IDN ccTLD, this will not be required.

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New Generic and Brand-Driven TLDs Delayed Pending Further Review and Opinions

As we have previously reported, ICANN is still proceeding with the expansion into generic and brand-driven top-level domains, gTLDs (generic top-level domains), allowing alternatives to .COM, .ORG, .BIZ, etc, such as .YOURCOMPANYNAME. The new gTLDs may also expand to include IDN gTLDs in addition to the new IDN ccTLDs. While ICANN has recently released for review and comment the Third Draft Applicant Guidebook relating to the proposal, it appears that the timeline for implementation has slowed down. At its recent meeting in Seoul, Korea, indications from the Board of ICANN were that there may be at least one more draft Guidebook prior to a Final Guidebook. These delays are due to significant disagreements amongst competing interests in the internet community, and the calls to further evaluate difficult issues. These include: conducting economic analysis to determine whether new gTLDs are necessary; analyzing the cumulative effect of the new IDNs and other implementations on the scalability of the domain name system; weighing additional considerations relating to trademark protection; and appointing evaluators for the new gTLD application process.

In the latest draft of the Guidebook, ICANN included some recommendations by the Implementation Response Team (IRT) concerning trademark protection. The IRT included members of the Intellectual Property Constituency (IPC) comprised of representatives from a variety of constituencies, including private practitioners, in-house attorneys for brand owners, registry and registrar representatives, and other domain-name and trademark experts from around the world. The recommendations included in the Draft relate to a number of trademark-owner protection mechanisms. These include a requirement for a registry to maintain a thick WHOIS database at the registry level, rather than the current method of WHOIS information being provided at the registrar level, to provide further safeguards for the maintenance of accurate information. In addition, there are provisions for creation of an IP Clearinghouse, which would make verification of rights easier when a new gTLD is in a sunrise period prior to launch. The Draft also includes the creation of a Uniform Rapid Suspension System ("URS"), which is a post-delegation dispute-resolution mechanism intended to address the most obvious cases of trademark infringement and cybersquatting more swiftly and economically. However, the Globally Protected Marks List, which had been proposed earlier, was not included in the Draft.

The Third Draft Applicant Guidebook is subject to a public comment period, including trademark protection solutions, until November 22, 2009. It is anticipated that following the comment period, and after further discussion and studies amongst the constituencies and ICANN, that another draft of the guidebook would be issued in Q1 of 2010. Rather than provide another timeline that it would not be able to meet, ICANN has chosen to further address a variety of issues in the time necessary to properly achieve a sound implementation, instead of hastily proceeding at the expense of proper protection mechanisms. As a result, implementation of the new gTLD program may be delayed until mid 2010, if not later. Comments on the guidebook, along with comments on other pending ICANN proposals, are encouraged by interested parties, and can be lodged at www.icann.org.

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Focus on Patents

IpHorgan is delighted to welcome Michael L. Kenaga and Valerie Neymeyer-Tynkov to its Patent Group. Michael has nearly 20 years of experience handling United States and foreign patent issues for large and mid-sized companies while Valerie has a depth of experience in the medical technology fields, as a practitioner, an academic and a researcher. Indeed, all members of the group acquired field experience in their chosen areas prior to entering law school and becoming patent attorneys. The team now includes:

Michael L. Kenaga is the Director of Patents. He is a registered patent attorney and his 20 years of patent experience include advising and counseling on patentability, providing infringement opinions, and preparing, filing and prosecuting domestic and foreign patent applications in the electrical and mechanical arts for large and mid-sized corporations. He has substantial experience in IP due diligence in connection with potential acquisitions of companies and his practice includes license-agreement work and litigation support. Michael is a regular speaker and lecturer on issues related to US and foreign patent practice. He is an electrical engineer by training (BSEE) and prior to law school worked for a telecom company and for a military and government contractor. Michael is a member of the Chicago Bar Association, Chair of the Intellectual Property Committee (2004-2005), The Intellectual Property Law Association of Chicago, Past Treasurer (1997-1999), American Intellectual Property Law Association and the Licensing Executives Society.

Sean Swidler prosecutes a broad range of patents, including those for medical, mechanical and electro-mechanical devices along with software and business methods inventions. He is also experienced in all phases of patent litigation and has spent significant time litigating patent claims associated with generic drug applications and medical devices. Sean also counsels clients in patent portfolio development and management, assisting clients in developing protection strategies and tailoring patent portfolios to specific business interests and market factors. Before attending law school, he also spent time working in the construction engineering field, conducting chemical analyses of concrete samples and developing application-specific concrete compositions. Sean has an undergraduate degree in Biomedical Engineering from the University of Iowa and his J.D. from the Chicago-Kent College of Law.

Valerie Neymeyer-Tynkov focuses on drafting and prosecuting patents in the pharmaceutical, biotechnological, medical and chemical arts; preparing legal opinions; devising cost-saving strategies; and troubleshooting patent-related problems for clients. Her technical expertise includes over six years of bench experience in R&D and academic laboratories, including experience manufacturing product under cGMP protocols. Valerie obtained a J.D. with Honors from the Chicago-Kent College of Law, where she has since taught International Patent Law for several years as an Adjunct Professor of Law. Her educational background includes an M.S. in Pharmacology and a B.A. (with Honors) in Literature, Science and the Arts with a minor in Chemistry from the University of Iowa.

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A Whiter Shade of Pale Turns into Some Green for Organist

On July 30, 2009, the House of Lords upheld a 2006 High Court ruling holding that the mere passage of time does not work to bar a claim to a share of copyright ownership. Despite a thirty-eight-year delay in bringing his claim for a share of copyright in the musical work A Whiter Shade of Pale, the equitable doctrines of estoppel and laches did not work to defeat Matthew Fisher's claim where the defendants, Gary Brooker and Onward Music Ltd. suffered no detriment. Rather, the House of Lords held that not only Mr. Fisher's claim was not defeated by the delay, but also that he is a co-author and 40% joint owner of the musical copyright in the song, and that the defendants' license to exploit his share was revoked as of May 31, 2005, when his claim was first brought.

Background

A Whiter Shade of Pale, a cult classic of the 1960s, was originally composed in 1967 by Gary Brooke, the lead singer and pianist of the British rock band Procol Harum, with lyrics written by Keith Reid, the band's manager. The band then signed a contract with Essex Music by which all of the copyrights to the words and music were assigned to Essex in exchange for a percentage of royalties generated from exploitation of the song. Shortly after the agreement was signed, Fisher joined the band as organist and composed the organ solo comprising the beginning of the song and organ melody which appears throughout the duration. After the song was recorded, the band members entered into a recording contract with Essex granting Essex rights to exploit any recording the band made. Mr. Fisher left the band two years later. In 1993, Essex assigned its rights to the song to Onward Music Ltd. In May 2005, Mr. Fisher brought suit to claim a share of the musical copyright in the song.

2006 High Court Ruling

After rejecting Brooker's claim that a fair trial was impossible after such a delay, the High Court found that Fisher was a joint owner of the work. The Court looked at the circumstances under which the song was written, the philosophy of the band being that each musician made his own musical contributions, and specifically whether Mr. Fisher's contribution of the organ solo could be regarded as invention separate from the song as it was originally written. The court drew on the evidence from Mr. Fisher that the solo was inspired by "Wachet auf, ruft uns die Stimme" by J.S. Bach, a completely different work from the one the original song was inspired by, and Mr. Brooker's own admissions that the solo was a result of a "careful creative process on [Mr. Fisher's] part." Based on the facts, the Court found that Fisher had a copyright interest in the song, but that he had granted Brooker and Essex Music an implied license to exploit the copyright in the song, which the Court deemed was terminated when Fisher gave notice to defendants of his intention to claim copyright ownership.

Next, the Court considered whether any equitable defenses might apply to bar Fisher's claim given the considerable delay in bringing it. Defendants asserted that the defenses of estoppel, acquiescence and laches were applicable in five instances: 1) Fisher's failure to assert his claim before the release of the Work in 1967; 2) Fisher's decision in 1967 not to pursue his claim so as to benefit from membership in Procol Harum; 3) the circumstances under which Fisher left Procol Harum in 1969; 4) Brooker's efforts in continuing to promote the Work, keeping it in the public eye; and 5) Fisher's delay in bringing his claims. The Court first noted that for estoppel to work, detriment to the defendant is an essential element. The Court rejected that Fisher's delay caused Essex to rely on the fact that he was foregoing his rights. The Court also found the second instance irrelevant as it relied on a statement in connection with advice Fisher sought at the time, and was only raised during these proceedings. Further there was no evidence to suggest that the defendants suffered detriment as a result of Fisher's failure to speak out. Finally, the Court found that not only was no detriment suffered by defendants by the delay, but rather the defendants benefited significantly in that they received all of the musical royalties to the Work over the years without having to pay Fisher. The Court found that delay itself is no defense to bringing a copyright claim under English law, especially where no equitable relief is sought. The court found that considering the case involved a "valuable property right" it would be "wholly unjust" to deprive Fisher for the remainder of his life and 70 years thereafter of his interest in the Work, when the defendants have enjoyed the fruits of the Work for years with no need to account to Fisher.

To assess what share was appropriate for Mr. Fisher's contribution, the Court first looked to evidence provided in Fisher's case in chief, finding that when Brooker was given a keyboard to play the song as it had been originally written without Fisher's contributions, there was "nothing akin to the flowing organ melody which is such a distinctive feature of the Work." The Court then went on to reject an argument made during the presentation of evidence suggesting that it is custom and practice in the music industry that where an arrangement is a result of collaborative effort from band members, because the skill and labor of each member relates to the musical elements of the arrangement of the original work, and not to creation of the original song itself, the persons contributing should not be entitled to any share in the copyright. The Court stated that it is well established under Copyright Law, despite what practice may or may not be customary, that the fact that a musical work is an arrangement of an earlier work does not mean the arrangement cannot attract separate copyright. Considering that Fisher's pleaded claim was for a 50% share of the copyright and no positive case was advanced by the defendants against this result, the Court granted Fisher a 40% share, as his share was definitely substantial, but not as great as that of Mr. Brooker.

Court of Appeal

The Case was ultimately appealed to the Court of Appeal, which upheld that a fair trial was possible and that Fisher was a joint owner entitled to a 40% share of the copyright, but held that Fisher was not entitled to his share because it was either assigned to Essex under the terms of the recording contract, or in the alternative, if deemed an implied license rather than an assignment, that implied license was made irrevocable by virtue of acquiescence as a result of Fisher's "excessive and inexcusable delay" in bringing his claim. The Court of Appeal found it would be unjust to permit Fisher to succeed in his claim, and that Fisher's implied license to Essex Music was irrevocable due to acquiescence and laches.

Appeal to House of Lords

Fisher further appealed the decision to the House of Lords, the highest court for copyright infringement. Here, there were three matters left to be considered: 1) the implied license issue; 2) the recording contract issue, and 3) the laches, estoppel and acquiescence defenses.

Defendants' argument regarding the implied license was that Essex had taken an assignment of the copyright in the original song, and since it was intended by Essex and the members of the band that Essex would exploit the song as developed for the recording, it also took an assignment of the copyright in the Work, as completed with Fisher's contribution. The House found this argument to be based on implication, meaning that for it to be successful, the elements of implication must be met, namely: 1) it would have to have been obvious to Fisher and Essex that Fisher's copyright was to be assigned, and 2) the commercial relationship between the parties could not sensibly have functioned without the assignment. The House rejected the argument finding it undermined by the fact that the agreement was reached between musicians in their early twenties on the one hand and the highly-experienced music-recording company, Essex, on the other. Further, the House found that an assignment of copyright was not necessary for Essex to exploit the recording; all that was needed was a license.

Turning to the recording contract issue, the House found that the High Court judge was right to reject the contention that the recordal contract worked as an assignment of copyright, finding that the contract operated as a provision licensing rights to Essex to exploit the Work.

The House then addressed the arguments based on laches, estoppel and acquiescence. First, the House noted that acquiescence does not really add anything beyond estoppel and laches. Turning to estoppel, the House noted that for the defense to be successful, defendants had to show that they have reasonably relied on Fisher having no claim, have acted on that reliance, and that it would now be unfair to permit Fisher to claim a share. The House noted that there was no evidence that the defendants would have acted any differently had Fisher brought his claim in 1967. Further, rather than suffer detriment, the House agreed that defendants had benefited considerably by his delay, collecting royalties for nearly 40 years without having to account for any part of them to Fisher.

For laches, the House noted that there is no explicit requirement of detriment, but suggested that it was an immutable requirement and covered by the evaluation of the facts on equitable principles. Thus, something more than mere delay would be required. The House found that the laches defense fails in two ways. First, laches can only act to bar equitable relief, and a declaration as to ownership of a property right recognized by statute is not an equitable remedy. Second, the House found that defendants failed to demonstrate that the delay resulted in an imbalance of justice justifying barring relief claimant would otherwise be entitled to.

Conclusion

While Fisher cannot recoup any royalties earned over previous years, he can now enjoy his share of the copyright in the song. He now also has a right to seek an injunction, although this would have to be decided by a trial judge on the merits.

For musicians and their lawyers, the decision is a victory. Musicians may now be more confident to seek what they believe to be their fair share of the riches from exploitation of their songs over the years. The decision will not be felt as a victory for music companies, on the other hand, who are likely to now be more concerned about the risks of a claim due to old poorly-drafted agreements. In addition, music companies now may fear that the decision may open up the prospect of countless claims from musicians who feel their rights have been overlooked.

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Microsoft v. Mal-Ads—a Summary of Unfolding Action Against Internet Marketing Abusers

On September 17, 2009, Microsoft Corporation (Microsoft) filed five lawsuits in the Superior Court of King County, Washington, alleging that malicious online advertisements, "malvertisements," caused users of Microsoft products to purchase and download malicious software, or "scareware" onto their computers, resulting in damage to consumers as well as to Microsoft's business. Microsoft has requested relief in the form of damages and injunctive relief.

All five suits name anonymous defendants, as Microsoft has been unable to locate the true identities of the persons driving this alleged activity. Microsoft has, however, identified the individuals by the fictitious business names believed to be used by the unknown individuals, namely, DirectAd Solutions, Soft Solutions Inc., Qiweroqw.com, ITmeter Inc., and ote2008.info, noting that Microsoft will amend the complaints once the true identities of the individuals behind the alleged activities are known. The discussion below is limited to the discussion of Microsoft's complaint against DirectAd Solutions.

Microsoft alleges in its complaint against one defendant, JOHN DOES 1-20, d/b/a DirectAd Solutions ("DirectAd"), that DirectAd posed as an ad agency working on behalf of Global Travel International, a legitimate company. DirectAd allegedly placed an ad with Microsoft for display on the MSN network of websites. Microsoft alleges that, according to information and belief, DirectAd has no affiliation to Global Travel International.

Microsoft alleges that DirectAd used this advertising space to direct consumers to a website which created the impression that the consumer's machine was being scanned for infection by Microsoft security software. The scan returned a list of "dangerous files" and urged consumers to purchase fake security software to eliminate them and protect against future problems. According to the complaint, Microsoft has determined that each scan was preprogrammed, and thus false, as was the furnished software. In addition, Microsoft alleges that DirectAd's website, where the false security software or "scareware" was made available, resembled the "look and feel" of Microsoft's Windows XP operating system, that the website generated a look-alike Windows Security pop-up alert and deceptively used Microsoft's trademarks. Microsoft alleges that these instances created the impression that this website, the warning, and the software available for purchase were associated with Microsoft.

Microsoft's prayer for relief requests temporary and permanent injunctive relief against DirectAd, actual damages in amounts to be proven at trial, disgorgement of DirectAd's ill-gotten profits, statutory damages as available, enhanced damages in an amount to be proven at trial under Washington law, and attorneys' fees and costs. Microsoft's claims against DirectAd, which constitute the force behind Microsoft's prayer for relief, are summarized as follows:

1) Violation of §4 of Washington Computer Spyware Act, alleging that DirectAd induced consumers to install software, deceptively misrepresenting the extent to which the software was necessary. As a result, Microsoft has been adversely affected and is entitled to injunctive relief and actual or statutory damages (whichever is greater) in addition to attorneys fees.

2) Violation of the Washington Consumer Protection Act, alleging that DirectAd's activities in targeting Microsoft's programs and customers constitute deceptive practices affecting the public interest.

3) Breach of Contract, alleging that DirectAd entered into a contractual agreement with Microsoft in purchasing ad space, and that DirectAd's submission of a malvertisement breached numerous terms of the agreement and has damaged Microsoft.

4) Fraud, alleging that DirectAd knowingly and with intent to deceive made false and misleading representations, knowing that Microsoft would rely upon them.

5) Trademark Infringement under the Lanham Act 15 U.S.C. § 1114, alleging that DirectAd's use of Microsoft's trademarks was unauthorized and constituted counterfeits of Microsoft's trademarks to promote, market or sell products and services, thus damaging Microsoft.

6) False Designation of Origin under the Lanham Act – 15 U.S.C. §1125(a), alleging that DirectAd used Microsoft's trademarks in a manner that is likely to cause confusion, mistake or deception as to the origin, sponsorship or approval of such goods or services, thus damaging Microsoft.

7) Unfair Competition/False Advertising under the Lanham Act – 15 U.S.C. §1125(a), alleging that DirectAd has used Microsoft's trademarks in connection with goods or services with false, misleading descriptions in commercial advertising, thereby misrepresenting the nature or qualities of their, or another person's goods or services.

8) Violation of the Federal Computer Fraud and Abuse Act – 18 U.S.C. §1030(a)(2), (4), and (5), alleging that DirectAd knowingly and with the intent to defraud accessed a protected computer without authorization, attempting to obtain value. Microsoft also alleges that DirectAd knowingly caused the transmission of a program or other information via computer with the intent to cause damage, resulting in loss of at least $5000 to one or more persons during a one-year period.

9) Intentional Interference with Contractual Relationships and Business Expectancies, alleging that Microsoft has contractual relationships and business expectations based upon the programs, services and software it provides to consumers; that DirectAd knew of these relationships; that DirectAd promoted and sold scareware targeting Microsoft programs, knowing that this activity would interfere with Microsoft's existing and prospective contracts with consumers.

10) Unjust Enrichment, alleging that DirectAd's conduct constitutes unjust enrichment at Microsoft's expense in violation with Washington common law.

DirectAd's response, as well as the response from the other John Doe defendants has yet to be seen.

In addition to Microsoft's own battle against malvertisements and scareware, in the days before these actions were filed, the New York Times claimed that it unintentionally ran an advertisement on its website for a supposedly legitimate company. This ad redirected consumers to a promotional website for anti-virus software, persuading them to purchase additional protection, much like the activity alleged in the Microsoft complaints.

It has been suggested by some that the incident with the New York Times and the instances involving Microsoft are linked. Whatever the case, these situations point to potential vulnerability in even the most trusted online sources, and raise an increased need for consumers' own skepticism in online marketing. Although safety in exposure to internet marketing has increased substantially, thanks to policing efforts by entities such as Microsoft and the New York Times, among others, if consumers operate with a heightened sense of awareness and responsibility, purveyors of malvertisement and scareware scams will see their profit base dissipate.

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Swiss Trademark Special

The Swiss PTO has announced its plans to abolish fee reductions for electronic applications, which will effectively increase the filing fees by 60%. Starting January 1, 2010, official filing fee for a trademark in up to three classes will be CHF 550 instead of the current rate of CHF 350. The fee for each additional class will become CHF 100 instead of the current CHF 60. In light of these changes, brand owners considering applying for trademark protection in Switzerland may wish to file their applications before the end of the year.

The current filing fees date back to 2002 when they had been lowered to encourage electronic filing. Because over 95% of new applications are now filed electronically, the Office feels that the incentive is no longer necessary and plans to use the additional revenue to finance further development of its electronic services.

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FCC Proposes Rules That Support Net Neutrality

On September 21, the Federal Communications Commission (FCC) proposed new rules that would require internet service providers to treat all content equally in terms of transmission speed. More recently, an announcement came that the rules may have proponents in Congress— Sen. Byron L. Dorgan (D- North Dakota) and Sen. Olympia J. Snowe (R-Maine) have both announced a possible proposal for new legislation in line with the new rules proposed by the FCC.

The principle of net neutrality is ensuring that consumers have unhindered access to all legal content, regardless of actual subject matter, its source, or the amount of bandwidth it requires. The intent is to ensure that network operators allow access to all content equally, regardless of whether it is bandwidth-heavy (e.g., music or video streamed from YouTube), or , like an SMS text message, only requires minimal amounts of network resources to transmit. The proposed rules attempt to codify principles of openness, beyond the current regulations, which many find problematic because although these regulations require network service providers to enable access to all legal content, they do not mandate that a network operator could not impede certain traffic because of its heavy bandwidth usage.

The issue prominently came to light when Comcast was accused of slowing some peer-to-peer traffic, asserting that it monopolized a disproportionate amount of bandwidth. Comcast maintained that it was not violating any laws and was merely managing its network resources, but nonetheless did change its practice. The proposed rules aim to officially make such action impermissible, whether the access is being hampered on the basis of content or on the basis of bandwidth usage. Another aim is to prevent a network operator from blocking content provided by a competitor. For example, AT&T and Apple have attempted to prevent iPhone users from accessing competitor's VoIP services, blocking access to the internet phone service Skype, maintaining that its use only clogs the network for other users. If proposed rules pass, AT&T may be forced to open up access.

The proposed rules would not only be applicable to ISPs, but also to mobile phone service providers, affecting access to content using mobile phones and other wireless devices. Such new rules would be a boon to content providers like Google, who owns YouTube, but would come under strong objections from network providers, like AT&T and Comcast, who view the proposed rules as a hindrance. Network providers are concerned that new rules may interfere with tiered pricing structures for faster connections and argue that there is no need for interference into how they manage their networks.

Wireless phone carriers are perhaps amongst the strongest objectors, as it often benefits them to slow or block data-heavy sites, so that their networks are not clogged or slowed when users are accessing sites that require a disproportionate amount of bandwidth, as compared to users accessing mobile-specific sites or receiving text messages. For example, many iPhone users in areas with a significant concentration of iPhones are finding that their service is slowing, as the increased use of such devices drains the network resources. AT&T has attempted to approach this issue by blocking access to some bandwidth-heavy applications.

It remains to be seen whether these rules will be adopted. In the meantime, content providers and network operators will continue to debate how to balance unimpeded access against smooth network operation and the need to manage network traffic so as to avoid bottlenecks and slowdowns across the board.

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Goodbye to Medinol: Federal Circuit Alters Fraud Standards

The Lanham Act provides that a registration procured by fraud is subject to cancellation. Over the past several years, there has been much discussion and litigation regarding what constitutes fraud egregious enough to subject a registration to cancellation. A 2003 decision by the United States Patent and Trademark Office Trademark Trial and Appeal Board (TTAB), Medinol Ltd. v. Neuro Vasx, Inc., proffered an answer to this question and elucidated a trademark owner's exposure to claims of fraud. In Medinol, the TTAB held that a registration may be subject to cancellation for fraud in situations where a registrant attests that a mark is in use on multiple goods when in fact it is not. The same result would occur where an applicant files a Statement of Use identifying multiple goods, where the mark is not being used on all goods. Under Medinol, any such fraud in the procurement or maintenance of a registration could render the entire registration void. It would not impact any common law rights, but it would make the federal trademark registration and the rights that come with it, disappear.

According to Medinol, attesting that a mark is in use on all goods identified in an application or registration, when it is not, constitutes a false statement. Since registration rights in the United States are based on use of a mark, a statement concerning whether a mark is in use is certainly material in obtaining or maintaining a federal trademark registration. But what knowledge of the falsity of a statement is required? The Medinol decision held that if a registrant knew, or should have known, that a statement made in connection with a registration was false, then the entire registration could be void for fraud. This led to registrants and applicants taking considerable steps to ensure their marks were in use on all goods identified in their filings before attesting to same. This also rendered a number of registrations void due to simple misunderstandings.

In Bose Corp. v. Hexwave Inc., one such misunderstanding caused the TTAB to find a registration void for fraud. There, Bose Corp. had registered the mark WAVE covering several different goods and opposed registration of Hexwave Inc.'s application for HEXWAVE. In the opposition proceeding, Hexwave counterclaimed for cancellation of the Bose WAVE mark on the grounds that Bose committed fraud on the PTO in renewal of that registration.

When Bose sought renewal of the registration, it attested that the mark was in use on all goods identified in the registration. However, Bose had actually ceased manufacture and sales of one type of product contained in the registration before the time to renew. However, the company was still servicing those goods for prior purchasers and Bose believed such service constituted use of the mark. The TTAB disagreed, finding that servicing did not constitute actual use of the mark on such goods. Therefore, the statement that the mark was in use on all goods identified in the registration was false and material to renewal of the registration. Further, since Bose was no longer selling the goods at issue, TTAB found that Bose knew or should have known it was not using the mark in connection with those goods at the time it filed for renewal. Following Medinol, these facts and imputation of knowledge to Bose constituted fraud on the PTO and the TTAB cancelled the WAVE registration in its entirety.

Bose appealed this decision to the United States Court of Appeals for the Federal Circuit. On August 31, 2009, that court issued a decision reversing the TTAB decision and essentially overruling Medinol. Per the Federal Circuit, though a party's knowledge is certainly relevant to the question of whether a statement is fraudulent, the standard is much higher than what the TTAB found in Medinol and applied in Bose. Rather than establishing that a registrant must have "known or reasonably should have known" a statement was false at the time it was made, the Federal Circuit held that establishing fraud on the PTO in this context requires a showing of an actual intent to deceive the PTO supported by clear and convincing evidence.

Looking at the facts in Bose, the Federal Circuit agreed with the TTAB that servicing goods did not constitute actual use of the mark on those goods. Therefore, the WAVE mark was not in use on all goods at the time Bose sought renewal. However, the court did not find any actual intent to deceive the PTO when the renewal was filed. Rather, the renewal was filed on the mistaken belief that service of goods constituted use of the mark on those goods. Because there was no actual intent to defraud, the registration should not have been cancelled, at least not in its entirety.

By dictating a firm standard that fraud on the PTO requires a showing, by clear and convincing evidence, that there was an actual intent to deceive, the Federal Circuit essentially overrules the Medinol decision and significantly changes USPTO fraud jurisprudence. Trademark owners should still take care in their statements to the USPTO in connection with registration or renewal of their marks and should certainly inquire as to use of their marks on all goods identified when attesting to same. However, the fraud standard of actual intent to deceive the PTO will expose far fewer registrations to potential cancellation. If a party has an objective, good faith belief that a mark is in use on all goods identified in a registration or application, then if it turns out later the mark is not in use on some goods, the registration will not be found void for fraud in its entirety.

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Microsoft Wordless Following Injunction to Stop Selling MS WORD

In an August 11, 2009 decision (i4i Ltd. vs. Microsoft Corporation) that struck some as rendering Texas justice, and left others with a sense of schadenfreude, Judge Leonard Davis of the US District Court for the Eastern District of Texas entered an order wherein "Microsoft Corporation is hereby permanently enjoined from performing the following actions with Microsoft Word 2003, Microsoft Word 2007, and [similar products]..." The judge's order not only enjoined the further sale of any copies of MS WORD "that have the capability of opening a .XML, .DOCX, or .DOCM file ('an XML file') containing custom XML" in the United States, but also confirmed a jury verdict in favor of the plaintiff in the case, i4i Ltd., awarding past and prospective damages in the amount of $200 million. Even for Microsoft, this is real money.

Microsoft filed the usual post trial motions to overturn the jury verdict, to reduce the amount of damages, to grant a stay of the injunction pending appeal, and others. In its final order, the court denied Microsoft's motions, and entered a permanent injunction. Some district courts, and the US Court of Appeals for the Federal Circuit, have occasionally stayed the effect of injunctions, but not payment of damages, pending the hearing of an appeal. The district court denied this motion but did provide a stay of the injunction order for a period of sixty days to enable Microsoft a period for appeal. Microsoft will be required to post a bond for the damages in the event of an appeal.

Following the district court's final order, and as was widely expected, Microsoft moved the Federal Circuit for an emergency stay pending full hearing on the appeal. Microsoft has briefed its motion, relying in part on the fact that a reexamination was filed and accepted by the US Patent and Trademark Office, and indeed that a "preliminary rejection" of the claims had been instituted against the patent in suit. It has been noted by at least one commentator, however, that reliance on the reexamination rejection is unusual in that the Federal Circuit does not give much weight to USPTO actions in a reexamination. Statistically, in most reexaminations, rejections are usually overcome and at least one of the original claims in a reexamined patent survives the proceeding and is confirmed by the USPTO in a Reexamination Certificate.

Additional grounds supporting the motion also have been relied upon, including the anticipation and obviousness arguments rejected by the jury and the district court at trial. In an appreciation of the urgency of this matter, oral arguments on the merits of the Injunction have been scheduled for September 23, 2009. The Federal Circuit's decision on the emergency stay motion is expected before October 10, 2009, after which the appeal may proceed in due course on the damages issues. In the meantime, Microsoft is most likely working on a patch that will disable the functionality of the .XML applications, which during trial i4i had shown was a possible fix in the event that the injunction is not stayed.

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ICANN's Efforts to Combat Domain Name Tasting a Sweet Success

Last year, ICANN, the governing organization for domain names, approved a provision that attempted to combat a common abuse of the five-day Add Grace Period (AGP) called domain tasting, by making it more expensive to register domain names en masse. This move worked, as recent report released by ICANN shows a 99.7% decrease in AGP deletes during the period of June 2008 to April 2009.

Domain name tasting refers to the practice of speculatively registering large quantities of domain names, populating attendant websites with pay-per-click advertising, monitoring incoming traffic, and dropping the names that have not generated enough revenue to justify acquisition at the end of the AGP for a full refund. Registrants whose business models are based on tasting often delete as many as 95.5% of their newly-registered domains within the AGP. Tens of millions of domains were registered speculatively and deleted each month through the loophole of tasting. Frequently, these domain names would include trademarks or misspellings of trademarks and would appear on companies' domain name watch reports.

To combat the abuses of tasting, ICANN made a registrar-level transaction fee of $0.20 per domain name registration non-refundable if the number of domain names deleted each month exceeded the maximum of (i) 10% of the registrar's net new registrations in that month, or (ii) fifty (50) domain names, whichever is greater. This change ended the practice of refunding the full fee for "tasted" domains. For registrants and registrars whose business model was based on these abuses, the change added a significant cost to doing business—the more deletes that would occur each month, the greater would be the expense for speculatively registering domain names. It appears that most registrars instead chose to stop the abusive practice.

Of particular note is a review of the drop in number of deletes at the registry level. Most dramatic is the decrease in .COM monthly deletes, dropping from over 15.8 million deletes in June 2008 to less than 38,000 in April 2009. The .NET registry also saw a significant drop from more than 1.8 million deletes to around 6,200 deletes in the same period. Overall, the reporting gTLDs in the study showed a decrease from 17.6 million deletes to just over 58,000 deletes.

Based on the results of the study, one avenue of domain name abuse appears to be substantially curtailed. As a result, trademark owners should see a significant reduction in expenses associated with reviewing short-lived domain name registrations that took advantage of the goodwill associated with well-known trademarks for the duration of the AGP before being dropped and "tasted" anew.

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ACR in Action

In our November 2008 Newsletter, we provided an overview of the USPTO's new Accelerated Resolution Process ("ACR") in trademark oppositions. The ACR process was created as a means to streamline and simplify opposition proceedings and to allow for more timely resolution of same by eliminating trial. In order to take advantage of ACR, the parties must stipulate that, in lieu of trial, the Board can resolve any issues of material fact. Generally, ACR is intended as an avenue of rapid resolution of "simple" cases—where the issues and the facts are clear. Because ACR only went into effect in late 2007, there have been few decisions to judge whether the process indeed yields the streamlined results it is intended to provide.

The ACR fast track is available to TTAB litigants at the outset of a proceeding and generally that is where the decision to take the track is made. However, the rules do allow for the parties to opt in to the ACR process at any time during a proceeding as well. Thus, where discovery reveals the issues between the parties are relatively simple, the parties can opt in to ACR and thus obtain a TTAB decision of their dispute in a relatively short order.

Very recently, the TTAB issued a decision in a case where the parties used ACR. In Eveready Battery Co., Inc. v. Green Planet Inc., Eveready opposed registration of Green Planet's application to register SLICK ULTRA PLUS for disposable razors, basing the opposition on, among other registrations, Eveready's registration for SCHICK for razors, and its family of SCHICK-formative marks for such goods. The opposition was filed in October, 2007, before the ACR rules were in effect. Thus, the case started off on the regular opposition track and the parties conducted discovery. After the close of fact discovery, but before any trial, Eveready moved for summary judgment contending there were no disputed facts as to its priority of use of SCHICK, identity of goods, similarities between the marks and likelihood of confusion. The motion was denied as the Board felt there was a disputed factual issue as to the similarity of the marks.

Following denial of summary judgment, the parties agreed to shift their case to the ACR track. They stipulated to a number of facts, including Eveready's priority of use and also stipulated that the TTAB could render its decision on the merits of the case, resolving fact questions based on a preponderance of the evidence. The various stipulations left only one issue for the TTAB to decide: were SLICK ULTRA PLUS and Plaintiff's family of SCHICK marks so similar as to create a likelihood of confusion. The parties briefed the issue and the TTAB ultimately decided the fact question in favor of Eveready, finding the marks so similar as likely to be confused.

The use of ACR in this case allowed the parties to obtain a final decision on the merits well before they would have, had they stayed on the regular case track and gone through the time and process of a trial. Once the case was fully briefed, the TTAB issued a decision within sixty days. The jump to ACR in this case likely advanced the final decision on the merits by a full year. In addition, by doing away with trial, the parties likely saved tens of thousands of dollars.

The Eveready decision indicates that ACR can and does work. Though not used from the outset, when the parties realized their case was quite simple—were the marks similar—the availability of the process indeed streamlined the litigation. It allowed the case to be resolved faster, by perhaps as much as a year, had the parties not used ACR. Thus, not only should TTAB litigants consider ACR at the outset of a proceeding, but they should also think of opting in to the process where the issues in a case have narrowed or become clear. Given this, ACR appears to function as advertised.

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A Sound Investment

In an era where the music industry is continuing to struggle with declining CD sales and other problems due to the movement into the digital age, music publishing, on the other hand, is prospering more than ever.

Investors, such as pension funds and equity firms, are increasingly being drawn to purchasing publishing catalogs, especially of seasoned musicians with proven longevity, which they consider to be promising assets due to the recurring and stable cash flow they provide from the royalties due every time songs are played on the radio, on television, in movies, in video games, in advertising, and online.

With the digital age, the entities that rely on forms of distribution for profit, i.e. labels, are being forced to consider other ways of doing business or risk failure. The internet has largely erased the need for physical copies of prerecorded songs and piracy continues to burden the distribution of music digitally. Publishers, on the other hand, are not reliant on income from distribution of prerecorded music. Rather, publishers collect revenue every time any one of the "sticks" in the "bundle of rights" included in copyright ownership of a particular song is exploited, be it public performance, synchronization of the song with audiovisual content, or print rights. Due to the diverse sources from which royalties are incurred, investment in music publishing is increasingly being considered a stable investment. Investors are attracted to the catalogs because their value does not monetize quickly, like with traditional assets, but rather revenue is constantly and steadily generated over a long period of time as songs are exploited. Moreover, due to the characteristics of the music industry, royalties are generated, most often, on an international basis.

Most recently, First State Media Group acquired Sheryl Crow's publishing catalog for $10 million, including 153 of her songs released from 1993 to 2008, and also rights to her next two albums. First State Media also acquired the DreamWorks Music Publishing catalog back in 2007. Its Media Works Fund I has made over $150 million music-copyright investments since its launch in October 2008, and includes the catalogs of The Carpenters, John Denver, Evanescence, George Benson and Creed.

Other examples include Pegasus Capital, which purchased song publisher Spirit Music Group for an estimated $55 million for its rights to works from artists such as Madonna and Frank Sinatra. Dutch Fund ABP, the world's third largest pension fund, purchased the Rodgers & Hammerstein catalog, containing songs from "The Sound of Music," among others, for an estimated $200 million, and in the biggest deal to date, Vivendi's Universal Music Group purchased Bertelsmann BMG's catalog in 2006 for $2.1 billion in order to repay debt from share repurchases. The catalog includes songs from Coldplay and Barry Manilow.

Further, EMI Group Limited recently considered securitizing its music catalog to refinance its corporate debt, before it decided to use corporate debt financing instead, and the recent death of Michael Jackson has led many to wondering whether the Beatles music catalog will be the next to be collateralized.

Ownership of songs by investors is a twenty-four-hour job. The songs must be constantly promoted and exploited for the revenue to be generated, meaning they need management teams with know-how. Currently, investors are competing with publishing divisions of music companies for ownership of these rights. It does not matter whether the catalog is owned by an investor or publisher, so long as the investor maintains an experienced management team to oversee exploitation of the songs.

For an artist, the upside is having access to a whole management team whose job is to constantly find avenues for exploiting the artist's music. For example, under Crow's deal with First State Media, Crow will work with the management team to promote the use of her songs in television and movies, and, she will also work with First State's existing songwriting teams to co-write bespoke songs for film productions. She retains her songwriter's share of copyright, meaning she will partake in any upside profit generated by First State's management team.

The idea of collateralizing publishing catalogs originated in 1997 with David Pullman's "Bowie Bonds." Pullman, founder and chief executive of Los Angeles-based Pullman Group LLC, issued $55 million worth of 10-year asset-backed bonds to insurer Prudential Insurance Co. on behalf of rock star David Bowie, based on future royalties from 25 of Bowie's albums recorded before 1990. The deal became perhaps the most famous IP securitization of all time, with the securities yielding 7.9%. The bonds were praised for their long life and international and steady income streams. The securitization of the collections of other artists, such as James Brown, Ashford & Simpson and the Isley Brothers, later followed.

It appears Pullman's idea has expanded into a trend, further shaking up the ever-changing music industry. While some fear that the increased interest in publishing catalogs will ultimately drive prices up, for now, more and more songwriters are placing their catalogs on the market and more and more investors are eager to buy. At a time when many asset classes are performing poorly, well-constructed portfolios for institutional investors are increasingly including investments in intellectual property rights.

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A Sound Exchange for Pureplay Radio

As reported on Pandora's blog on July 7, 2009, "the royalty crisis is over!" After two years of negotiation, three internet webcasters, AccuRadio, radioIO, and Digitally Imported, reached an "experimental" settlement with SoundExchange, the group which collects royalties on behalf of artists and labels. The Settlement affects royalty rates to be paid for the streaming of sound recordings online, and gives "pureplay webcasters" (those that generate a predominant portion of their revenue from the online streaming of sound recordings under a statutory license) an alternative to paying the fees directed in May 2007 by the Copyright Royalty Board ("CRB"). Webcasters had immediately protested the rates set by the CRB, the three judge panel which sets rates for statutory copyright licenses. They argued that the costs would run them out of business. Under the Settlement, artists are essentially providing pureplay webcasters a discount from streaming rates set by the CRB in exchange for a share of the revenue generated by the internet webcasters. Other pureplay webcasters, such as the popular Pandora, are also opting-in to the Settlement's terms.

Previous CRB Decision

The Settlement came just days before a July 10, 2009 decision of the US Court of Appeals for the District of Columbia upholding the royalty rates established by the CRB back in May 2007. The rates were established to comply with the Digital Millennium Copyright Act (DMCA), passed by Congress in 1998, which requires performance royalties to be paid for satellite radio and internet radio broadcasts in addition to publishing royalties. In contrast, traditional radio broadcasters pay only publishing royalties and no performance royalties. Under the Copyright Act, the CRB judges were required to set rates that "most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller." The CRB set the per-play rates for 2006-2010 at $.0008 per play for 2006, set to increase to $.0019 by 2010; also requiring webcasters to pay a minimum fee of $500 for each channel broadcast (though SoundExchange later settled on an annual cap of $50,000). When a group of webcasters, led by the Digital Media Association (DiMA), sought review of the rates, SoundExchange defended the rates by providing expert testimony.

Webcasters argued that the "willing buyer-willing seller" standard used by the CRB was unfair as it did not take into account the potential impact of the royalties on the stability of the businesses that would be subject to them (in this case, webcasters). By contrast, the standard used to calculate rates for satellite radio in a separate decision by the CRB, based on section 801(b) of the Copyright Act, did, assessing not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music. This standard resulted in a rate for satellite radio companies of 6-8% of annual revenues, which is much lower than what SoundExchange wanted, and significantly lower than the rate of 40-70% of annual revenue the CRB set for internet radio.

Since the CRB set the internet radio rates back in 2007, webcasters have expressed their opposition, arguing that they could not stay afloat and also pay the rates. Pandora, for example, publicly criticized the rates, pointing out that the fees would take up approximately 70% of its $25 million in revenue, and likely run the company into the ground. Before the 2007 decision by the CRB, internet and satellite radio companies were treated the same as terrestrial radio broadcasters. They were only required to pay composers of songs by purchasing blanket public performance licenses from ASCAP and BMI. The 2007 change was meant, in part, to account for the argument by the recording industry that internet play is a "substitute" for purchase of the actual recording, diminishing the amount of income an artist might otherwise receive.

The Settlement

The July 2009 Settlement between pureplay webcasters and SoundExchange was reached under the authority of the Webcaster Settlement Act of 2009, which granted webcasters an additional thirty days after enactment to negotiate an alternative royalty structure to the criticized rates set by the CRB.

The Settlement applies to all commercially-released sound recordings licensed under Sections 112 and 144 of the Copyright Act, and not just recordings released by members of SoundExchange. It provides an alternative rate structure for pureplay webcasters who elect not to pay the rates set by the CRB. The Settlement is retroactive to 2006 and set to be in effect until 2015 for large pureplay webcasters, and 2014 for smaller pureplay webcasters. The terms of the Settlement were officially entered into the Federal Register on July 17, 2009 (74 Fed. Reg. 34796, July 17, 2009), beginning the 30-day period within which eligible webcasters wishing to join must file a Notice of Election with SoundExchange. Any pureplay webcasters not signing on to the Settlement must continue to pay CRB rates.

Under the Settlement, webcasters opting into the deal are divided into three classes based on the size and characteristics of their business: 1) large pureplay webcasters; 2) small pureplay webcasters, and 3) pureplay webcasters that provide bundled, syndicated, or subscription services. All payments are made by the webcasters directly to SoundExchange, which collects on behalf of the artists and labels.

Large pureplay webcasters, those earning more than $1.25 million in annual revenue, are given the option of paying either 25% of total revenue or a per stream rate significantly discounted from that set by the CRB increasing from $.0008 for retroactive 2006 payments to $.0014 by 2015.

Small pureplay webcasters, those earning $1.25 million or less, have the choice of paying a percentage of revenue or a percentage of expenses. For 2009-2014, the percentage is set at 12% of the first $250,000 in gross revenue and 14% for earnings beyond that. For 2006-2008, retroactive payments of 10% of the first $250,000 and 12% after that are required to be paid. At all times, for small webcasters electing to instead pay a percentage of expenses, the rate is 7%. The Settlement also provides a transitional rate for small webcasters who exceed the $1.25 million revenue cap.

Webcasters providing bundled, syndicated, or subscription services, such as Rhapsody, will pay a set fee per performance equivalent to that set by an agreement previously reached between SoundExchange and the National Association of Broadcasters, discussed below, set at $.0008 in 2006 increasing to $.0025 in 2015.

All pureplay webcasters opting into the Settlement must pay a minimum $25,000 fee annually which can then be applied to their royalties owed, and also must provide SoundExchange with census reports accounting the actual recordings played and total listenership, and retain server logs for at least four years. Small webcasters can opt for less stringent reporting in exchange for a "proxy fee".

Conclusion

The Settlement comes with a sigh of relief in light of the pending doom felt by most pureplay webcasters after passage of the 2007 CRB rates. Although the Settlement was negotiated by only three webcasters, AccuRadio, radioIO, and Digitally Imported, Pandora has already confirmed its intention to sign on, and others are expected to follow. Pandora announced on its blog that it will begin limiting listening to 40 hours per month on the free version of its service. Listeners who use the service for 40 hours per month or more can then opt for unlimited listening for the remainder of that month for a $0.99 fee.

As a result of this Settlement, royalty rates for almost every member of the webcasting community are now shielded from the CRB rates by negotiated deals with SoundExchange. Most public radio stations have now elected to abide by the terms of an agreement between SoundExchange and the Corporation for Public Broadcasting ("CPB") which has introduced reduced rates for those noncommercial stations with a large web audience which were before required to pay at commercial rates anytime their internet audience exceeded 159,140. In addition, eligible commercial broadcasters simulcasting on the internet can now elect the terms under the deal negotiated between SoundExchange and the National Association for Broadcasters, under which new "per performance" rates are slightly lower than those set by the CRB.

Full CRB rates still apply to various religious and educational webcasters that have not reached agreement with SoundExchange. These remaining webcasters have 30 days from enactment of the Webcaster Settlement Act of 2009, which was signed by President Obama on June 30, 2009, to negotiate deals with SoundExchange.

As for other traditional radio companies, the music industry is pushing to create a level playing field for all forms of radio, by requiring all over-the-air radio to pay the performance royalties as well via a new bill called the Performance Rights Act (H.R. 848), introduced in February 2009. Webcasters support the idea, viewing the non-payment by terrestrial radio companies as both unfair to webcasters currently paying the fees, and to the artists left uncompensated when their works are played on traditional radio. The National Association of Broadcasters, however, has launched a campaign to avoid having to pay performance royalties, airing advertisements suggesting that over-the air radio is the life-line for artists, generating substantially more revenue than online webcasters, considering the size of audience, and arguing that any performance fees paid would ultimately end up in the hands of major record labels. Lawmakers in support of this view introduced in February 2009 the Local Radio Freedom Act, a resolution declaring opposition to "any new performance fee, tax, royalty or other charge on radio for music airplay" (House Resolution 49).

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Court-Directed Product Recalls Early in Infringement Litigation

Trademark infringement litigation often starts with a request for preliminary injunctive relief. In the usual case, at the outset of litigation, plaintiff will seek a preliminary injunction ordering defendant to immediately cease its use of plaintiff's mark and stop all sales of potentially infringing goods. In order to obtain preliminary injunctive relief, a plaintiff must establish a) that it is likely to succeed on the merits of its case; b) that it will suffer an irreparable harm in the absence of preliminary injunctive relief; c) that the balance of hardships tilts in its favor and d) that a preliminary injunction is in the public's interest. It is fairly easy to see how cessation of use of an infringing mark and cessation of sales of infringing goods fit within these parameters: infringement destroys plaintiff's goodwill, which could be an irreparable harm; and may cause public confusion, which should be avoided.

If plaintiff ultimately proves its infringement case (or settles) it will likely seek a permanent injunction further barring defendant from use of plaintiff's mark and providing other relief to the plaintiff. Among the more common permanent-injunction provisions is a requirement that defendant recall any infringing product from distributors and resellers.

When, however, would a recall be appropriate at the preliminary stage of litigation? What behavior or facts would support a court-mandated recall at the outset of litigation? A recent decision by the United States Court of Appeals for the Ninth Circuit addressed this very issue.

In Marlyn Nutraceuticals Inc. v. Mucos Pharma GMBH & Co., Mucos owned a federal trademark registration for the mark WOBENZYM, which covered dietary supplements. Mucos manufactured the supplements and distributed them globally. Marlyn was, at one time, the sole US distributor of WOBENZYM. In 2006, a dispute arose between Marlyn and Mucos regarding alleged product changes and Marlyn took it upon itself to manufacture and continue marketing dietary supplements under the mark WOBENZYM pursuant to a different formula.

Mucos brought a trademark-infringement action and among the preliminary injunctive relief sought was a recall of WOBENZYM sold by Marlyn and restitution to customers. After what appears to have been a long, thorough and contested hearing on the preliminary injunction, the U.S. District Court in Arizona granted the injunction and Marlyn appealed.

The appeals court reviewed the question of propriety of the recall order. This was a case of first impression, so there was no prior binding precedent on the issue. The Ninth Circuit first pointed out the distinction between prohibitory injunctive relief, which is intended to prevent additional action by a party and to maintain the status quo and mandatory injunctive relief, which goes further than maintaining status quo by forcing a party to take action. Such mandatory relief is allowed at the preliminary injunction stage only in extreme cases. Here, the Court considered the recall mandatory injunctive relief, since it required Marlyn to take steps to pull product off the market and out of the hands of consumers. Because the relief was mandatory, what standard must be met, if any, to support the recall requirement?

The Ninth Circuit adopted a test first articulated by Third Circuit Court of Appeals which requires a plaintiff to meet threshold requirements before mandatory injunctive relief is granted. In the context of product recalls in trademark-infringement litigation, the additional factors to consider when presented with a recall request include a) whether defendant's infringement was willful or intentional; b) whether the risk of confusion to the public and injury to the trademark owner are greater than the burden of the recall to the defendant; and c) how substantial is the risk of danger to the public due to the defendant's infringing activity. There is no indication as to which factor may be determinative, but all must be considered.

Because this was an issue of first impression, the Appeals Court remanded the matter to the District Court to consider the propriety of the recall in light of these additional factors. As of this date, no decision has been issued by that court. The Appellate decision, however, provides some fairly clear guidance as to what facts are relevant when a plaintiff seeks a recall at the preliminary injunction stage of an infringement action. Due to the drastic nature of the relief, the situation will have to be fairly egregious. Where a defendant's illegitimate motives are clear, or where the public may be in danger—especially where public health and safety are at issue—a recall may be appropriate. This could encompass situations involving counterfeiting and low-quality knockoffs, where motive is fairly clear. Defendants who act in good faith may be able to avoid a recall order. Similarly, some classes of product may lend themselves more readily to a recall, such as foods and drugs or supplements that could impact health, or manufactured goods that might impact safety.

Though the Marlyn Neutraceuticals decision is recent, the standard required to obtain a recall as preliminary injunctive relief has been set. Where a party is considering litigating against an infringer, it should closely analyze the facts to determine whether a product recall at the preliminary injunction stage is appropriate.

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CAFC Requested to Delay Rehearing of Tafas Decision in Patent Rules Reform Matter

On Monday, July 6, 2009, the United States Court of Appeals for the Federal Circuit (CAFC), the sole appellate-level court having jurisdiction over patent appeals in the U.S., granted an en banc rehearing to the parties and has vacated a March 20 decision of a CAFC panel comprising Judges Rader, Bryson and Prost in Tafas and GlaxoSmithKline v. Doll (Commissioner for Patents). The earlier CAFC decision had provided mixed guidance as regards the challenge to the rule changes restricting claims and continuations practice before USPTO which met with wide disapproval of the patent community. In accordance with its procedures, the CAFC had vacated the original decision in order to rehear and possibly overturn or modify that decision by a rehearing before the whole court. The date for oral arguments before the full Federal Circuit court is set for October 7, 2009.

The CAFC panel had crafted a compromise resolution to the issue of whether the USPTO had the power to "enact" by regulatory fiat rules that change substantive rights of prospective applicants as well as those whose applications are already on file with the USPTO. That is, the original decision provided a mixed ruling that could have significantly changed the way most practitioners practice and prosecute patent applications before the USPTO. The prior CAFC decision had remanded the case to the lower District Court for a determination of whether the rules were to be applied retroactively.

From comments posted on blogs and other media, most patent practitioners consider the rule changes as more properly being within the province of the legislative branch, as was held by the District Court below with respect to at least some of the rule changes.

At rehearing, all of the judges of the CAFC, sitting as a single judicial body, will hear the case and decide it anew based on the briefs already submitted by the parties and numerous amici curiae, as well as on limited additional briefs. Appellant's (USPTO) additional brief is due within 30 days (August 5), followed by a 20-day period within which the Appellees (Tafas and GSK) may file a subsequent brief (August 25), followed by a 7-day period within which the Appellant may file a reply (September 1). Additional briefs are limited to 7,000 words and any reply brief is limited to 3,500 words. In a late breaking development, both the USPTO and Appellants have consented to postponement of the briefing schedule until 60 days after the new Undersecretary of Commerce for Patients and Trademarks (David Kappos) is confirmed by the US Senate. This delay is sought to permit the new head of the USPTO a period of time in which to review and perhaps withdraw the new USPTO rules, which are the subject of the litigation.

The issues that the CAFC will decide include the validity of the onerous rule changes that were announced in January 2006, implemented in November 2007, and stayed before they took effect by the lower court pending litigation. The lower court struck down the more egregious rules, but made a determination that some of the proposed rule changes be permitted to take effect as being within the purview of the USPTO regulatory authority. The original CAFC three-judge panel made its own determination, which is now open to further review by the full court.

Several points need be made about the proposed rules. First, the CAFC decision to grant en banc review is considered by some as indicative that the CAFC may overturn all the rules, simply because the court would not have granted the review if only to affirm the three-judge-panel decision. Second, even the en banc decision is open to further review by the US Supreme Court. Finally, even if the USPTO were to prevail on all counts, there is some question whether the USPTO will implement these—or any—rules changes, in view of the pending appointment of a new USPTO head.

The advancement of the arts and sciences is a major concern of the new administration and any decision of the CAFC may be mooted by the new management at the USPTO reexamining the backlog and perceived patent quality problems. Any proposed solutions must formulate a new strategy with the possible cooperation of the broader patent community. The indications are trending toward the new rules not being implemented, and the previous experience of Mr. Kappos as head of the IBM Patent Department should provide some measure of clear thinking about the USPTO's dual concerns, i.e., the severe backlog and the need for more quality patents to be issued by the USPTO.

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Design Patents—An Inexpensive Way to Protect Ideas?

With the economy taking a downturn, many corporate IP departments have been considering alternatives to the usual practice of filing non-provisional, utility applications for patents. While the economic advantages of preparation and filing of design patent applications readily help the bottom line, significant protection is sacrificed. The major difference between the two is that design patent protection extends only to the ornamental, non-utilitarian appearance of a product, and any concepts including utilitarian or technical features are specifically NOT protected. Conversely, utility patent protection provides more comprehensive coverage of the utilitarian idea or concept, beyond its mere appearance, as defined by the claims. Thus, the design patent route may be more appropriate for part designs covering a part of a larger assembly, or for subject matter where any replacement part must look like the original. For example, an OEM may desire to retain the design rights so as to enable the OEM to exclude unauthorized parts suppliers from selling replacement parts, which necessarily would be desired to have an identical appearance to the original part.

An additional consideration in foreign jurisdictions is that some competitors or knock-off copyists are not above filing for and obtaining design patents covering products they are copying. Despite the requirement in the US patent law that only an inventor may be the original applicant for patent, the same consideration may not apply in other jurisdictions. For example, where the applicant is a corporation or other legal entity, no inventor may need to be named. Such a patent, even though improperly-procured, may be used to later threaten existing and prospective customers of legitimate products with infringement litigation. No matter that the defenses against such litigation will ultimately prevail, the idea that patent litigation is even a possibility is anathema to many who have experienced or heard tales of the costs associated with it.

Design patents are becoming popular in other jurisdictions beyond the US. Sometimes, however, the differences in design-patent law between jurisdictions can provide unexpected problems. In one such instance, a Chinese design patent was obtained covering the ornamental appearance of our client's products. The Chinese patent law includes provisions for a reexamination proceeding, permitting a party that believes it has prior rights or prior art to attack the validity of a patent after it issues. A successful reexamination proceeding invalidated the spurious design patent and removed any cloud on the IP relating to the client's products. The take away lesson is two-fold. When dealing with designs in other jurisdiction, it is best to be proactive and register any important designs early. Additionally, it may be prudent to monitor the design patents that are obtained by others with a view of moving to invalidate any design patents on products that are being produced in foreign jurisdictions once a design patent is uncovered that should not have issued.

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Virus-Laden Advertisements

It is no secret that the American consumer reliance on online media has increased significantly over the past decade. The rise of convenience (read: immediacy) has forced online marketers to launch new, faster, and flashier avenues to grab our attention. The frenzy to be "the chosen one" among online advertisements has only increased with the economic downturn, as advertising dollars must go further to achieve big-budget results. While this influx of immediate information is, in most cases, a blessing for busy lives, the security pitfalls in the form of viruses and identity theft are, most certainly, the opposite. We expect, as consumers, to be protected, especially when visiting legitimate, well-known websites. However, the economic climate has created a marketing squeeze that unfortunately allows certain safety checks to fall by the wayside, exposing the less-than-careful busy consumer to viruses and identity theft.

The Wall Street Journal reported on June 15, 2009, that attacks from virus-inundated advertisements are on the rise, as more and more legitimate businesses are finding their website's advertising systems hacked by individuals taking advantage of the increasingly complicated business relationships prevalent in online advertising. The economic downturn has forced web publishers to outsource their website ad sales to middlemen and resellers, creating a long, and ultimately dangerous, chain of vendors, few of whom are subjected to security checks.

This chain begins when a company's website publisher sells advertising space on its forum sections, often visited by millions per month. As noted in the Wall Street Journal, ideally, ad networks who visit these forums purchase the available ad space to sell directly to business marketers. However, if the network fails to sell the space within a given time, the space will be resold to another ad network. In some cases, unused advertising space is auctioned off to the highest bidder. The chain of buyers and sellers becomes longer, reducing the certainty that every step in the buyer/seller process is checked for security purposes. The end result – a hacker who ultimately buys the ad space, posts either a false, virus-laden advertisement, damaging the consumer's operating system, or a false ad redirecting the consumer to a website requesting sensitive, personal information.

Businesses usually discover and remove the dangerous material within hours, however, hours often equal years in internet-surfing real time, and consumers' computers and personal information are often compromised before the fix is implemented.

The business of online advertising continues to march forward, raising questions about privacy and security. Facebook, the popular social-networking site, recently launched new targeting methods for its advertisers, posting 11 new ways to hone in on potential consumers based on information on individuals' Facebook profile pages. These targeting features, available to all businesses who advertise through Facebook, will identify and contact consumers based on (among other factors) the consumer's birthday, listed connections, and geographic location, in addition to gender, age, relationship status, and other parameters.

As noted by Jeff Chester, executive director of the Center for Digital Democracy:

Currently there are no advertising platforms (that I'm aware of) that provide this level of targeting capabilities. With these new features, Facebook will be able to increase revenue while increasing the effectiveness of ads. One thing that has been challenging for Facebook is to receive high conversion levels but with these new targeting features, creative advertisers will be able to increase their conversion levels.

One group that can also benefit from this new ad platform is application developers. Want to get new users that aren't yet using your application? Now you can exclude all users of your existing application and only target those that haven't installed it. This is something that as far as I know, no cost-per-install networks are able to provide yet. Facebook has been heavily focused on improving their advertising offerings over the past few weeks and with this latest announcement, it's clear that Facebook is looking to provide powerful tools for all advertisers.

Full article content is available at: http://www.democraticmedia.org/jcblog/?p=847.

In June of this year, Jeff Chester testified before a House subcommittee on the issue of security and privacy in consumer targeting by advertisers. Chester urged Congress to implement more sophisticated online policing measures to protect consumers' privacy, stating, "As with our financial system, privacy and consumer protection regulators have failed to keep abreast of developments in the area they are supposed to oversee," he explained. "In order to ensure adequate trust in online marketing—an important and growing sector of our economy—Congress must enact sensible policies to protect consumers." Full article content is available at: http://www.democraticmedia.org/release/cdd-testimony-20090618.

While Facebook, and other well-known sites currently have security measures in place, they are not invulnerable to hacking and manipulation. As tools for consumer profiling rise in sophistication and availability, it is essential for businesses and consumers alike to keep security in mind, especially as protective measures for internet privacy may well lag behind.

Best practices include keeping your browser and operating system current by installing software updates and new patches as vulnerabilities become known; using a limited-privileges account for everyday browsing; blocking harmful IP addresses with a firewall; using high-security settings in your browser and taking advantage of browser add-ons, such as NoScript, which prevents untrusted sources from running scripts on your computer without your approval, and Adblock Plus, which prevents advertisements from being downloaded and displayed.

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